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Grupo Garantia (A) 

A Case of Diversification 

BAB006 

6/12/00 

Grupo Garantia was one of Brazil’s biggest diversified corporations with interests 

ranging from investment banking to beer. In 25 years, Garantia enjoyed a stunning string of 

successes that benefited from Brazil’s economy when it boomed. At other times, it found ways to 

ride out the country’s many economic storms, and even to profit from them. “Grupos” were a 

common form of business enterprise in Latin America with each holding diversified companies 

in several sectors of their respective economies. Exhibit 1 and Appendix A summarize a casewriter’s 

view on the merits and demerits of “grupos” and give some details of the five biggest 

domestic Grupos in Brazil in 1995. 

Known as the Brazilian version of Goldman, Sachs & Co., the Investment Bank of 

Garantia at the center of the diversified group together with GP Investimentos, the associated 

private investment company, attracted a group of some 20 private partners and scores of highlymotivated 

young traders. The secret of success was simple: find opportunity, commit capital and 

apply talent. 

“They combined investment with management skills, access to outside managerial 

talent and financial skills. Above all, they displayed the right attitude: a desire to 

leverage their own money in order to buy under-performing companies, turn them 

around and sell them for a profit. Furthermore, they had demonstrated their ability 

to make money in a wildly volatile climate, through hyperinflation and massive 

devaluations.” 1 

1 

Lorenzo Weisman, “The advent of private equity in Latin America,” Columbia Journal of World Business, March 

1, 1966. 

Michael S. Lelyveld prepared this case under the supervision of Professor Jeffrey Ellis, Babson College, and with the 

assistance of David Wylie, Director of Babson College Case Publishing, as a basis for class discussion rather than to 

illustrate either effective or ineffective handling of an administrative situation. The authors would like to express thanks to 

the Arthur D. Little School of Management for a paper written for them by Maria Luisa Rodenbeck MSM’97, upon which 

major portions of this case are base, to Andres Kriger Babson MBA2000 for his detailed review of drafts, and to 

Professor U. Srinivasa Rangan, Babson College, for allowing inclusion of material from his case “Brazil 1995: Fernando 

Cardoso and the Petrobras Crisis.” 

Arthur D. Little School of Management 

Copyright © by R. Jeffery Ellis, 1999 and licensed for publication to Harvard Business School Publishing. To order 

copies or request permission to reproduce materials, call (800) 545-7685 or write Harvard Business School Publishing, 

Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or 

transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the 

permission of copyright holder or licensee.

Grupo Garantia (A) BAB006 

But how well did Garantia really outperform the Brazilian economy? How, by how 

much, and for how long? Was the group as a whole equally well positioned to respond to 

opportunities and economic crises? And if so, which of its lines of business did it best? Was its 

corporate culture an asset or a liability? Would specialization have been a better strategy than 

diversification in Brazil over time? What direction should the company take? 

Figure 1 

Gross Domestic Product per 

Capita 

Brazil: 1975-1995 

120 

100 

80 

60 

40 

20 

0 

GDP/capita (1990=100) 

While some details of a private 

corporation may remain sketchy, the story of 

Garantia’s successes, its management style, 

selected financial data, and press coverage 

provide threads of evidence and give clues to the 

answers. Grupo Garantia had many elements, but 

at the center was the Investment Bank: Banco de 

Investimentos Garantia SA. A few select 

members of the Investment Bank formed a 

separate company to invest in Brazilian 

companies: GP Investimentos. GP’s two principal 

holdings in the middle ‘nineties were both 

managed actively by Garantia’s management or 

by former associates: Crevejaria Brahma, Brazil’s 

largest brewery and fifth largest in the world; and 

Lojas Americanas S.A. (LASA), the biggest non- 

food retailer in Brazil. Figure 1, Gross Domestic Product Per Capita for Brazil and Figure 2, 

the Monthly Inflation Rate for Brazil, indicate the roller coaster economic environment in Brazil 

within which the management of Grupo Garantia plotted its course. A brief review of Brazil’s 

economic history is provided in Appendix B and Exhibit 2 provides details of selected 

economic statistics for Brazil from 1989 to 1997. 

Figure 2: 

Average Monthly Change in Brazilian Consumer Price Index 

March1990 –March 1995 

80.0% 

70.0% 

60.0% 

50.0% 

40.0% 

30.0% 

20.0% 

10.0% 

0.0% 

2


Banco de Investimentos Garantia SA and GP Investimentos 

Strengths and Strategies - Sources of Strength 

There seemed little doubt that Grupo Garantia (both the Investment Bank and the 

Investment Company) derived its strength from the drive and individuality of its founder, Jorge 

Paulo Lemann. (See insert below). 

In July 1997, Forbes listed Lemann as a leader among the “Global Power Elite” of Latin 

America, calling him “Brazil’s equivalent of a Wall Street investment banker.” The magazine 

estimated his net worth as “at least $600 million.” These were the boom times. In the year to 

date, Brazil’s stock market was up 79%, riding the Latin American recovery after the Mexican 

peso crisis of 1995. 

A long list of profiles and press reports depicted Lemann and his company, Grupo 

Garantia, as business giants that could stand astride two worlds. That image allowed Lemann to 

borrow the best financial techniques of Wall Street and bring them into an untried market, while 

attracting Brazil’s brightest talent. 

“Jorge Paulo Lemann ambles into the room with a slightly rolling gait, a lanky whitehaired 

figure dressed in an open- necked blue shirt and tan slacks. Relaxed and informal, with a 

ready smile and an Ivy League twang to his fluent English, he might have just come from a stroll 

along the beach at Cape Cod or the Hamptons,” said London-based Euromoney magazine in 

March 1995. 

Positive Press 

The Man Who Brought Wall Street to Sao Paulo 2 

FIVE YEARS AGO Philip Morris was in a tight corner in Brazil. It owned 40% 

of Brazil’s biggest chocolate maker, Industrias de Chocolate Lacta, and wanted to 

acquire the rest. But the Brazilian family that ran the company and owned a chunk 

of the stock had issued more shares, diluting Philip Morris’ stake. 

So Philip Morris turned to a Sao Paulo-based investment bank called Banco de 

Investimentos Garantia. Lawyers handpicked by Garantia stormed into court with 

evidence that the share issuance was illegal. The court agreed, and last June Philip 

Morris acquired the rest of Chocolate Lacta. “We tried friendly dialogue and it 

never worked. It was only when (Garantia) turned aggressive that we really turned 

the tables,” says Hans Grether, chief financial officer of Philip Morris’ Brazilian 

unit. 

Garantia has become one of Brazil’s most profitable investment banks and most 

prestigious places to work -- a Brazilian version of Goldman, Sachs. It admits to 

earning $168 million last year on capital of $412 million, but denies what some 

competitors insist is true: that Garantia’s real profits exceeded $1 billion over the 

course of 1994 and 1995 and that it tucked away the unreported profits at Garantia 

Banking Ltd., its offshore trading vehicle in the Bahamas. 

2 Kerry A. Dolan, Forbes, Dec 16, 1996, © 1996 Forbes Inc. (with permission) 

3


In the last two years Garantia has handled six merger-and- acquisition deals for 

U.S. clients, worth a total of $2 billion. The toughest of these was the Philip 

Morris/ Chocolate Lacta deal, but the biggest was Colgate-Palmolive’s $1 billion 

acquisition of Kolynos Oral Care, a leading Brazilian toothpaste maker, in 

January 1995. 

Garantia is the creation of a wiry former tennis champion named Jorge Paulo 

Lemann. Lemann’s father emigrated from Switzerland to Brazil in the early 1920s 

and started a dairy business outside of Rio de Janeiro. He sent Jorge Paulo north 

to Harvard, where he played tennis and finished his economics degree in three 

years, graduating with the class of 1961. After working as a trainee for Credit 

Suisse in Switzerland, he quit to join the European tennis circuit for a year and a 

half, winning the Swiss nationals and playing at Wimbledon. 

Returning to Brazil in 1963 Lemann worked at various financial houses until 

1971, when he and three partners launched Garantia as a brokerage amid the socalled 

Brazilian miracle. The stock market was booming and the partners paid 

$800,000 -- then the highest price ever -- for the equivalent of a seat on the Rio de 

Janeiro Stock Exchange. Six weeks later the stock market fell 60%, wiping out 

most of Garantia’s capital. 

Setbacks like this toughen some people, and it toughened Lemann. The young 

firm survived the crash by developing an expertise in trading newly created 

Brazilian Treasury bills. This required quick wits and skill rather than family 

connections. Breaking with local tradition, Lemann later ruled that Garantia’s 

partners could not bring their relatives to work at the bank. Unimpressed by the 

efforts his cofounders were making, by 1976 Lemann had bought them all out. 

Lemann watched carefully the innovations taking place on Wall Street and lost 

little time bringing them to Brazil. “One of the advantages of being in a backward 

country,” he says, “is that you can go outside and look at how people are doing 

things and copy the things you think are good.” 

In the mid-1970s, for example, Lemann started trading and syndicating loans -- 

soon after Wall Street started doing it and long before other Brazilian firms had 

caught on. 

In 1983 Lemann and his new partners bought control of discount retail chain 

Lojas Americanas. Since then, Lojas Americanas’ sales have grown from $280 

million to $1.9 billion, making it one of Brazil’s largest non-food retailers. In 

1994 Lojas partnered with Wal-Mart and a year later opened five stores around 

Sao Paulo. Five Garantia partners own 40% of Lojas, worth around $280 million. 

In 1989 Garantia partners bought control of Cervejaria Brahma, Brazil’s largest 

brewery. A former head trader at Garantia took the helm at the brewery, raising 

4


profits from around $15 million a year to $260 million in 1995. Various Garantia 

partners and entities own 20% of Brahma. 

Lemann went to New York in 1989 to observe derivatives trading at Bankers 

Trust. He then implemented at home what he had learned abroad. 

Lately, however, some of Lemann’s New York friends have begun to invade the 

Brazilian market. Earlier this year Goldman, Sachs and Morgan Stanley opened 

offices in Sao Paulo -- the first for both in South America. No mystery what 

brought them. Brazilian new equity issuance, fueled in large part by 

privatizations, jumped to $7.9 billion last year from $3.1 billion in 1993. For next 

year alone $10 billion in privatizations are slated. 

Lemann, now 57, admits the added competition will make it tougher to make 

money as spreads narrow and commissions shrink, but he’s confident he can hold 

his own. “It’s like a tennis match,” he says. “Sure, you’re out to kill the other guy, 

but if you live by the rules, it will be good for both of you.” 

With kidnapping rampant and populism still powerful in Brazilian politics, it pays 

to keep a low profile if you’re as rich as Lemann is. He tools around Sao Paulo in 

an inconspicuous Volkswagen even though Veja, a Brazilian weekly, estimates 

Lemann’s personal fortune at over $800 million. “We don’t want to call attention 

to ourselves. In Brazil people still think if you have money you did something 

wrong to get it,” explains Garantia’s chief executive, Claudio Haddad. 

“Garantia [the investment bank] is a partnership modeled on Goldman Sachs, with which 

it maintains close relations. Currently there are 22 partners with an average age of about 35 and 

the entire firm consists of only 315 people,” Euromoney said. 

GP Investimentos was a private investment company. The objective of GP Investimentos 

was to attain superior capital gains through the acquisition of controlling interest, or significantly 

influential equity investments, in companies with potential for substantial capital appreciation. 

GP Investimentos invested in fundamentally sound companies, growth opportunities, or 

emerging ventures. The partners of GP Investimentos believed the success of a venture 

depended on a complementary combination of hands-on managerial expertise, country-specific 

knowledge, and financial skills. GP Investimentos provided a team with past experience of 

managing companies, consulting, and investment banking. The partners believed that these were 

the core competencies required to enhance shareholders’ value. 

