“It was an epic decision, the most difficult I had ever taken,” he once said.
He needed to tell JP Morgan the transaction would not go ahead, but did not want to back out and leave the world’s largest bank annoyed with him. His way out was to create “difficulties” for the deal to come about. It was initially agreed that Morgan would have 30% of the new institution (the maximum allowed at that time) and the Garantia brokerage having just over 40%. The rest would be distributed among Brazilian investors to be defined. Lemann then got in touch with his contacts at the Central Bank to confirm it would only give a permit for the new institution created by the association between JP Morgan and Garantia if 51% of the capital remained in Lemann’s hands. He believed that when JP Morgan saw that this requirement meant it would never be the controller of the new institution, it would give up the association. He was right. When Morgan learned about the Central Bank’s new decision, it withdrew. The deal was aborted and each one went its own way.
Lemann had freed himself from JP Morgan, but the idea of having his own investment bank had been planted. A few months after the end of the negotiations with the Americans, the Garantia brokerage obtained a permit to enter into this new area on its own.
“We will be bigger than Bozano,” Lemann used to tell his partners, referring to the investment bank founded by Julio Bozano and Mario Henrique Simonsen, which dominated the market at that time.
To get there, he would have to continue attracting good people and distributing the bank’s stock among the best. However, for a new talent to gain room, somebody obviously had to be pushed out. The first to feel this effect of the meritocracy put forward by Lemann were those partners who had been with him when Garantia brokerage was founded.
Although they all had their own offices in the bank, it was rare to find them working there. Ramos da Silva, for example, who had been with Lemann since the times of Libra, was much more excited about the fortune he had amassed and did not want to be hanging on the phone trading shares any more. He started to spend time dating and driving cars. He took up race car driving as a hobby and ended up taking part in a number of Brazilian long-distance championships for three years.
Lemann began buying parts of his friend’s stake from 1975 until Ramos da Silva left the partnership three years later. Gentil, who had financed most of the purchase of Garantia brokerage, had said right at the beginning that he would only pitch in with the money and had no intention of working. The arrangement worked for a couple of years, but the team emerging from the lower level soon began to question the stake held by a partner who brought no revenues to the firm and spent his days in a huge house with an Olympic-sized swimming pool, tropical gardens and tennis court, in the upper class Barra da Tijuca district of Rio. Squeezed by Lemann – to either work or go – Gentil sold his stake, but their personal relationship soured. Gentil never hid the fact to his friends that he felt the maneuver had been a tremendous act of ingratitude from someone he had helped from the beginning. (The rule that all Garantia partners had to work was only broken once, in the case of Alex Haegler, Lemann’s cousin, who never put a working day and even then had a small share of less than 1%.)
Guilherme Arinos was the only one of the founding partners Lemann was unable to get rid of. Just as he had never given up his membership of the Rio Country Club, although he had been blackballed by the other members (which in practice made it impossible for him to use the club, although he had a membership card), Arinos stubbornly refused to sell his stake in Garantia. He stayed there until 1998 when the bank was sold to Credit Suisse (Arinos died in October 2011, aged 96).
With the Ramos da Silva and Gentil stakes in the bag, Lemann could speed up the distribution of shares among the younger staff. The initial stake he held in Garantia was 25%, but it rose to more than 50% in 1978. It was gradually reduced as he sold shares to the new partners. This management of the business was a delicate task that required constant dedication. Marcelo Medeiros, who came from Rio and was a partner in Garantia in the 1990s, remembered how Lemann dealt with the issue:
“He thought all the time about how the company should evolve... At the meetings to decide which new partners would enter, he would take a little piece of paper from his pocket and say who would have to sell a stake, who would have to buy and how much... He distributed the shares and adjusted the corporate structure. He was the one who controlled the discussion on the entry of new partners. Even when Jorge Paulo was quiet, everybody knew that they needed to present arguments that he would accept.”
When Garantia ended up in the hands of Credit Suisse in 1998, Lemann had already transferred almost half of his stake, which was then below 30% of the capital.
By the end of the 1970s, Garantia had almost 200 employees, mainly men in their early 20s and few with the “PSD” profile. Everybody dreamed of scaling to the very top and did almost everything to get there. Embarrassing a colleague in front of others during the half-yearly assessment was common. As hierarchy was of no importance, going over the head of your boss and speaking directly to his boss was also part of the common practice. Sometimes the enthusiasm went over the top and arguments literally ended up in fights. On one occasion, a trader emptied a bucket of water over the head of a rival at the trading desk itself and they had to be separated by colleagues. Almost a dozen people interviewed for this book used the expression “pressure cooker” to describe a day in the bank.
“It was if you had thrown five gorillas into a cage and left a female outside,” said former partner Alex Abeid. “Somebody was going to die.”
Although it appeared to be a cruel environment to many people, those like Abeid accepted it as a fight in which only the best would survive. “When you know the rules of the game, it is easy to play. If a guy managed to knock me down, this showed he was more capable and had won the game and I left to find another experience. This was a rule that everybody knew.”
