Beer Monopoly

 

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Posted November 2010

If her-indoors is bugging you for what to give you for Christmas, let her buy you a book. Itís called ďDethroning the KingĒ and it has just come out. It is the inside story of the fall of the house of Busch by the American journalist Julie MacIntosh. I recommend this book most highly. Ms MacIntosh, who at the time covered the Anheuser-Busch takeover for The Financial Times newspaper, brings to life boardroom intrigue, dysfunctional family dynamics and a complacent parochial corporate culture in her lively, meticulously researched book.

Please donít tell your wife, though, that the book will turn you into a total party pooper. The detailed account of how Anheuser-Buschís initial resistance was swept away by the Brazilians in merely six weeks will keep you glued to the 350 pages for hours on end. But what can be more exciting? Certainly not having to do the barbeque or talking to the in-laws, eh?

How did Anheuser-Busch (A-B), with a dominant market share in the world's largest beer market, a legacy of marketing brilliance, a strong distribution system and generations of family management, suddenly seem so powerless to resist a buyout in the summer of 2008? In ďDethroning the King: The Hostile Takeover of Anheuser Busch, an American IconĒ Ms MacIntosh provides several answers.

A-B founded the eponymous brewery in St. Louis in the 1850s, but the company went on a tear under the leadership of August Busch III. August III, born in 1937, didn't graduate from college. But he was an iron-fisted boss with a flair for marketing, who preferred to surround himself with bootlickers, which included A-Bís board.

Between 1980 and 2002, when August III stepped down as CEO, A-B's market share in the U.S. rose from 28 percent to 50 percent, thanks in large part to the runaway success of Bud Light.

Like many U.S. industrial titans of the World War II decades, August III wasn't much interested in international expansion. Although he had lots of options to clinch foreign deals he was incredibly risk-averse. His horizon, as viewed from St Louis, stretched as far as Milwaukee, the home of Miller Brewing, his arch rival.

That ultimately proved A-Bís downfall. He thought the U.S. was the world while the real world had become global and the U.S. a tiny yet profitable Switzerland in comparison.

Whilst August III tried to crush Miller underfoot, his rivals, empowered by global acquisitions, grew bigger and more numerous. In May 2002, about the time when August III retired, South African brewer SAB bought Miller and Belgian brewer Interbrew prepared a merger with Brazilís AmBev.

What I found particularly revealing were the passages dealing with A-Bís shareholders Ė mostly institutional investors. They allowed August III and his son August IV to run the company like their personal fiefdom although the Busch family only controlled about 4 percent of the shares.

With his playboy image and tragic past, August IV wouldn't have made CEO material if he had had a different name. As industry observers had known for a long time, August IV as CEO was really out of his depth. With the blessings of A-Bís board, August IV, then 42, took the reins of A-B in 2006, at a time when the firm was in big trouble. A-B had slipped from the largest beer company in the world to the fourth largest. Its market share in the U.S. had nowhere to go but down. To aggravate his situation, August III as father and member of the board routinely undermined August IVís authority.

In June 2008, when InBev made an unsolicited offer of USD 65 per share, A-B tried to fend if off by engineering a quick acquisition of Mexican brewer Grupo Modelo, reasoning it would make the combined company too big for InBev to swallow. But the deal fell apart, thanks to August IIIís machinations. By July, when InBev raised its bid to USD 70 per share, the drama was over.

ďDethroning the KingĒ is strongest in its analyses of the manoeuvres of A-Bís board, which makes you wonder, in a general sort of way, whose interests company boards protect except their own.

The message that Ms MacIntosh gets across is that motivations all-too human led to A-Bís ultimate fall: arrogance, vanity, pig-headedness, provincialism.

InBev probably thought they had a much more cunning and resilient adversary in A-B. How they were deluded.

 

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