Lemann’s image as an investment banker who was at home in both worlds also attracted 

U.S. companies, which often turned to Garantia when they needed a gateway into the Brazilian 

market. 

Philip Morris, Colgate-Palmolive and Wal-Mart Stores Inc. were not the only ones to 

take advantage of Garantia’s contacts, expertise and home-field advantage. In the beverage 

industry, for example, Miller Brewing Co. joined forces in 1995 with GP Investimentos’ affiliate 

Cervejaria Brahma when it wanted to market Miller beer in Brazil. 

5


““Our strengths vis-a-vis our international competitors are that our top brains are 

in Brazil, and are concentrated on Brazil,” said Roger Wright, a partner at 

Garantia. “We’ve obviously got more resources on the ground than anyone from 

abroad, because no one can afford to have so many resources focused on one 

niche country.”” 3 

The bank’s approach drew high praise. 

“Garantia’s strengths are in mergers and acquisitions, debt and corporate finance, 

where it has consistently ranked higher than foreign banks operating in Brazilian 

markets,” said Euromoney on Oct. 15, 1996. “In mergers and acquisitions it 

advised a greater number of Brazilian deals than both SBC Warburg and Goldman 

Sachs. Its share so far in 1996 is 26.2% of the $3.07 billion market.” 

As a private company in Brazil no financial statements were published for Grupo 

Garantia for either the investment bank part of the total group (Banco de Investimentos Garantia 

SA.) or the private investment company (GP Investimentos.) Rumors put the value of the 

investment bank, including its holdings in other companies, at perhaps as much as the equivalent 

of one billion United States Dollars. 

Directional Strategies, Substance and Style 

The main areas of activities for Banco de Investimentos Garantia were corporate finance, 

asset management, and agency brokerage, as well as sales and trading in fixed-income, foreign 

exchange and derivative products. 

Garantia’s bedrock had always been the maintenance of a solid core of talented and 

motivated staff who not only drove the firm forward in terms of profit and success, but which 

also had the vision and commitment to guarantee its progress into the next generation of owners 

and executives. Essential elements for Garantia’s accomplishment of its overall business strategy 

were continuous attention to shareholder and general remuneration structures. Unlike many 

banks in Latin America, the culture based advancement on personal achievement. 

Since 1971, its principal executives owned the firm exclusively. Garantia had always 

provided every employee a chance to become a shareholder in the business, whatever his or her 

initial rank in the firm. According to its executives, the challenge of motivating the great 

majority of people in the firm was as vital as preserving the quality and integrity of its 

shareholder structure. 

“Informality is part of the culture: there is no dress code and everyone in the brand-new 

Sao Paulo head office works in a single state-of-the-art trading room. Enormously profitable, the 

bank attributes its success to teamwork, training the brightest people available, flexibility and 

some inspired risk-taking plus its meritocratic structure.” 4 

No one stood out as the single driving force behind Grupo Garantia, which prided itself 

on its meritocratic structure that rewarded teamwork and paid little heed to tradition. Traders 

3 Scott Weeks, “A race against time,” Latin Finance, Dec. 1, 1996. 

4 Euromoney, March 1995. 

6


frequently showed up to work in blue jeans and polo shirts. The bank provided no separate 

offices for senior partners. They worked alongside junior staff in the trading room. 

Clients’ visits were held in Spartan meeting rooms, devoid of artwork, expensive 

furniture and frills traditionally found in bank offices. Business cards carried no titles below the 

names of bank employees, including those of senior partners. Even Claudio Haddad avoided 

using his CEO title. “We all like to think of ourselves as associates,” he is quoted as saying. 

“Most investment banks are aware that their biggest asset is their good name, anyway.” 

Broadly speaking, Garantia was engaged in two kinds of activity in all of its ventures. 

First, the Investment Bank pursued opportunities created by the tumultuous and often 

treacherous nature of the economy. Lemann was know to have referred to profit as taking lemon 

and turning it into lemonade. Second was investment in growth sectors of the Brazilian economy, 

represented by its acquisitions in Brahma and LASA (see sections below) and other companies. 

Being constrained by legal and other issues, the partners created GP Investimentos for this 

second purpose. The two paths were pursued side-by-side and simultaneously. 

Contacts, Conflicts and Innovation 

Garantia’s aggressive business tactics usually raised eyebrows throughout world markets 

when it came to making money in Latin America. Very few did better than Brazil’s Banco de 

Investimentos Garantia. Outside Brazil, Garantia made a name for itself in Brazilian sovereign 

debt, trading some $50 billion of the nation’s Brady bonds up until 1995. Brady bonds were 

repackaged bank loans from emerging countries with sweeteners in the form of guaranteed final 

payoff and possibly some other guarantees. The market price of Brady bonds had fluctuated 

violently since they were first traded in the late ‘eighties. 

In 1992, Garantia became the first Brazilian investment bank to open offices in New 

York, where it competed head-on with J.P. Morgan, Salomon Bros. and other top players in 

emerging market debt. The second overseas office was established a year later in London. At 

home, Garantia’s strategy focused on corporate finance. It became a leader in mergers, 

acquisitions and underwriting securities. 

In 1995, Banco Garantia launched the first private equity fund to invest exclusively in 

unlisted and high-growth Brazilian companies, in a bid to expand its asset management business. 

The fund, called Brazilian Equity Investments III was mainly targeted at United States investors 

and was able to raise $84 million of retail and institutional money on the first Friday right after it 

opened. Retail, consumer and construction services were favored, but the fund was basically 

interested in any company likely to benefit from Brazil’s renewed economic growth. 

During this period, some United States investment banks put Brazil back on their target 

lists for global private equity funds. Foreign direct investment rose sharply from 1993, thanks to 

the economic growth and the sharp and sustained fall in inflation. From outflows of portfolio 

foreign investment before 1990, inflows had increased step by step from US$646 million in 1991 

to US$50,836 million in 1994. This was particularly positive for the country as a whole. Some 

analysts saw private equity as an important source of longer- term financing, which until that 

time had been difficult or expensive to access. 

In the 23 years since its founding as a brokerage, Garantia grew into an institutional bank 

with assets of $5 billion to $6 billion (1996-1997 data) and a net worth equivalent to more than 

$300 million. The key to those results was the partnership concept modeled after Goldman, 

7


Sachs & Co., which was credited with creating an environment in which top-notch staff worked 

harder to get transactions. Unlike many banks in Latin America, top management always ensured 

that there was a chance for the best and brightest to become partners in the company. 

New Opportunities, New Competition 

By late 1996, Brazil had been a free market economy for more than two years, following 

the introduction of the economic stabilization program known as the “Real Plan” on July 1, 

1994, named after the new currency, the Real. (See Appendix A.) The sudden shock of a more 

stable economy and currency had a profound effect on business outlook and strategies. Brazil 

had been the subject of numerous revaluations of its currency as shown in Table 1, but the mood 

was upbeat about the success of this latest attempt to bring the currency and inflation under 

control. 

Table 1 

Brazil’s Currency Changes to 1995 

1967 1,000 old cruzeiros = 1 new cruzeiro 

1986 1,000 new cruzeiros = 1 cruzado 

1989 10,000 cruzados = 1 new cruzado 

1990 1 new cruzado = 1 cruzeiro 

1993 1,000 cruzeiros = 1 cruzeiro real 

1994 2,750 cruzeiro reals = 1 Real 

8 

According to International 

Monetary Fund figures, Brazil’s annual 

inflation averaged 101.2% from 1975 to 

1985. During the decade from 1986 to 

1996, it averaged 983.1%. But in 1996, 

consumer prices rose only 11.1% 5 . 

For the first time in a decade, 

foreign companies and institutions were 

growing enthusiastic about establishing or 

acquiring businesses in Brazil. The 

international financial community was no exception. Competition from other world- class 

operators, which Garantia had already faced with success in international markets such as 

sovereign debt and Brazilian equities, would now be increasingly present on Brazilian home 

ground. Garantia’s competitors were using cutting-edge information technology, systems and 

controls. They also had the resources, the status and the visibility to attract local banking talent. 

Certain that this would eventually happen, Garantia’s human resources strategy had been 

designed to deal with such a challenge. It had always demanded, since its inception, that senior 

and mid-level managers spend time abroad assimilating skills and experiences they could not 

acquire in Brazil, bringing in foreign knowledge and techniques. 

With the internationalization of Brazil’s capital markets, the sources of Garantia’s 

profitability had been changing. Structural inefficiencies and high inflation had often been the 

bane of the financial community in Brazil over the past quarter of a century. But at the same 

time, they had also provided good opportunities. Such a complex and opaque environment had 

allowed enterprising and astute trading desks to make substantial profits. For many years, 

Garantia had been in the forefront of these institutions. 

Unlike many other powerful Brazilian business groups that developed and prospered with 

the generous helping hand of central government, Banco Garantia was one of a handful of 

Brazilian banks that took the government to court in 1994. Their complaint was that when the 

anti-inflation Real Plan took effect, it reduced the automatic inflation, or indexing, increase on 

securities already purchased. Garantia eventually dropped the case. But some financial sources 

5 World Economic Outlook, Sept. 30, 1998


praised the bank as one of the most agile, creative banks in Brazil, capable of inventing new 

products, such as interest rate swaps over the counter. 

“Garantia is widely considered one of Brazil’s most aggressive investment banks,” said 

Dow Jones Emerging Markets Report (Oct. 29, 1997). 

On Feb. 28, 1997, Moody’s Investors Service called Garantia “a leading pure investment 

bank in Brazil, with a strong reputation -- both domestically and internationally -- in the areas of 

research, fund management, sales and trading, and mergers & acquisitions. A significant portion 

of Garantia’s revenue came from active proprietary trading positions, which increased its risk 

profile in Moody’s view.” 

What Next? 

Brazil’s changing economic environment, and the new international lure of its success, 

brought Grupo Garantia to a crossroads. What kind of company should it be? 

In October 1996, Lemann wondered about the next steps the group should take, in view 

of the stiffer competition and prospects of falling profit margins. Brazilian investment banks, 

whose earnings had soared under two consecutive years of economic stabilization, were now 

facing tougher times as competition increased and the whole banking industry was going through 

a consolidation process. 

Claudio Haddad, Garantia’s CEO, who had been interviewed by the Financial Times 

during the previous week, had declared: 

“Investment banks have prospered and thrived under the stabilization process. 

Brazil’s economic opening over the past five years created a huge demand for the 

underwriting of debt and equity securities, and assistance with corporate 

restructuring, mergers and acquisitions, etc. However, we can rest assured that the 

competition will become much, much stronger, and we shall see some mergers in 

our own industry taking place pretty shortly.” 

Success in banking had been paralleled by growth in two of GP Investimentos’ major 

acquisitions, Brahma and LASA, detailed below. Should Garantia continue to pursue all its 

ventures, or just some of them? What strategies promised the greatest return? 

Diversification Strategy – Brewery 

In 1989, GP Investimentos partners bought controlling interest in Cervejaria Brahma, 

Brazil’s largest brewery and the fifth largest in the world. The company’s major brands included 

Brahma Chopp and Skol. 

A former head trader at Garantia, Marcel Telles, took the helm at the brewery, reportedly 

raising annual profits (before taxes) from about $15 million in 1989 to $260 million in 1995. 

Various Garantia partners and entities owned 20% of Brahma, although one source 6 cited 51% 

ownership by GP Investimentos. 