In this pre-politically correct world, even jokes between people who worked in the financial market in general, and for Garantia in particular, were aggressive. The fact that there were practically no women in the bank also helped make the atmosphere more like a boy’s school in which pranks and jokes were considered acceptable. One of the most frequent targets of jokes was Fred Packard, an Englishman hired by Lemann in 1974. Packard’s main tasks included opening the way for Garantia on the international market at a time when the word globalization was not yet part of the corporate vocabulary. In the tradition of English businessmen, he was formal, the only person in the bank who wore a suit. But one of his habits was to take off his shoes when he was seated at the table, and from time to time, somebody would hide them.
In another typical prank at Packard’s expense, before he would leave on one of his frequent business trips, his colleagues would often ask him to make a “delivery” when he reached his destination. These were heavy, useless packages that normally contained telephone lists or bricks.
But no episode was as embarrassing as when Packard was trying on a suit in a meeting room at the bank and had his trousers stolen by colleagues. Right after the theft, one of his main clients, the owner of a Coca-Cola bottling plant in upstate São Paulo, entered. Packard was astonished and, having no time to hunt down the culprit – or, more importantly, another pair of trousers – hunched down on the chair at the head of the table, wearing only a shirt, jacket and underpants. The client thought it odd that the Englishman, who was usually so polite, did not get up to greet him, but he went off without knowing that Packard had been semi-naked during the important business discussions.
“It was a real circus,” said the former partner quite candidly. Garantia was never a place for sensitive souls.
But it was no coincidence that the worst examples of this horseplay were planned at the trading desk, the tensest part of the bank. Telles, who was the head of the desk, not only encouraged pranks, but took an active part in them. He himself was a victim soon after arriving. (The most Lemann ever agreed to in terms
of fooling around was to take part in races down the stairs from the 22nd floor to the ground floor of the Garantia building. Sicupira always kept away from the jokes.)
Telles was once speaking on two phones at the same time, the Central Bank on one and a client on the other. His colleagues saw that his shirt had a hole in the elbow and began to rip it. Telles, who could not stop his conversation in the middle, had to put up with the joke without complaining. By the end, all that was left from the shirt were the collar and cuffs. However, as it regarded the phone calls, he acquitted himself with aplomb.
Weddings were another target for jokes – many of them in bad taste. Ask anyone who worked at Garantia in the 1970s and 80s about the atmosphere, and chances are that you will hear the story of the “marriage of Jacaré.” “Jacaré” – “alligator” in Portuguese - was the nickname of Leopoldo Caetano, a trader and somebody who loved to make jokes. The ceremony was to be held in the Rector’s Chapel of the University (UFRJ) in the Urca district. Putting almost as much preparation into the wedding as the bride did, Garantia staff ordered seven masks of the Cuca character, an old witch with the face of an alligator, from a TV Globo children’s television program called Sítio do Picapau Amarelo. Telles, who was one of the groom’s best men, made a point of paying for the costumes himself.
In the middle of the wedding ceremony, seven people – a mix of Garantia staff, including Abeid, and boys “recruited” in front of the church – wearing alligator masks, invaded the church, shouting “Dad! Dad!” The bride was astonished and the priest was so furious he threatened to suspend the wedding.
“After a lot of confusion, the ceremony ended, but when it came to compliment the couple, we handcuffed the bride and groom and took them to the Lagoa Bar while the party was going on in the Yacht Club,” said Rogério Castro Maia. “It was horrible. Every wedding was like that.”
Castro Maia has an almost unending list of unsavory anecdotes from the bank’s daily occurrences. Some of which he witnessed, others he heard about during the fraternity lunches he regularly organizes with ex-partners of Garantia.
The meetings, always held in Rio, usually bring together just over 20 ex-partners from different generations. Telles never misses one, while Sicupira has only attended one. Lemann has rarely been present. The last meeting of ex-partners of Garantia in which Lemann took part took place in 2010. The lunch was arranged at the Country Club of Rio de Janeiro at his suggestion.
“As hiring the place would cost R$ 4,000 to be split by everybody, I asked Jorge if he would pay,” said Castro Maia, laughing. “He said, ‘no,’ that everyone should chip in.” When the event was over, Lemann suggested to Castro Maia that one of the bank’s former economists should be invited to give a presentation at the next event. “I knew Jorge would want to turn this into work,” said one of those who took part on the meetings when he heard the idea.
Lemann’s suggestion was duly ditched.
From bankers to
businessmen
Lemann spent a long time considering the possibility of investing in companies that were undervalued and could bring large financial returns after undergoing shock treatment. He loved the financial world with its daily dose of adrenaline and chances of extraordinary gains, but he felt it would be worth staking some of his chips on the real economy. Garantia gradually began to take a look at this new world.
