Book Review and Lessons From Dream Big: A Glimpse Inside the Strategies and Tactics of 3G Capital
This book has long been on my list to read, but unfortunately it had only been published in Portuguese. Last week an English version was released and you can now find it on Amazon. (Kindle version only). What follows is a summary of the book and some key takeaways.
The three Brazilian tycoons that run 3G Capital share a passion for underwater spearfishing: a dangerous sport requiring swift action, physical endurance, and absolute precision. Firing at a moving target against the ocean’s resistance on the fish’s home turf is a challenge left to only the most daring fisherman. The sport is an apt metaphor for 3G Capital’s approach to hunting the biggest game of the corporate world. Their conquests include iconic global brands Anheuser-Busch, Heinz, and Burger King. In the process, they’ve made billions for themselves, their cadre of managers, and investors from Brazil to Belgium.
Dream Big, newly published in an English translation from the original Portuguese, charts the meteoric rise of these businessmen from their early days as brokers in the São Paulo stockmarket to their $28 billion takeover of Heinz with the backing of Warren Buffett in February 2013. Author Cristiane Correa, a long-time Brazilian business journalist, deftly illustrates the formula for success crafted by 3G Capital’s principals – Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira over four decades. The lessons that emerge are valuable for investors, managers, and anybody seeking to create a culture of success in their own organization.
Correa has distilled the core of their business philosophy down to “recruit good people, preserve meritocracy, and share the success amongst the best performers.” Using this simple framework, they built Brazil’s top investment bank Garantia, Latin America’s premier private equity firm GP Investments, and turned the takeover of a failing Brazilian brewery into control of the world’s largest beermaker, AB InBev.
Frugality, focus, accountability and a lack of hierarchy are embedded in the DNA of every organization they have built or controlled.
These ideas about business were honed at Garantia, the investment bank that the three partners built together in the 1970s (3G stands for the three of Garantia). They sought to model the investment bank on the best in the industry: Goldman Sachs. The structure they built at Garantia shared many characteristics with the pre-IPO Goldman partnership – low salaries, large bonuses based on performance not tenure, and the recycling of top employee’s earnings back into the business by purchasing partnership stakes. This formula rewarded performance, kept partners hungry, and prevented them from flaunting their wealth.
Over the years at Garantia, the partners steadily became less interested in trading securities and more focused on using the investment bank’s capital to acquire businesses. They found their first major deal with a Brazilian retailer, Los Americanas. When they took over the retailer, Sicupira was tasked with turning around the business. He immediately looked for a model to study, just as they had modeled their bank after Goldman. Sicupira wrote to the CEOs of the top 10 retailers in the world to visit them and learn from their experience. Once they met Sam Walton in Bentonville, they knew they had found their model for the retailer: a fanatical focus on low-cost and a demanding culture of excellence among managers.
They later repeated their success by turning around a Brazilian railroad formerly state-owned and buying control of the Brazilian brewer Brahma. These deals gave them the confidence to take their formula onto the global stage as they consolidated the beer sector in Brazil and then merged with Belgium’s Interbrew.
The $52 billion deal to buy Anheusuer Busch in the midst of the 2008 financial crisis tested the team’s mettle. The 3G managers demanded rapid change to pay off the large debt burden taken on to buy the beer giant after decades of largesse at the Busch family-run business. Walls separating executive offices were torn down, 1,400 employees dismissed in the first weeks, the company’s fleet of private jets sold, and the remaining executives told to fly coach. Within a year of taking the helm, 3G’s Carlos Brito had cut $1 billion of costs and sold off $9 billion of assets from the Anheusuer Busch empire. As the global economy deteriorated, AB InBev offered 39 senior executives $1 billion worth of stock options, but only if they could cut the company’s debt in half by 2013. The managers responded by hitting the target two years early and AB InBev’s stock responded by rising nearly four-fold over that period.
AB InBev spread the options payout between 2014 and 2019 to encourage the newly rich managers to think long-term and keep their own capital in the business. This approach rewarded the managers, but kept them from being distracted with their new wealth – echoing the lesson they learned from Goldman and first applied in their Garantia partnership.