6 Latin Finance, Apr. 1, 1995. 

9


The Brahma deal was a coup for GP Investimentos. With a paltry investment of $15.6 

million in 1989, the bank acquired 12% of the 81- year-old company’s voting stock. That stake, 

along with a formal alliance with key shareholders, allowed the bank to assume full control of 

Brahma, one of Brazil’s most coveted takeover targets in the late 1980s. The strategy behind the 

takeover was the certainty of a perfect marriage between GP Investimentos’ business and 

financial engineering talents and Brahma’s lead in a fast- growing, cash-generating industry. 

The Beer Boom in Brazil 

Few sectors of Brazil’s economy enjoyed the benefits of new-found stability as much as 

the brewing industry. After the launch of the government’s economic reform plan in June 1994, 

beer consumption jumped 16% over the previous year. In 1995 and 1996, the predicted growth 

rates of 20% were surpassed (see Table 2). 

Table 2 

Sales of Beer in Brazil, by Volume and by Value: 1991-1996 

Beer 1991 1992 1993 1994 1995 1996 1996 

Per Capita 

Volume 

(Million litres) 

5,502 4,520 4,821 5,707 6,714 7,920 50.0 

Value 

(Million US $) 

7,042 5,785 6,683 8,439 12,195 15,566 98.31 

Source: Euromonitor from National Statistics 

The reason was the broadening of income distribution and the end of inflation in taxes 

leaving much more disposable income available to lower class workers. Before the reform plan, 

there was a huge section of the Brazilian society that hardly consumed anything. As shown in 

Table 3, the ratio of the highest 20% of the population by income to the lowest 20% was 32 

times and the corresponding figure for the highest and lowest 10% was 73 times. These ratios 

changed to 25.7 and 60, respectively, in 1995 showing a flatter distribution of income and 

consumption across the population of Brazil. Economic improvement led to enormous growth in 

the market for beer. 

10


Table 3 

Distribution of Income or Consumption: Brazil 1989 and 1995 

Percent Share of Income or Consumption 

Lowest Lowest Highest Highest Ratio of Highest to 

Lowest 

10% 20% 20% 10% 10% 20% 

1989* 0.7% 2.1% 67.5% 51.3% 73 32 

1995 0.8% 2.5% 64.2% 47.9% 60 25.7 

Source: World Bank, World Bank Development Report, 1995 and 1997 

*Note: to be read for 1989 as: the lowest 10% of the population accounted for 0.7% of income; the highest 

10% of the population accounted for 51.3% of income; the ratio of the highest 10% to the lowest 10% was 

73 (51.3%÷0.7%) for income in 1989. A slightly more even distribution of income was achieved in Brazil 

from 1989 to 1995. 

Niche marketing meant very little in Brazil’s beer industry. Over 90% of the market was 

in standard “popular” lager, while 70% of beer consumers were from the poorer majority of the 

population. The poor benefited most from the drop in monthly inflation from 50% in June 1994 

to less than 2% a year later and from the consequent increase in disposable income. 

Brewers like Brahma were confident that new spending power in their core market would 

lead to continued growth in the next few years. The market was expected to increase from about 

6 billion liters in 1994 to 10 billion liters per year by the end of the decade (see Table 2). There 

was room for expansion: Brazilians drank an average of 34 liters of beer in 1992 compared to 88 

liters for the United States. In 1997, the gap had narrowed dramatically, but there was still 

plenty of consumption anticipated. Brazilians drank 50 liters in 1997 and consumers in the 

United States drank 84 liters. In the United Kingdom, beer consumption was 106 liters per 

capita in 1997 7 . 

Even if sales grew by two-thirds in the next five years, the market was likely to remain 

dominated by Brahma and by its biggest rival, Antarctica. Their flagship beers each held 32% of 

total sales, although Brahma took an extra 13% share with sales of Skol, brewed under license. 

Another important rival was Kaiser, partly owned by Coca Cola, Brazil being the only nation 

where Coca Cola participated in the beer market. Kaiser was able to leverage the vast 

distribution network that Coca Cola had built across the entire country. 

“Even low income and high taxes don’t dissuade Brazilian beer drinkers. Of the 

cost of a bottle of beer, the brewery gets about 21%, the government about 22%. 

Workers at or below minimum wage drink 42% of the beer sold in Brazil, 

according to a report by Nomura Equity Research.” 8 

The key to the leaders’ grip on the market was distribution. Antarctica said its beer was 

available in 97% of the country, thanks to a network of 918 exclusive dealers delivering to 

900,000 outlets. Brahma made similar claims. The extent of Brahma’s market penetration was 

astonishing. In smart city neighborhoods and shanty towns, from the semi-arid Northeast to the 

7 Investext, # 2934928 

8 Martha Hamilton, “Fast-Growing Latin Companies Attracting Attention of Global Investors, Washington Post, 

Dec. 4, 1994. 

11


remotest backwater of the Amazon basin, there was hardly a bar in the country that did not sell 

Brahma. 

The importance of a mature distribution system forced foreign brewers hoping for a share 

of Brazil’s growth to court the local market leaders. In a deal signed in September 1995, Brahma 

formed a partnership with Miller Brewing Co. to first import then brew Miller’s Genuine Draft. 

(This was partly in response to moves by Miller’s US rival, Anheuser- Busch, which had paid 

$105 million for a 10% stake in Brazil’s No. 2 brewer.) 

Such deals offered foreign brewers the chance for dynamic growth outside the US and 

Europe. Although they could only hope for a small share of Brazil’s market in the near term, the 

opportunity was worth pursuing. Imported and premium beers took at most 3% of Brazil’s 

annual sales, but a 1% share in Sao Paulo state was worth about $60 million a year in revenue. 

As the government of President Fernando Henrique Cardoso consolidated the economic reforms, 

the market for such beers was expected to expand. 

“Rising Brazilian beer consumption, up 24% last year, is spurring rapid expansion by 

brewers such as Brahma. The surge is attracting major U.S. and European brewers searching for 

room to grow abroad.” 9 

Big Plans 

In this euphoric environment, the strategy was to invest in expansion and modernization. 

Brahma, not surprisingly, was moving faster than its competitors. A new brewery in Rio de 

Janeiro state, just opened in July 1996, expanded its capacity by 1.2 billion liters a year, bringing 

the company’s total annual production capacity to 5.1 billion liters. GP Investimentos’ Marcel 

Telles, Brahma’s CEO, said the company planned $840 million in investments through 1998 to 

boost capacity by 54% 10 . Meanwhile, Brahma’s controlling shareholders at GP Investimentos 

were enjoying an excellent rate of return. Brazilians were fiercely loyal to their favorite brand, 

following its advertising slogan “Brahma -- a Numero 1.” 

Expansion through diversification included opening plants across the border. In 1994, 

Brahma opened a $120 million brewery near Buenos Aires, in a bid to threaten the supremacy of 

Quilmes (Argentina) which commanded nearly 80% of the Argentine beer market. The 

Argentine unit of Brahma invested another $76 million to double output of its Lujan plant, which 

was already operating at full capacity. Brahma grabbed a 10% market share in Argentina in only 

two years. By 1996, analysts expected Brahma to overtake Japan’s Kirin Brewery Co. to become 

the world’s fourth-biggest brewer behind Anheuser-Busch (Budweiser), Heineken and Miller. 

Telles also drove Brahma to enter other Latin American markets, taking advantage of the 

Mercosur free-trade area. The aim was to make Brahma the largest brewery in the region. 

Bright Forecasts 

In August 1996, Brahma launched a program of Level One American Depository 

Receipts (ADRs), backed by existing shares, allowing the company to be traded in the US overthe-counter 

market. (Each ADR represents 20 preferred shares.) The offering was coordinated by 

Banco Garantia and the Bank of New York. 

9 Ian Katz, “In a Bullish Beer Market, Brahma is King,” Business Week, Aug. 5, 1996. 

10 Business Week, Aug. 5, 1996 

12


In the first quarter of 1997, Brahma’s net profits jumped 53% to 93 million Reals. Net 

turnover (sales) rose to 362 million Reals from 265 million Reals in the comparable year-earlier 

period. In physical terms, sales were up 5% from a year before in the first quarter. Exchange 

rates and money market interest rates are provided in Table 4. Please consult Exhibit 3 for 

financial statements for Cervejaria Brahma including common size income statement and 

balance sheet. 

Table 4 

Exchange Rates of Reals: US Dollar and Money Market Interest Rate: 1993-1997 

Exchange Rate 

US $ per real 

Money Market after Inflation 

Rate per Year 

1994 1995 1996 1997 

1.000 0.8440 0.9723 1.0394 

4820.64% 53.37% 27.45% 25.00% 

A new plant in Rio de Janeiro increased lager production by 3.2 billion liters. In 1997, the 

company planned to invest 350 million Reals to build two new plants in Sergipe and Rio Grande 

do Sul (see Figure 3 for a map of Brazil). Brahma also planned to set up a company to exploit 

new niche areas in the drinks market. The new company, Fratelli Vita, would have a range 

including isotonic drinks, teas, mineral waters, fruit juices, chocolate drinks and coffee. Sales in 

1997 were expected to top $100 million. Eight security firms issued buy recommendations for 

Brahma’s shares, despite a 53% climb in the share price over the past year. (See Figure 4 for 

share prices of Brahma and Table 5 for the annual movements of share prices in Brazil). 

For the partners of GP Investimentos, the success of diversifying into brewing seemed to many 

to be a matter of being in the right business at the right time. Brazilian beer consumption was 

forecast to rise 12% in 1997 and 7% in 1998. The question was whether this incredible growth 

could be sustained? Would Garantia see strong returns on its investment in expansion, or should 

it move its assets to something else? 

13


Figure 3 

Map of Brazil 

14


900 

800 

700 

600 

500 

400 

300 

200 

100 

0 

Jun-91 

Jun-92 

Source: Datastream 

25.00 

20.00 

15.00 

10.00 

5.00 

0.00 

Jun-91 

Jun-92 

Source: Datastream 

Jun-93 

Jun-93 

Jun-94 

Jun-94 

Jun-95 

Figure 4 a 

Brahma Equity Prices 

Jun-96 

Jun-97 

Figure 4 b 

Lojas Americanas Equity Prices 

Jun-95 

Jun-96 

Jun-97 

15 

Date Price Date Price 

6/1/91 0.02 12/1/94 304 

9/1/91 0.03 3/1/95 270 

12/1/91 0.05 6/1/95 310 

3/1/92 0.15 9/1/95 370 

6/1/92 0.25 12/1/95 395 

9/1/92 0.31 3/1/96 490 

12/1/92 0.53 6/1/96 596 

3/1/93 1.45 9/1/96 640 

6/1/93 3.35 12/1/96 620 

9/1/93 7.64 3/1/97 730 

12/1/93 17.45 6/1/97 770 

3/1/94 83.64 9/1/97 750 

6/1/94 163.64 12/1/97 690 

9/1/94 310 

Date Price Date Price 

6/1/91 0.01 12/1/94 22.62 

9/1/91 0 3/1/95 16.86 

12/1/91 0 6/1/95 15.13 

3/1/92 0.01 9/1/95 19.48 

6/1/92 0.01 12/1/95 14.98 

9/1/92 0.01 3/1/96 17.53 

12/1/92 0.03 6/1/96 12.89 

3/1/93 0.09 9/1/96 11.24 

6/1/93 0.25 12/1/96 10.11 

9/1/93 0.43 3/1/97 9.74 

12/1/93 1.56 6/1/97 10.47 

3/1/94 6.42 9/1/97 8.99 

6/1/94 16.93 12/1/97 5.17 

9/1/94 20.23


Table 5 

Share Prices in Brazil: 1992-1997 

Year 1992 1993 1994 1995 1996 1997 

Index (1995=100) .08 2.77 85.11 100 151.59 263.62 

Source: IMF: International Financial Statistics 

Diversification Strategy – Retail 

In 1983, Lemann and his partners (GP Investimentos) bought controlling interest in the 

financially-troubled discount retail chain LASA for $23 million. (In 1997, five partners owned 

40% of LASA, valued at about $300 million.) Since the buyout, LASA sales rose to $1.9 billion 

in 1995, making it the biggest non-food retailer in Brazil. In the same year, LASA issued shares 

and bonds, dramatically increasing its status and visibility. 