One of the first initiatives was launched in the 1970s with the purchase of a 25% stake in São Paulo Alpargatas, the owner of the Havaianas brand. Garantia also bought a small stake in the Lojas Brasileiras retail chain (which would be sold years later to entrepreneur Bernardo Goldfarb, the founder of Lojas Marisa). As minority shareholders in both cases, the Garantia partners had little say in how the companies were managed. However, they gained inside experience of how a company was run – from the inefficiencies to the opportunities, the need to invest in corporate governance (or lack of it, as was common among Brazilian companies at that time) and the relationship between investors and executive remuneration. Although this was an excellent learning process, the Garantia people felt the time had come to get down to work. They needed to be the owners of their own business.
One particular company drew Lemann’s attention: the Lojas Americanas retail store chain. Lojas Americanas had been founded in Niterói in 1929 by a group of American investors that included John Lee, Glen Matson, James Marshall and Batson Borge. It was a trailblazer on the Brazilian capital markets and was listed on the Rio stock exchange in 1940. However, four decades after going public, Lojas Americanas had lost its sparkle. The founders had long gone and the earnings deteriorated by the year. Its market value at that time did not even amount to US$ 30 million – a fraction of the company’s real estate holdings of almost US$ 100 million alone.
Lemann carried out a simple calculation. The company was so cheap that, even if everything went wrong in operational terms, a profit could still be made just by selling the real estate assets. The bank was doing well and making lots of money, but Lemann thought that rather than distributing dividends and doling out spectacular bonuses, it would be better to use the profits to invest in new areas.
“OK, let’s make this deal and see what happens,” Lemann told the partners. He and Packard began to buy shares in the retailer from large stockholders like investor Mario Serpa, who held almost 10% of the company.
Sicupira soon noticed there was a great opportunity – not only for the bank, but also for himself. By 1981, Garantia already held a large enough equity stake to ensure a seat on the board of directors. Sicupira was chosen to be its representative and began to attend the meetings. He always carried a notebook with a red cover in which he noted all the information he heard and read. He crosschecked the figures he had with others that were available and spoke to employees. He compared Americanas’ performance with that of its competitors and studied retail developments abroad. Within a short time, no-one had as detailed knowledge of how Lojas Americanas worked as he did.
To generate cash and be in a position to assume control of Americanas, Garantia sold its stake in São Paulo Alpargatas to Camargo Correa.
“I spent two years trying to convince Sebastião Camarago (founder of the Camargo Correa Group) to buy that stake,” said Fernandes.
With this cash in hand, Lemann went to Banco Itaú’s head office in São Paulo to talk to its owner, Olavo Setúbal, an engineer and former mayor of the city. He explained that he needed the block of shares Itaú held in Lojas Americanas to obtain control of the retailer and get it back on the right track. Setúbal was won over by his enthusiasm and agreed to the offer.
This move not only marked the transformation of Jorge Paulo Lemann the banker into Jorge Paulo Lemann the businessman, but also gave all the Garantia partners the chance to become owners of Lojas Americanas, regardless of whether they were involved in the business. (Those partners who joined after the acquisition had no share in the retailer.) Lemann was changing his career path and taking people like Sicupira, Telles and Fernandes with him.
Being diplomatic at work was never Sicupira’s strong point and incidents of his bad temper became legendary within Garantia. “Bulldozer” and “self-righteous” are some of the most common terms used by former colleagues at the bank to describe his mercurial temperament. He never stopped shouting, swearing and banging his fist on the desk to impose his opinion. “It’s easier to rein in a guy who’s crazy than push someone who is slow,” is one of his favorite phrases.
When Garantia acquired the weakened Lojas Americanas in 1982, the fired-up Sicupira was the best choice to get the company back on track. He visited Lojas Americanas’ modest head office in Rua Sacadura Cabral in the center of Rio armed with a detailed plan and a burning desire to turn the business round. His initial remuneration would be much lower than at Garantia – around 10% of his bank salary.
He left money and his former colleagues behind and arrived at Lojas Americanas almost alone. He immediately hired an accountant from the former Arthur
Andersen, Carlos André de Laurentis (who would become CEO of the Shoptime site years later). His first intention was to get to know the people there first hand, select those who had talent and get rid of the others. This was a strategy that was repeated in almost all the acquisitions made by the three partners.
Despite the fact that the company was going nowhere, the former management had megalomaniacal plans. The best example was to erect a kind of sub-head office in the Barra da Tijuca district with a tennis court at the back. One of Sicupira’s first moves was to cancel this huge project. The other was to call the company’s top executives into his office. He was unimpressed by what he saw. Many were unable to explain their business aims clearly. Within a few months, 6,500 people, 40% of the workforce, were fired.
“We were too big and bloated and needed to make a big adjustment,” he said at the time.
One of Sicupira’s most unpopular measures was related to the executive remuneration system. Their goals were so easy, that bonuses had continued to be paid even though the company’s position had been weakening in previous years. How? One of the most “creative” mechanisms used in the balance sheet was to calculate the monetary restatement only on the assets, although the liabilities were not similarly readjusted – a distortion that would make the hair of any serious shareholders stand on end.
DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz Page 7