Not every deal in the U.S. has been an instant success. Lemann and his colleagues took a 4.2% stake in railroad operator CSX in 2007, working with Children’s Investment Fund in an attempt to take it over. Ultimately, they failed to wrest control from the board after years of legal wrangling. 3G exited the investment in 2011 with a return of 80% in four years – not bad, but far less than they thought possible with their managers in charge.
3G Capital’s $28 billion takeover of Heinz last year in a 50/50 joint venture with Warren Buffett’s Berkshire Hathaway won’t be the last big deal for the partners in their journey to the top echelon of global business. They’ve laid out their criteria for future targets: a strong brand, global reach, and a company whose results can be improved through their system of management shock. These ambitious managers are continuing to Dream Big and have their spears sharpened for the next big fish in the sea.
The partners’ playbook for executing takeovers have led to 25%+ annual returns and can be synthesized into six major steps:
1. Find a business with poor management and bloated costs, but strong underlying economics and positive growth trends. Find mentors who have succeeded in the industry from across the globe and adapt their strategies.
2. Inject a results-oriented culture into the business with hard-charging managers in the most senior roles. Immediately fire managers and employees unwilling to adapt to the new model (often up to 20% of employees in the first year). During the transition period, study the details of the business with hard data. Understand how the company makes money and what the customer wants.
3. Set four big targets for senior managers each year: market share, expenses, EBITDA, and cash. Give managers and employees the incentive to achieve these goals by giving them low salaries and bonuses at big multiples of their salaries if they achieve them.
4. Implement Zero Based Budget – requiring every expense to be justified each year rather than build off last year’s budget. Be ruthless about trimming any expense that doesn’t generate revenue.
5. Don’t spread yourself too thin and focus on only one or two opportunities at a time.
6. Continue to Dream Big and find new opportunities for talent regardless of age and experience by redeploying free cash flow into buying other companies and expanding the business.
The author conducted an interview with Warren Buffett for the book and there are several interesting passages.
Buffett on the partnership between the partners of 3G Capital and their managers:
“You can’t compete with your own partner. You can’t get upset about who gets credit for a deal. The idea that one has to win doesn’t work in any relationship – in business or marriage. Not one of this group of Brazilians seeks credit for himself. On the contrary, Jorge Paulo says the success of AB InBev comes from [Carlos] Brito and his team. This is not common here. Some time ago, the former executive Michael Eisner wrote a book on successful companies [Working Together – Why Great Partnerships Succeed] and had trouble finding 10 cases that really worked [one of the examples was precisely that of Buffett and Munger]…Many people want recognition above all. These people think ‘what’s the point of being on top if there’s no-one below?’ Jorge Paulo and his partners are the opposite of them.”
Buffett on his first meeting with Lemann in 1998 when they were both on the board of Gillette:
“I knew absolutely nothing about him and had never even heard of him. We used to meet every two or three months and it took some time before we really got to know each other. However, you learn a lot about people on a board of directors. What I noted right from the beginning was that he said things that made sense. He didn’t pretend to know things he didn’t or talk just to hear the sound of his own voice. He had a tremendous view of business and was articulate, which cannot be said for all board members.”
Buffett on the bid for AB and his decision to sell his stake during the bidding:
“I thought that he would do it one day, but did not know it would be at that moment. It was an enormous step at a completely hostile time. There was one moment when I honestly did not think the deal would go ahead. It was the only transaction of that size at that time….My decision was to evaluate whether, against that backdrop, the share price would rise or not and whether the deal would really be made despite the crisis. I then sold a part of my stake, which annoyed some people. I didn’t know how the AB board worked. I had met [August Busch] the Fourth only once at a baseball game and spoken personally to the Third about 15 years earlier. I had never spoken to them by phone or had any relationship. This happens sometimes with companies in which we invest. We had a big investment in AB, but not as big as we have in Coca-Cola, for example. I liked the company and we had been part of it for many years…It would be difficult to lose money there just as it would be difficult to make any great gain. It was a solid option, but nothing particularly exciting.”