Once again, Garantia was in the right business at the right time, according to the case 

writer, to benefit from Brazil’s economic recovery. But its investment took time to pay off. 

“Garantia acquired Lojas Americanas, a chain of department stores, for $23 

million in 1983, when the stores had $300 million in sales. Since then LASA has 

doubled its floor space, and sales last year were $1 billion. It hasn’t been a bad 

investment, says Mr. Lemann, especially since, once the recession is over, LASA 

will be a strong going concern. But in 1983-90 GP Investimentos invested $220 

million in LASA cash flow and depreciation. The accounting rules for balancesheet 

indexation were not strong enough to keep up with inflation over this 

period. From a financial point of view, that investment -- ten times the purchase 

price of the company -- has simply disappeared; GP Investimentos would have 

been better off in cash and gold.” 11 

LASA staged a dramatic turnaround in 1994-95. In 1994, the company began to pay 

dividends. GP Investimentos’ financial strategy quickly shifted into high gear. Please see 

Exhibit 4 for financial data relating to LASA including common size income statement and 

balance sheet and Figure 3 (above) for equity prices for the company. In 1995, LASA issued 

901,681,530 preferred shares, as part of an option scheme approved in April. A total of 

76,643,798 new shares were issued as the result of bond conversion, qualifying for the 1995 

dividends. Capital rose to 268.7 million reals. Also in 1995, the Bank of New York sponsored an 

over-the-counter American Depository Receipts (ADR) program for LASA to tap the US capital 

markets. In addition, LASA raised $150 million with a Eurobond issue, the company’s biggest 

offering to date. The chain invested another $35 million in new technology, including a data 

communications system for its 97 affiliates. 

In early 1996, LASA started its own program on the Brazilian television shopping 

channel Shoptime, offered by MultiChannel and NET Cable through subscription. The program 

was also made available by an open signal for satellite dishes. LASA invested $1 million on the 

service, which was to be extended eventually to conventional TV. With the Brazilian economy 

heating up after a long spell of limited credit, consumption began to rise in the second half of the 

11 “Brazil: Drunk not Sick,” The Economist, Dec. 7, 1991. 

16


year. The government cut interest rates and made consumers’ lives easier by facilitating access to 

financing. The home appliance sector had already been growing significantly. Now this growth 

was spreading to consumer and retail companies. The share price in these sectors reflected the 

industry’s positive performance. 

Just like its parent company (GP Investimentos), LASA had an aggressive strategy for the 

future. It planned to open 100 more stores by the turn of the century, while also concentrating on 

a new joint venture formed with Wal-Mart Stores Inc. 

Suddenly, U.S. companies were lining up to invest in Brazil. The chance to partner with 

LASA was a prize plum. Brazil had emerged as one of Latin America’s brightest spots with real 

GDP growth above 5%, a balanced budget, strong foreign reserves and signs of serious fiscal 

reforms. US investment was close to $17 billion, the highest for any Latin American nation. 

In 1994, GP Investimentos, through LASA, partnered with Wal-Mart to form Wal-Mart 

Brasil SA to open Sam’s Club and Wal-Mart supercenter stores. The joint venture was funded 

60% by Wal-Mart and 40% by GP Investimentos’ LASA. A year later, the management of Wal- 

Mart Brasil SA opened five stores around Sao Paulo. The 1994 reports showed the acquisition of 

fixed assets for 15.5 million Reals for the capitalization of the joint venture. Wal-Mart cited 

Brazil’s economic reforms and the demand for low-priced consumer goods. The company 

announced it would make an initial investment of up to $100 million. Wal-Mart was enthusiastic 

about entering the biggest retail market in Latin America, with nearly 160 million consumers. 

To be successful, Wal-Mart management thought the company needed the association 

with LASA. Brazil’s high transport costs made it difficult even for Wal-Mart to operate the 

sophisticated distribution system that has been the secret of its success elsewhere. “I think that 

Wal-Mart can grow (in Brazil) at the same rates it grew in the United States up to 10 years ago 

when it had the market totally open to itself,” said Lemann, speaking at a conference on the Latin 

American economy, sponsored by the University of Pennsylvania’s Wharton School. 

But in 1996, Wal-Mart posted a larger-than-expected first quarter loss of $21 million, due 

to price wars with its major competitor, Carrefour, a French company that was the leader in 

“hypermarkets” in Europe and which operated 38 “hypermarkets” in Brazil. Regardless of its 

losses in the first years of operations, Wal-Mart was still seeking scarce real estate for more 

units. The company declared that it did not expect profits before 1998 anyway, after a 

skyrocketing expansion of the number of shopping malls in the country’s interior. Plans for the 

future included an accelerated growth strategy to overcome the losses registered in the first two 

years of operations. 

The group expected to open between 10 and 12 more outlets by the end of 1998, 

investing over $200 million. The company’s president, Arthur Emmanuel, predicted that Wal- 

Mart Brasil would be a totally profitable company in 1998 due to its aggressive growth plans and 

its strategic alliance with LASA, the country’s biggest retailer. 

17


Appendix A 

Diversified Corporations within Developing Economies 

Maria Luisa Rodenbeck 

Diversified business groups have been common in developing economies. During the 

time frame of this case study, Latin America was no exception. On a macro-economic level, 

there were important reasons for choosing a diversification strategy: privatization, industry 

opportunities, business cycles, new market structures, cost motivations, risk issues, synergy 

creation, and changes in companies’ historic profiles, just to mention a few. 

In the case of Brazil, three of the top 10 private groups were diversified companies. It 

was no coincidence that their origins were in the finance sector. All of them, including Garantia, 

enjoyed spectacular growth and generous cash inflows during inflationary times. Anticipating 

that economic stabilization would inevitably produce competition, weaker profits, rationalization 

of resources and new usage of funds, these big businesses set out to diversify. They adopted the 

strategy as an “escape paradigm.” Survival, growth or preservation of profit levels were the 

driving forces and root causes of diversification in some cases. In others, the motive was simply 

to find outlets for excess capital generated by core businesses. 

Over the past decades, companies like Garantia were subject to numerous economic 

upheavals and stabilization plans in Latin America. The cycle of crises and corrective programs 

constantly changed “the rules of the game,” making a single-business strategy difficult for big 

players to adopt. Putting all of a firm’s eggs in one industry basket could be dangerous. If an 

industry stagnated, the firm’s growth rate could be tougher to sustain, and profits harder to 

achieve. That was what Garantia visualized as coming, much earlier than the launching of the 

Real Plan. The speculative inflow of overnight money that the banking industry was managing in 

the 1980s had to be stopped, or else the whole financial system would eventually collapse, as in 

Venezuela several years before. 

When revenue growth in Brazil slowed, there were basically two strategic options to be 

considered. Companies could either try to take market share from rivals or focus on 

diversification. Companies like Garantia, with the competitive strength of strong finances and 

superior intellectual capital chose the second path. One of their competitive advantages was the 

chance to cross-subsidize to gain footholds in attractive new industries or markets. These efforts 

increased as they found remaining opportunities in their core or home-based industries 

decreasing or becoming too competitive and saturated. 

Large groups like Garantia throughout Latin America were also motivated to diversify to 

build shareholder value. It was not by chance that the same partners at Banco Garantia had 

shares in all the other businesses of the group (Brahma, LASA and others), through their 

holdings in GP Investimentos. If an opportunity for further diversification at Grupo Garantia 

passed three basic tests, it was quickly approved. The tests were: (1) attractiveness; (2) low cost 

of entry; and (3) the better-off and risk-free test. 

Among all the possible diversification strategies, GP Investimentos chose to invest in 

unrelated businesses. GP Investimentos often sought companies with undervalued assets where 

capital gains could be realized (as with Brahma). Alternately, Garantia looked for firms that were 

financially distressed and with limited capital but bright prospects (like LASA), which could be 

18


purchased at bargain prices. Any business that fit one these profiles was considered a good 

acquisition. 

After Latin America’s many economic shocks, the model of diversifying into unrelated 

businesses seemed the best way to scatter risk, while investing capital and human resources in 

industries offering the most stable prospects. 

19


Appendix B 

Brief Review of the Economic History of Brazil 

Maria Luisa Rodenbeck (modified by Jeff Ellis) 

Brazil, the fifth most populous country in the world, developed the range of its economic 

activities in the 30 years from the mid-1940s to the mid-1970s. Growth resulted from rapid 

industrialization, but it was accompanied by political pressures, corruption, income inequality 

and regional imbalances. For all its problems, Brazil’s growth throughout the 20th century has 

been phenomenal. 

“For the first eight decades of this century, Brazil’s economy grew faster than that of any 

other country except Japan. Then Brazil lost its way, amidst debt, high oil prices, inflation and 

protectionism.” (The Economist, March 14, 1998.) This appendix describes the inflationary 

‘eighties and the ups and downs of the ‘nineties in Brazil when inflation was moderated by 

concerted government action. 

The Inflationary 80s 

By the end of 1979, the second oil price shock, soaring world interest rates and recession 

among major trade partners meant that the policies of the previous decade were no longer viable. 

Throughout the 1980s, inflation showed a strong tendency to rise. To a considerable degree, the 

trend was linked to the debt crisis. With foreign capital no longer available after 1982, Brazilian 

governments experienced problems funding the public-sector deficit. Increasingly, they turned to 

internal lending. 

Rapid deterioration of Brazil’s external position became evident in September 1982, 

when the impact of the Mexican debt crisis became more severe. By the end of the year, the 

current account deficit stood at $16.3 billion, gross international reserves had fallen to $4 billion 

and debt service on medium-term obligations as a proportion of exports had reached 71.7%. 

Total debt was estimated at $83.3 billion, 63% of which was owed by the public sector. Brazil 

was forced to seek help from the IMF and international commercial banks. 

The IMF stabilization program produced few results at first and simply deepened the 

recession in 1983, but recovery began in 1984. Gross domestic product rose 4.5% that year, 

followed by 8.3% GDP growth in 1985. The upturn was triggered by the manufacturing sector’s 

response to the export drive and was reinforced by rapid expansion in demand and an increase in 

real incomes. 

But the arrival of the first civilian government in March 1985 coincided with the onset of 

a crisis in public sector finances, as well as the effective end of wage curbs imposed by the 

military governments as part of stabilization. 

In 1986, Jose Sarney’s government launched its major campaign to end the inflationary 

spiral: the Cruzado Plan. The plan was to shift the focus of economic policy from large 

infrastructure projects toward social priorities. A greater role was allocated to private sector 

investment, with the emphasis on the domestic rather than the export market. Certain segments 

of industry were to be protected from external competition, mainly in the fields of electronics 

and communications. The new administration initially adopted orthodox monetary and fiscal 

policies to try to meet IMF requirements, but negotiations on a new standby loan were soon 

abandoned. 

20


By the end of 1985, government had completed a switch from orthodox to supply-side 

measures in its attempts to bring down inflation, but radical adjustments were needed to achieve 

growth targets. The Cruzado Plan froze wages, prices and the exchange rate, introducing a new 

monetary unit: the cruzado. Set at a fixed rate to the dollar, the cruzado was designed to break 

inflationary expectations and stimulate domestic savings. These measures were supposed to be 

accompanied by steps to rein in the public-sector deficit. But virtually nothing was done. 

Inflationary pressures built up behind the freeze, although the end was delayed for political 

reasons until December 1986. 

In mid-1987, the New Cruzado Plan was introduced to stave off hyperinflation. It 

consisted of a 90-day freeze on wages and prices, new rules on wage adjustments, further steps 

for cutting public spending and devaluing the cruzado. But by the end of 1987, inflation was 

soaring again. The authorities had again failed to cut trim expenditures. 

The 1990s - Ups and Downs 

In January 1989, another attempt to hold back prices, the Summer Plan, proved even less 

successful. The period was characterized by turmoil and strikes to protect salaries against 

prevailing inflation. The old formula of freezing prices, reducing indexation and suspending 

debt-equity auctions was tried again in an effort to attack the public-sector deficit. But without 

public or political support, the government was unable to negotiate reforms that might have 

reduced the deficit. Money supply rose and inflation soared, reaching a record of 1,864% at yearend 

and forcing reindexation of the economy. 

The hyperinflationary spiral forced the Sarney administration’s successor to take drastic 

action with the New Brazil Plan, announced with Fernando Collor’s inauguration on March 15, 

1990. An annual inflation rate of 4,854% greeted the new administration. Collor and his 

economists decided to apply bitter remedies. The economy was subjected to a brutal liquidity 

squeeze. Government froze bank and savings accounts, leaving depositors with a limit of 50,000 

cruzados (about $1,000) for withdrawals for the next 18 months. The radical step reduced 

monthly inflation to single figures in May, but liquidity seeped back into the economy, leading to 

the return of double-digit inflation in June. The ambitious but unrealistic goal was to transform a 

budget deficit caused by public-sector spending equal to 8% of GDP in 1989 into a 2% surplus in 

1990 at the expense of an already-impoverished population. 

Monthly inflation climbed to 20% in January 1991, when a new freeze was announced as 

part of Collor Plan II. A temporary easing of inflation until May was followed by accelerating 

monthly rates of over 25% from October 1991 to January 1992. Recession and scandals 

characterized the Collor administration. A corruption crisis erupted in May 1992, ending in his 

impeachment. In September 1992, Collor’s vice- president, Itamar Franco, became president. 

The Real Plan 

After the deep recession of 1990-92, the economic recovery began in 1993. In May 1993, 

Fernando Henrique Cardoso became minister of finance and drew up the most successful 

economic stabilization program to date: the Real Plan. 

Cardoso approached the inflation problem carefully and gradually. He stated in a 

television interview that “one of the advantages of this program is that it was designed not to 

have any shocks, not to scare anyone.” In February, the government established a Social 

21


Emergency Fund to consolidate all existing transfers to the states for health care and education. 

This measure, combined with $7 billion in new taxes on wealth and financial transactions, 

eliminated the 1994 fiscal deficit. 

On March 1, the Unit of Real Value (URV) gradually began to replace the cruzeiro. The 

URV was equivalent to the dollar and adjusted daily in terms of cruzeiros to keep its value 

constant. Wages were immediately linked to the URV. Prices, taxes, investments and rents were 

gradually converted. Amended labor laws required annual renegotiation of salaries and wages 

instead of the automatic monthly adjustments that had been the practice. 

In April, the government finalized a $49 billion commercial debt restructuring with 

representatives of 750 international banks. The IMF agreed to cooperate closely. On July 1, 

1994, the Real was introduced as the new currency. It was pegged to the dollar and defended by 

$10 billion in earmarked foreign reserves, out of $40 billion on hand. 

Although generals, bishops and business leaders forecast social convulsions from the 

Real Plan, moderate and conservative political forces persuaded Cardoso to run for president. 

The basis of Cardoso’s platform was that stabilization was essential for growth and must be 

accompanied by spending on health, housing and education. He positioned the anti-inflation 

campaign as a populist cause. 

In July 1994 when the Real was introduced, the rate of inflation fell from 50% to about 

2%, and subsequently to 1% per month. The economy started to grow again. As the Real Plan 

began to work, Cardoso’s standing rose. The poor backed Cardoso in large numbers. The 

second-largest labor federation endorsed Cardoso, as did 276 independent unions. Cardoso won 

by a wide margin. 

The economy benefited from a strong performance by agriculture, with a record grain 

harvest. Export earnings rose 12% in dollar terms. Terms of trade improved, with higher 

commodity prices and falling oil prices. Domestic consumption was stimulated by low 

international interest rates and a strong inflow of foreign capital. 

The vigorous upturn in the economy since 1993 was at first consumption-led, 

underpinned by higher real wages and an expansion of credit following the fall in inflation 

during the second half of 1994. But as manufacturing approached full-capacity, the rate of 

investment (measured as a proportion of investment in GDP at 1980 prices) rose sharply, from 

14.2% in the second quarter of 1994 to 16.8% in the first quarter of 1995, despite high interest 

rates. By late 1994, the expansion of domestic output was being outpaced by domestic demand 

growth. The result was a surge in imports and a slowdown in export growth, especially of 

manufactured goods, pushing the trade balance into deficit. 

In 1995, the government squeezed credit and kept interest rates high. GDP growth 

collapsed from 10.3% in the first quarter from a year earlier to -2.5% in the first quarter of 1996. 

The investment rate followed suit, falling to 14.8% in the fourth quarter of 1995. But GDP and 

the rate of investment recovered in the second half of 1996. 

22


Exhibit 1 

Brazil’s Five Largest Domestic Grupos (1995) 

Company Net Worth ROE Principal lines of business Number of Grupo organization 

($US millions) companies Top 5 officers Controlling shareholders 

Votorantim 5,973,380 6.1% Non-metallics, metallurgy, 

9 Jose Ermirio de Moraes, Antonio Ermirio de Hejoassu Adm Limitada (96%) 

lumber/furniture/paper, finance 

Moraes, Ermirio Pereira de Moraes, Jose 

Ermirio de Moraes Neto, Clovis Scripilliti 

Itausa 5,102,819 9.4% Finance, securities and insurance, 7 Olavo Sgydio Setubal, Jose Carlos Moraes Grupo Villela (36.4%), Grupo Setubal 

lumber/furniture paper, electronics, 

Abreu, Roberto Egydio Setubal, Jairo (22.8%), Grupo Camargo Correa 

information and telecommunications, 

holding company 

Cupertion, Paulo Setubal Neto 

(10.1%), Fund Itaubanco (7.9%) 

Bradesco 5,085,906 10.9% Finance, securities and insurance, 

information and telecommunications, 

general services 

Camargo Correa 2,884,296 9.4% Construction, non-metallics, 

metallurgy, textiles and leather, 

electronics, meat and livestock 

Odebrecht 2,783,875 7.3% Holding company, construction, 

chemicals and petrochemicals, 

information and telecommunications 

Source: Balanco Anual, 1997 (data as of 12/95) 

9 Lazaro de Mello Brandao, Antonio Bornia, 

Dorival Antonio Bianchi, Ageo Silva, Marcio 

Artur Laurelli 

23 

Cidade de Deus Cia. Comercial 

(44.6%), Fundacao Bradesco (16.4%) 

9 Carlos Antonio Rossi Rosa, Joao Augusto Dirce Navarro C. Penteado e familia 

Chagas Pestana, Joao de Oliveria Mattos, 

Jose Geraldo Gallo Ferreira, Paulo de Tarso 

de Camargo Opice 

(100%) 

9 Emilio Alves Odebrecht, Aluizio Rebello de 

Araujo, Ruy Lemos Sampaio Sergio Foguel, 

Renato Antonio M. Martins 

Kieppe Invs S/A (54%), Victor Calixto 

Gradin Boulhosa (7.9%), Leda 

Nascimento Pedreira (5.3%), Walter 

Caymmi Comes (4.6%), Fundacao 

Emilio Odebrecht (1.2%)


Exhibit 2 

Selected Macroeconomic Statistics for Brazil, 1989 – 1997 

1989 1990 1991 1992 1993 1994 1995 1996 1997 

Balance of Payments Minus Sign Indicates Debit 

Current Account, n.i.e 1,002 -3,823 -1,450 6,089 20 -1,153 -18,136 … … 

Government Finance Thousands 1990-92; Millions Beginning. 1993 

Deficit (-) or Surplus -74,282 -672 -257 -24,389 -1,315 -23,671 … … … 

National Accounts Thousands 1990-92; Millions Beginning 1993 

Gross Fixed Capital Formation 114,496 2,400 10,900 118,100 2,718 72,453 132,753 148,884 … 

Gross Domestic Product (GDP) 400,000 11,500 60,300 641,000 14,097 349,205 646,192 778,820 865,919 

Money (National Definitions) Thousands 1990-1992; Millions Beginning 1993: End of Period 

M4 480,230 3,779 26,124 492,451 14,820 175,136 250,616 322,140 392,754 

Interest Rates Percent Per Annum 

Money Market Rate 6,404.97 15,778.57 847.54 1,574.28 3,284.44 4,820.64 53.37 27.45 25.00 

Prices, Production, Labor Period Averages 

Consumer Prices (‘90=100mill) 328,113 … … … … … … … … 

Consumer Prices (‘90=1) … 1 5 56 1,136 24,724 41,044 47,512 50,803 

Source: International Financial Statistics Yearbook, 1998, pages 267 and 269 

24


Exhibit 2 (continued): Selected Economic Statistics for Brazil, 1989-1997 

(Graphical Representations) 

Thousands Reals ('90-'92); Millions thereafter 

For Deficit/Surplus: thosands for 1990-92; Millions thereafter 

20,000 

10,000 

0 

-10,000 

-20,000 

-30,000 

-40,000 

-50,000 

-60,000 

-70,000 

-80,000 

1,000,000 

900,000 

800,000 

700,000 

600,000 

500,000 

400,000 

300,000 

200,000 

100,000 

0 

Balance of Payments Current Account and Government Finance Deficit/Surplus 

1989 1990 1991 1992 1993 1994 1995 1996 1997 

Money Supply (M4), GDP, and Gross Capital Formation 

1989 1990 1991 1992 1993 1994 1995 1996 1997 

Year 

25 

Year 

Current Account, n.i.e 

Deficit (-) or Surplus 

Gross Fixed Capital Formation 

Gross Domesic Product (GDP) 

M4


Consumer Prices using 1990 as a bse of 1 

Money Market Rate (Percent per Annum) 

Exhibit 2 (continued): Selected Economic Statistics for Brazil, 1989-1997 

(Graphical Representations –Continued) 

18,000.00 

16,000.00 

14,000.00 

12,000.00 

10,000.00 

8,000.00 

6,000.00 

4,000.00 

2,000.00 

60000 

50000 

40000 

30000 

20000 

10000 

0.00 

0 

Interest Rates 

1989 1990 1991 1992 1993 1994 1995 1996 1997 

Year 

Consumer Prices 

1989 1990 1991 1992 1993 1994 1995 1996 1997 

Year 

26


Exhibit 3 

Cervejaria Brahma SA Financial Statements 

BALANCE SHEET 

ASSETS ('000'S) 

Fiscal Year Ending 12/31 1997 1996 1995 1994 1993 1992 

CASH & EQUIVALENTS 884,576 821,008 857,524 654,783 69,756 1,686 

NET RECEIVABLES 461,955 266,217 356,489 242,557 16,707 451 

RAW MATERIALS 141,362 190,218 145,740 40,238 4,737 152 

WORK IN PROCESS 25,415 25,261 14,604 8,555 673 24 

FINISHED GOODS 41,126 36,527 25,229 15,352 644 24 

PROGRESS PAYMENT & OTHER 106,850 68,320 37,426 55,781 3,915 74 

INVENTORIES 314,753 320,326 222,999 119,926 9,970 275 

PREPAID EXPENSES 17,410 18,533 21,386 14,121 211 25 

TOTAL CURRENT ASSETS 1,678,694 1,426,084 1,458,398 1,031,387 96,643 2,436 

OTHER INVESTMENTS 11,719 7,274 4,782 5,751 535 20 

INVST IN ASSOC COMP 0 0 31,260 14,912 1,850 76 

LONG TERM RECEIVABLES 171,845 213,039 134,104 63,744 3,544 183 

PROP., PLANT, EQUIPMENT - GROSS 3,334,664 2,639,481 2,348,956 1,439,071 128,318 4,732 

ACCUM. DEPRECIATION 1,215,107 925,544 824,252 638,365 59,095 2,046 

NET PP&E 2,119,557 1,713,937 1,524,704 800,706 69,223 2,686 

DEFERRED CHARGES 141,288 131,966 64,284 48,081 3,245 145 

INTANGIBLE OTHER ASSETS 35,062 23,588 0 0 0 0 

OTHER ASSETS 176,350 155,554 64,284 48,081 3,245 145 

TOTAL ASSETS (1) 4,158,165 3,515,888 3,217,532 1,964,581 175,041 5,546 

LIABILITIES ('000'S) 


ACCOUNTS PAYABLE 291,261 190,471 150,301 100,492 3,863 134 

ST DEBT & CURRENT LT DEBT 710,630 478,406 197,698 161,068 23,182 232 

ACCRUED PAYROLL 121,477 92,321 114,392 77,745 7,937 206 

DIVIDENDS PAYABLE 71,230 51,853 435,577 28,903 1,537 52 

INCOME TAXES PAYABLE 165 33,896 98,288 127,426 11,560 322 

OTHER CURRENT LIABILITIES 270,531 228,486 297,253 327,382 23,979 822 

TOTAL CURRENT LIABILITIES 1,465,294 1,075,433 1,293,509 823,016 72,059 1,768 

LONG TERM DEBT 872,351 541,832 335,647 96,313 9,811 370 

PROV RISKS/CHARGES 315,609 473,705 387,369 0 0 0 

DEFERRED TAXES (2) -95,154 36,821 58,993 35,151 5,137 365 

OTHER LIABILITIES 195,963 62,373 35,791 5,241 582 24 

UNREAL SEC GAIN/LOSS -428 -928 -717 -179 -24 -1 

TOTAL LIABILITIES 2,754,063 2,190,164 2,111,309 959,721 87,589 2,528 

NON EQUITY RESERVES 0 0 12,956 26,471 1,305 88 

MINORITY INTEREST 53,799 61,872 99,076 40,836 3,412 136 

COMMON STOCK/ORD CAP (3) 927,777 877,284 684,457 503,393 48,577 138 

REVAL. RES./CAPITAL SURPLUS 2,468 2,468 4,181 3,414 340 1,495 

OTHER APPROPRIATED RES 558,566 425,784 324,708 445,981 35,340 1,135 

RETAINED EARNINGS 86 

TREASURY STOCK 138,080 40,756 18,438 15,056 1,498 59 

COMMON SHLDRS EQUITY (4) 1,350,303 1,263,852 994,191 937,553 82,736 2,794 

TOTAL LIABS & EQUITY 4,158,165 3,515,888 3,217,532 1,964,581 175,041 5,546 

27


Exhibit 3 (continued) 


INCOME STATEMENT ('000'S) 


NET SALES OR REVENUE 2,376,843 2,240,116 123,429 1,501 

1,661,129 1,233,043 862,660 61,691 

GROSS INCOME 1,067,959 985,281 657,691 635 

DEPRECIATION & AMORT 182,633 131,267 8,937 131 

714,134 599,091 458,980 35,479 

OTHER OPERATING EXPENSES -175,954 208,939 46,443 74 

2,249,669 1,988,064 1,465,035 110,514 

OPERATING INCOME 529,779 187,821 152,268 1 

NON-OPER INTEREST INCOME 

0 0 -3,687 -641 

OTHER INC/EXP - NET 140,118 270,390 213,288 1,645 

INTEREST EXPENSE (5) 257,234 102,338 5,969 939 

392,906 251,996 176,763 22,673 

INCOME TAXES 53,659 100,709 32,858 382 

MINORITY INTEREST 6,693 -8,526 -242 -3 

114,671 153,328 -18,681 -3,644 

NET INCOME BEFORE EX. ITEMS 456,323 250,299 117,901 268 

NET INCOME BEFORE PREF. DIV. 324,894 250,299 11,610 268 

NET INCOME 456,323 324,894 250,299 117,901 11,610 268 

FOOTNOTES TO FINANCIAL STATEMENTS: 

1: 1997 - ADJUSTED TO EXCLUDE DEFERRED TAXES 

2: 1997 - ADJUSTED TO INCLUDE DEFERRED TAX DEBITS 

3: 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988 - PROFIT 

PARTICIPATING PREFERRED STOCK INCLUDED IN COMMON EQUITY 

4: 1992 - INCLS 251.1 BIL OF PREFERRED STOCK WHICH SHARES IN PROFITS OF THE COMPANY 

5: 1991 - INCLUDES OTHER INCOME OR EXPENSE 

KEY FINANCIAL ITEMS ('000'S US$) 

Fiscal Year Ending 12/31 1997 1996 1995 1994 1993 

MARKET CAPITAL (US$) 4,720,099 3,995,903 2,832,928 2,160,702 1,437,568 

COMMON EQUITY (US$) 1,209,953 1,216,407 1,022,834 1,103,003 719,395 

TOTAL ASSETS (US$) 3,725,965 3,383,902 3,310,229 2,311,271 1,521,999 

SALES (US$) 2,490,552 2,287,616 2,304,654 1,902,708 1,073,225 

NET INCOME (US$) 408,893 312,697 257,510 138,706 100,953 

Fiscal Year Ending 12/31 1992 1991 1990 1989 1988 

MARKET CAPITAL (US$) 1,024,929 1,245,121 286,863 490,207 

COMMON EQUITY (US$) 654,444 541,448 261,448 423,661 252,177 

TOTAL ASSETS (US$) 1,298,880 1,026,380 673,803 778,266 546,611 

SALES (US$) 351,520 946,018 501,825 284,991 222,444 

NET INCOME (US$) 62,878 75,075 73,473 46,726 20,572 

28




FUNDS FLOW STATEMENT (000's) 

SOURCES OF FUNDS 


NET INCOME/START LIN 456,323 324,894 250,299 117,901 11,610 268 

DEPR., DEPLETION & AMORTN. 272,496 182,633 131,267 96,952 8,937 131 

OTHER CASH FLOW -112,768 113,609 256,452 54,239 5,712 171 

FUNDS FROM OPERATION 616,051 621,136 638,018 269,092 26,259 570 

FUNDS-OTHER OPER ACT 137,251 -235,043 268,786 38,766 -6,902 -653 

PROCEED SALE/ISS STOCK 42,283 211,553 46,581 14,864 9,449 10 

OTHER STOCK SALES 42,283 211,553 46,581 14,864 9,449 10 

DISPOSAL FIXED ASSETS 0 0 0 0 0 0 

LONG TERM BORROWING 479,803 270,124 263,528 1,505 0 725 

OTHER SOURCES 4,815 -28,314 51,691 2,789 2,024 44 

TOTAL SOURCES 1,280,203 839,456 1,268,604 30,830 695 

Fiscal Year Ending 12/31 1997 1995 1994 1992 

CASH DIVIDENDS PAID-TOTAL 77,323 452,962 10,727 66 

697,729 472,188 247,909 15,887 

ADDITIONS TO OTHER ASSETS 35,028 28,771 20,857 118 

REDUCTION IN LT DEBT 0 0 3,627 0 

293,108 183,176 0 0 

INCR IN INVESTMENTS 4,445 593 374 2 

OTHER USES 42,152 56,042 0 195 

1,280,203 839,456 327,016 30,830 

RECONCILIATION OF SOURCES 


-137,251 185,762 183,786 23,917 

SUPPLEMENTARY DATA (000's) 


213,400 350,651 208,371 24,585 

LT DEBT EX-CAP-LEA 872,351 335,647 96,313 370 

MONETARY CORR - CAP 

TOTAL CAPITAL 2,276,453 1,441,870 1,101,173 3,388 

MONETARY VAR-DEBITS 

EXTERNAL FINANCING 228,978 310,109 16,369 735 

TOTAL DEBT 1,020,238 533,345 32,993 602 

10 9 14 16 

669,897 509,230 361,869 28,642 

MARKET VALUE 5,267,615 2,753,596 1,836,598 4,376 

1997 1996 1994 1993 

2,779,448 2,376,843 1,617,303 123,429 

456,323 324,894 117,901 11,610 

63.11 44.45 16.48 1.65 

29




Common Size Balance Sheets 

Assets 

FY ending 12/31 1997 1996 1995 1994 1993 1992 

Cash & Equivalents 21% 23% 27% 33% 40% 30% 

Net receivables 11% 8% 11% 12% 10% 8% 

Raw materials 3% 5% 5% 2% 3% 3% 

WIP 1% 1% 0% 0% 0% 0% 

Finished Goods 1% 1% 1% 1% 0% 0% 

Progress payment & other 3% 2% 1% 3% 2% 1% 

Inventories 8% 9% 7% 6% 6% 5% 

Prepaid expenses 0% 1% 1% 1% 0% 0% 

Total Current Aseets 40% 41% 45% 53% 55% 44% 

Other investments 0% 0% 0% 0% 0% 0% 

Invest in Assoc comp 0% 0% 1% 1% 1% 1% 

Long term receivables 4% 6% 4% 3% 2% 3% 

PPE 80% 75% 73% 73% 73% 85% 

Accum Depr 29% 26% 26% 32% 34% 37% 

Net PPE 51% 49% 47% 41% 40% 48% 

Deferred charges 3% 4% 2% 2% 2% 3% 

Intangible other assets 1% 1% 0% 0% 0% 0% 

Other assets 4% 4% 2% 2% 2% 3% 

Total Assets 92% 91% 93% 94% 94% 95% 

Liabilities 

FY ending 12/31 1997 1996 1995 1994 1993 1992 

Accounts payable 7% 5% 5% 5% 2% 2% 

St. debt & Current LT debt 17% 14% 6% 8% 13% 4% 

Accrued payroll 3% 3% 4% 4% 5% 4% 

Dividends payable 2% 1% 14% 1% 1% 1% 

Income taxes payable 0% 1% 3% 6% 7% 6% 

Other current liabilities 7% 6% 9% 17% 14% 15% 

Total Current Liabilities 35% 31% 40% 42% 41% 32% 

Long Term debt 21% 15% 10% 5% 6% 7% 

Prov risks/charges 8% 13% 12% 0% 0% 0% 

Deferred taxes -2% 1% 2% 2% 3% 7% 

Other liabilities 5% 2% 1% 0% 0% 0% 

Unreal sec gain/loss 0% 0% 0% 0% 0% 0% 

Total Liabilities 66% 62% 66% 49% 50% 46% 

Non equity reserves 0% 0% 0% 1% 1% 2% 

Minority interest 1% 2% 3% 2% 2% 2% 

30


Common stock/ord cap 22% 25% 21% 26% 28% 2% 

Reval res/capital surplus 0% 0% 0% 0% 0% 27% 

Other appropriated res 13% 12% 10% 23% 20% 20% 

Retained earnings 0% 0% 0% 0% 0% 2% 

Treasury stock 3% 1% 1% 1% 1% 1% 

Common shldrs equity 32% 36% 31% 48% 47% 50% 

Total Liabilities & Equity 100% 91% 93% 94% 94% 95% 

Common Size Income Statements 

FY ending 12/31 1997 1996 1995 1994 1993 1992 

Net sales or revenue 100% 100% 100% 100% 100% 100% 

COGS 60% 52% 50% 53% 50% 49% 

Gross income 38% 40% 44% 41% 43% 42% 

Depreciation & amort 2% 8% 6% 6% 7% 9% 

SG&A 26% 25% 26% 28% 29% 37% 

Other operating expenses -6% -1% 9% 3% 4% 5% 

Total operating expenses 81% 84% 92% 91% 90% 100% 

Operating income 19% 16% 8% 9% 10% 0% 

Non-oper interest income 0% 0% 0% 0% 0% 0% 

Pretax equity in earnings 0% 0% 0% 0% -1% 0% 

Other inc/exp – net 5% 5% 12% 13% 13% 110% 

Interest expense 10% 11% 5% 11% 5% 63% 

Pretax income 14% 11% 16% 11% 18% 47% 

Income taxes 2% 3% 4% 2% 6% 25% 


After tax other inc/exp 4% 6% -1% -1% -3% -4% 

Net income before ex. Items 16% 14% 11% 7% 9% 18% 

Net income before pref. Div 16% 14% 11% 7% 9% 18% 

Net income 16% 14% 11% 7% 9% 18% 

31


Exhibit 4 

Lojas Americanas SA Financial Statements 

BALANCE SHEET 

ASSETS ('000'S) 


CASH & EQUIVALENTS 298,975 423,631 291,769 260,015 23,716 893 

NET RECEIVABLES (1) 220,587 220,682 275,297 62,921 37 

FINISHED GOODS 245,678 230,679 177,179 128,772 11,889 222 

INVENTORIES 245,678 230,679 177,179 128,772 11,889 222 

OTHER CURRENT ASSETS 0 0 0 15,235 1,288 0 

TOTAL CURRENT ASSETS 765,240 874,992 744,245 466,943 36,893 1,153 

OTHER INVESTMENTS 1,644 31,156 27,090 3,528 337 20 

LONG TERM RECEIVBLES 55,739 97,585 80,392 28,250 1,211 3 

PROP PLANT EQ-GROSS 598,843 579,992 571,877 356,825 32,286 1,251 

ACCUM DEPRECIATION 353,595 325,097 298,416 169,289 14,827 529 

NET PP&E 245,248 254,895 273,461 187,536 17,459 722 

DEFERRED CHARGES 28,511 14,038 9,633 3,792 340 10 

OTHER ASSETS 28,511 14,038 9,633 3,792 340 10 

TOTAL ASSETS (2) 1,096,382 1,272,666 1,134,821 690,049 56,240 1,908 

LIABILITIES ('000'S) 


ACCOUNTS PAYABLE 217,486 309,519 265,722 176,651 16,376 479 

ST DEBT & CURRENT LT DEBT 105,131 205,674 218,955 80,088 4,484 233 

ACCRUED PAYROLL 26,691 16,463 18,021 11,575 1,393 35 

DIVIDENDS PAYABLE 331 363 15,815 12,599 1,457 16 

INCOME TAXES PAYABLE (3) 51,366 67,130 61,447 2,953 100 

OTHER CURRENT LIAB 26,545 31,811 17,120 60,642 970 24 

TOTAL CURRENT LIABILITIES 427,550 630,960 597,080 341,555 27,634 886 

LONG TERM DEBT 226,367 160,736 10,044 7,291 968 40 

PROV RISKS/CHARGES 8,400 5,000 0 0 0 0 

DEFERRED TAXES (4) -8,482 -9,082 217 843 35 43 

OTHER LIABILITIES 0 6,996 39,362 2,933 0 14 

TOTAL LIABILITIES 653,835 794,610 646,703 352,622 28,637 983 

MINORITY INTEREST 69 101 0 0 0 0 

PREFERRED STOCK (5) 

COMMON STOCK/ORD CAP (6) 405,035 399,506 384,136 255,772 19,059 586 

CAPITAL SURPLUS 

OTH APPROPRIATED RES 40,613 81,351 105,476 82,433 8,584 340 

TREASURY STOCK 3,170 2,902 1,494 778 40 0 

COMMON SHLDRS EQUITY (7) 442,478 477,955 488,118 337,427 27,603 926 

TOTAL LIABS & EQUITY 1,096,382 1,272,666 1,134,821 690,049 56,240 1,908 

32



Lojas Americanas SA Financial Statements 

INCOME STATEMENT ('000'S) 


NET SALES OR REVENUE 1,875,157 1,952,136 1,892,014 1,388,377 95,511 2,869 

COST OF GOODS SOLD 1,408,330 1,496,618 1,478,924 1,061,835 71,890 2,233 

GROSS INCOME 427,186 416,355 384,208 306,847 21,753 562 

DEPRECIATION & AMORT 39,641 39,163 28,882 19,695 1,868 73 

SELL. GEN. & ADMIN. EXP 407,922 425,311 355,870 228,775 19,622 640 

OTHER OPERATING EXPENSES 0 0 5,353 29,454 1,977 5 

TOTAL OPERATING EXPENSES 1,855,893 1,961,092 1,869,029 1,339,759 95,357 2,951 

OPERATING INCOME 19,264 -8,956 22,985 48,618 153 -83 

PRETAX EQUITY IN EARNS -9,903 -22,256 -6,615 0 0 7 

OTHER INC/EXP - NET 37,211 35,675 61,095 70,252 6,442 160 

INTEREST EXPENSE 78,197 31,850 27,567 80,614 3,398 42 

PRETAX INCOME -31,625 -27,387 49,898 38,256 3,197 43 

INCOME TAXES 5,709 -3,205 5,201 3,441 -936 -3 

MINORITY INTEREST -32 -56 0 0 0 0 

NET INC BEFORE EX ITEMS -37,302 -24,126 44,697 34,815 4,133 47 

NET INC BEFORE PREF DIV -37,302 -24,126 44,697 34,815 4,133 47 

NET INCOME -37,302 -24,126 44,697 34,815 4,133 47 

KEY FINANCIAL ITEMS ('000'S US$) 


MARKET CAPITAL (US$) 212,965 600,214 1,050,386 1,285,352 584,511 242,874 

COMMON EQUITY (US$) 396,487 460,013 502,181 396,973 240,010 216,836 

TOTAL ASSETS (US$) 982,424 1,224,890 1,167,515 811,822 489,009 446,962 

SALES (US$) 1,680,253 1,878,853 1,946,523 1,633,384 830,474 671,907 

NET INCOME (US$) -33,425 -23,220 45,985 40,959 35,933 10,932 

FOOTNOTES TO FINANCIAL STATEMENTS: 

1: 1992, 1991, 1990, 1989 - INCLUDES OTHER CURRENT NON-TRADE RECEIVABLES AND/OR OTHER CURRENT ASSETS 

2: 1997, 1996 - ADJUSTED TO EXCLUDE DEFERRED TAXES 

3: 1997, 1996, 1995 - INCLUDES OTHER TAXES 

4: 1997 - ADJUSTED TO INCLUDE DEFERRED TAX DEBITS 

5: 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989 - PROFIT-PARTICIPATING 

PREFERRED STOCK INCLUDED IN COMMON EQUITY 

6: 1991 - INCLUDES MONETARILY CORRECTED CAPITAL 

7: 1990 - INCLS 98.5 MIL OF PREFERRED STOCK WHICH SHARES IN PROFITS OF THE COMPANY 

33



Lojas Americanas SA 

FUNDS FLOW STATEMENT ('000's) 

SOURCES OF FUNDS 


NET INCOME/START LIN -37,302 -24,126 44,697 34,815 4,133 47 

DEPR, DEPLETION & AMORTN. 39,641 39,163 28,882 19,695 1,868 73 

OTHER CASH FLOW 22,220 22,268 10,917 524 66 -6 

FUNDS FROM OPERATION 24,559 37,305 84,496 55,034 6,067 114 

FUNDS-OTH OPER ACT -93,658 -96,867 6,388 -32,305 -2,718 -125 

PROCEED SALE/ISS STK 2,093 15,371 16,141 35,013 4,548 6 

OTHER STOCK SALES 2,093 15,371 16,141 35,013 4,548 6 

DISPOSAL FIX ASSETS 0 15,543 0 0 0 0 

LONG TERM BORROWING 61,102 124,042 36,070 983 0 0 

DECR IN INVESTMENTS 40,390 101 0 0 0 0 

OTHER SOURCES 53,776 0 607 0 -1,349 62 

TOTAL SOURCES 88,262 95,495 143,702 58,725 6,547 56 

USES OF FUNDS 


CASH DIVS PAID-TOTAL 0 0 12,740 10,230 4,435 13 

CAPITAL EXPENDITURE 28,254 31,471 50,054 30,540 1,059 41 

ADDITS TO OTH ASSETS 19,096 8,578 7,110 1,879 187 3 

COM/PFD PURCH RTRD 268 1,408 541 376 32 0 

INCR IN INVESTMENTS 30,215 26,830 27,460 348 2 0 

OTHER USES 10,429 27,208 45,797 15,352 831 -2 

TOTAL USES 88,262 95,495 143,702 58,725 6,547 56 

RECONCILIATION OF SOURCES 


INC/DEC WORK CAPITAL 93,658 96,867 21,777 116,128 8,993 255 

SUPPLEMENTARY DATA (000's) 


WORKING CAPITAL 337690 244032 147165 125388 9260 267 

LT DEBT EXCL. CAP-LEA 226367 160736 10044 7291 968 40 

TOTAL CAPITAL 668914 638792 498162 344718 28571 965 

EXTERNAL FINANCING 62927 138005 51670 35620 4516 6 

TOTAL DEBT 331498 366410 228999 87379 5452 272 

EMPLOYEES 20 16 16 15 14 

EARN BEF INT & TAXES 46572 4463 77465 118870 6595 85 

MARKET VALUE 237669 623624 1020972 1092550 67223 1037 

34




Common Size Balance Sheets 

Assets 

FY ending 12/31 1997 1996 1995 1994 1993 1992 

Cash & Equivalents 27% 33% 26% 38% 42% 47% 

Net receivables 20% 17% 24% 9% 0% 2% 

Finished Goods 22% 18% 16% 19% 21% 12% 

Inventories 22% 18% 16% 19% 21% 12% 

Prepaid expenses 0% 0% 0% 2% 2% 0% 

Total Current Aseets 70% 69% 66% 68% 66% 60% 

Other investments 0% 2% 2% 1% 1% 1% 

Long term receivables 5% 8% 7% 4% 2% 0% 

PPE 55% 46% 50% 52% 57% 66% 

Accum Depr 32% 26% 26% 25% 26% 28% 

Net PPE 22% 20% 24% 27% 31% 38% 

Deferred charges 3% 1% 1% 1% 1% 1% 

Other assets 3% 1% 1% 1% 1% 1% 

Total Assets 100% 100% 100% 100% 100% 100% 

Liabilities 

FY ending 12/31 1997 1996 1995 1994 1993 1992 

Accounts payable 20% 24% 23% 26% 29% 25% 

St. debt & Current LT debt 10% 16% 19% 12% 8% 12% 

Accrued payroll 2% 1% 2% 2% 2% 2% 

Dividends payable 0% 0% 1% 2% 3% 1% 

Income taxes payable 5% 5% 5% 0% 5% 5% 

Other current liabilities 2% 2% 2% 9% 2% 1% 

Total Current Liabilities 39% 50% 53% 49% 49% 46% 

Long Term debt 21% 13% 1% 1% 2% 2% 

Prov risks/charges 1% 0% 0% 0% 0% 0% 

Deferred taxes -1% -1% 0% 0% 0% 2% 

Other liabilities 0% 1% 3% 0% 0% 1% 

Total Liabilities 60% 62% 57% 51% 51% 52% 


Common stock/ord cap 37% 31% 34% 37% 34% 31% 

Other appropriated res 4% 6% 9% 12% 15% 18% 

Treasury stock 0% 0% 0% 0% 0% 0% 

Common shldrs equity 40% 38% 43% 49% 49% 49% 

Total Liabilities & Equity 100% 100% 100% 100% 100% 100% 

35




Common Size Income Statements 

FY ending 12/31 1997 1996 1995 1994 1993 1992 

Net sales or revenue 100% 100% 100% 100% 100% 100% 

COGS 75% 77% 78% 76% 75% 78% 

Gross income 23% 21% 20% 22% 23% 20% 

Depreciation & amort 2% 2% 2% 1% 2% 3% 

SG&A 22% 22% 19% 16% 21% 22% 

Other operating expenses 0% 0% 0% 2% 2% 0% 

Total operating expenses 99% 100% 99% 96% 100% 103% 

Operating income 1% 0% 1% 4% 0% -3% 

Pretax equity in earnings -1% -1% 0% 0% 0% 0% 

Other inc/exp - net 2% 2% 3% 5% 7% 6% 

Interest expense 4% 2% 1% 6% 4% 1% 

Pretax income -2% -1% 3% 3% 3% 1% 

Income taxes 0% 0% 0% 0% -1% 0% 


Net income before ex. Items -2% -1% 2% 0% 4% 2% 

Net income before pref. Div -2% -1% 2% 0% 4% 2% 

Net income -2% -1% 2% 0% 4% 2% 

36

Grupo Garantia (B) 

How it All Ended 

In 1997, the fortunes of Grupo Garantia came crashing down. 

BAB007 

05/05/00 

Banco de Investimentos Garantia suffered trading losses estimated at $95 million to $110 

million in October 1997 alone. Some 20% of the owners’ equity was reportedly wiped out in a 

month 12 . 

The Asian economic crisis was seen as the immediate cause. After a series of 

devaluations struck economies from Thailand to South Korea, Brazil came under irresistible 

pressure. The Bovespa, Brazil’s stock market index, lost 32% of its value in a little over two 

weeks. See Figure 1 for more than six years of quarterly time series for the Bovespa Index. 

While Banco Garantia’s losses were seen as huge in light of its size, they came against a 

backdrop of a far larger crisis in world markets. Even the solid pillars of Wall Street were not 

immune. In November 1997, Chase Manhattan stunned the global banking industry by reporting 

losses of $160 million during the previous month in emerging markets from Asia to Latin 

America. Japan’s finance ministry and central bank appealed for calm as shares in the country’s 

financial institutions plunged 13 . 

Even so, the trouble at Garantia stood out as both a significant symptom and a source of 

the instability. “Local analysts fear the revelation that Banco Garantia -- arguably Brazil’s 

leading investment bank -- will this week seek a R$50m ($45m) capital increase, to cover losses 

12 

Brian Caplen, “Decision Time for Brazil’s Top Bankers, Euromoney, May 10, 1998; William Hall, “CSFB Set to 

Lead Sector in Brazil,” Financial Times, June 11, 1998. 

13 

Financial Times, Nov. 14 and 27, 1997. 


assistance of David Wylie, Director of Babson College Case Publishing, and Susan Ellis, adjunct research associate, as a 

basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. 

The authors would like to express thanks to the Arthur D. Little School of Management for a paper written for them by 

Maria Luisa Rodenbeck MSM’97, upon which major portions of this case are based, to Andres Kriger Babson MBA2000 

for commenting in detail on drafts, and to Professor U. Srinivasa Rangan, Babson College, for allowing inclusion of 

material from his case “Brazil 1995: Fernando Cardoso and the Petrobras Crisis” and to the Institute for Latin American 

Business Studies at Babson College for its generous support 


Copyright © by Jeffry Ellis, 1999 and licensed for publication to Harvard Business School Publishing. To order copies or 

request permission to reproduce materials, call (800) 545-7685 or write Harvard Business School Publishing, Boston, MA 

02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in 

any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of 

copyright holder or licensee.

Grupo Garantia (B) – How It All Ended BAB007 

incurred over the last two weeks, will add to the 

gloom,” said the Financial Times in a front page 

story 14 . 

As Banco Garantia turned to its partners for 

more cash, rumors of liquidity problems contributed to 

the loss of confidence in the real. The Brazilian 

government doubled annual interest rates to 43.4% in 

a bid to stave off devaluation. Annual data on the 

value of the Brazilian monetary unit versus the United 

States Dollar as at the first day of each year from 1995 

through 1999 is provided in Figure 2. The move 

raised borrowing costs by some 40% over inflation, 

creating immediate hardship for both businesses and 

consumers. The government also spent an estimated 

$7 billion in one week to defend the currency. 

Brazil’s battle was taken seriously in the 

United States because it represented a new exposure to 

the world monetary crisis that came close to home. 

The fear was that if Brazil’s overvalued currency 

toppled, it would start a series of monetary dominoes 

falling in Argentina and Chile. In January 1998, 

President Fernando Henrique Cardoso called a special 

session of Congress to cut the fiscal deficit by 

reforming the civil service and pension systems. Tax 

hikes and spending cuts of $18 billion were planned to 

restore confidence and bring some measure of 

monetary relief. 

The press on Garantia turned decidedly sour. 

Some publications that sang the bank’s praises in its 

heyday now seemed equally enthusiastic about writing 

its obituary. 

“An investment bank’s problems rarely prompt 

an outpouring of joy. But since Brazilian leader 

Garantia ran into troubles, triggered by last year’s 

Asian crisis, competitors, ex-employees and even 

regulators and journalists have been out celebrating. 

They see Garantia’s fall as a punishment for past 

arrogance and high risk-taking.” 15 The bank’s profits 

took a beating, falling to $12 million in 1997 from 

$117 million the year before. 

14 Financial Times, Nov. 10, 1997. 

15 Euromoney, May 10, 1998. 

2 

Figure 1 

Bovespa Index, 1992-1999 

Period Index Index # 

Q4 92 39,642 8 

Q1 93 86,073 8 

Q2 93 21,847 9 

Q3 93 59,179 9 

Q4 93 17,665 10 

Q1 94 64,202 10 

Q2 94 13,456 11 

Q3 94 38,746 11 

Q4 94 47,587 11 

Q1 95 38,093 11 

Q2 95 33,306 11 

Q3 95 38,294 11 

Q4 95 45,850 11 

Q1 96 49,090 11 

Q2 96 50,756 11 

Q3 96 64,116 11 

Q4 96 67,981 11 

Q1 97 78,162 11 

Q2 97 9,422 12 

Q3 97 11,181 12 

Q4 97 12,487 12 

Q1 98 9,752 12 

Q2 98 12,108 12 

Q3 98 11,057 12 

Q4 98 6,593 12 

Note: In Brazil, the share price index is 

calculated quarterly based on the price of 

the most traded 80% of shares in the 

preceding 12 months. To keep up with 

inflation, the index is rebased periodically. 

For example it was rebased twice in 1993 

and also once in 1994 and 1997 

*


Many of Garantia’s virtues were suddenly portrayed as vices. Its vaunted initiative was 

seen as arrogance, its creativity was risky, its casual co-mingling of traders and partners was 

painted as unwise and intolerable for any potential buyer. 

“No global house could take on Garantia without bringing its structure more into line 

with international norms. At present investment bankers, proprietary traders, sales and research 

all sit on the same floor -- and until very recently asset managers did too,” Euromoney 

complained. The magazine traced the bank’s troubles to trading in Brady bonds, one of 

Garantia’s specialties. It reportedly leveraged itself heavily, expecting the market to strengthen 

before a buyback as part of debt restructuring. When the Asian crisis reached Brazil, the bonds 

fell from 87% of face value to 65% in two weeks. Garantia’s total net assets under management 

fell to $3 billion at the end of 1997 from $6 billion in June. Euromoney even questioned Grupo 

Garantia’s diversification, saying it had deliberately used its acquisitions “to make itself 

unattractive to acquirers.” 

In more measured tones, The Economist referred to Garantia as “Brazil’s classiest bank,” 

but it also found fault. “The bank had a large and highly-geared exposure, on behalf of clients 

and on its own account, to Brazilian shares and bonds.” 16 The bank now came to a crossroads. It 

would either change or be bought out, or both. There would not be long to wait. 

Figure 2 

Foreign Exchange 

Rates 

Brazil Monetary Unit 

/United States Dollar 

Date Rate 

1995 0.844 

1996 0.9723 

1997 1.0394 

1998 1.1164 

1999 1.2074 

(on the first day of the year) 

On June 10, 1998, Credit Suisse First Boston 

announced it would buy Banco Garantia S.A. in a cashand-stock 

deal, variously valued at $675 million and 

$1.13 billion. The higher figure included $200 million in 

cash, $200 million in shares up front, $275 million in 

shares over the next three years and $450 million set aside 

in retention for Garantia staff based on profit performance 

until 2001 17 . Assets were $5 billion at the time of the 

sale, while the purchase price was equal to 1.68 times 

book value of $400 million 18 . Jorge Paulo Lemann was to 

step down as chairman but would be retained as a senior 

adviser. CEO Claudio Haddad left to pursue other 

interests, while the rest of the management would remain 

in place 19 . Goldman Sachs and Morgan Stanley Dean 

Witter also reportedly made bids. 

GP Investimentos’ holdings in Cervejaria Brahma, Brazil’s largest brewery, and Lojas 

Americanas (LASA), the discount retail chain, were not immediately affected, although LASA’s 

earnings clearly suffered as a result of the economic crisis. Although speculation rose over 

Brahma, its ownership proved to be only indirectly linked to Garantia. The group’s senior 

partners owned GP Investimentos, a holding company which in turn owned 60% of Brahma’s 

voting shares. Brahma’s 1998 earnings fell to 329.1 million Reals from 456.3 million the year 

before, but consolidated revenue rose to 7 billion Reals from 5.8 billion in 1997. 

16 Economist, March 7, 1998. 

17 Financial Times, June 11, 1998. 

18 The New York Times, The Wall Street Journal 

19 Investment Dealers’ Digest, June 15. 

3


LASA faced a more difficult struggle. In December 1997, the company sold its 40% 

interest in Wal-Mart Brasil to Wal- Mart for 40.5 million Reals. LASA reportedly invested $100 

million in the joint venture and lost $30 million in three years 20 . LASA scrambled to raise funds 

after losing $33.4 million on sales of $1.6 billion in 1997. In April 1998, it moved to sell $25 

million of real estate and divested its interest in a shopping center venture. It also disclosed that it 

had lost money in leveraged funds managed by Banco Garantia 21 . In the third quarter, LASA 

earned 218.2 million Reals after the sale of 23 supermarkets to Comptoir Modernes for 237.4 

million Reals 22 . The company focused on its core business, keeping 86 stores and interests in 

three Sao Paulo shopping centers, down from 110 stores a year earlier. 

Meanwhile, Brazil’s cyclical economic troubles had returned. After fighting off the first 

and worst effects of the Asian crisis after October 1997, Brazil came under a second wave of 

pressure when the Russian ruble collapsed on Aug. 17, 1998. Within five weeks, stocks fell 

nearly 40%. The government cut spending again and raised interest rates to nearly 50%, pumping 

another $20 billion of precious reserves into the market to support the pegged value of the 

Real 23 . 

The months that followed were filled with political efforts to convince the United States 

that it must back Brazil through an International Monetary Fund rescue package, similar to one 

previously organized for Mexico. Again, there were rumors and denials that the Real was grossly 

overvalued. But the domino argument prevailed. By November 1998, the IMF had assembled a 

$41.5 billion package with a first disbursement of $9 billion. The aid represented a new approach 

by U.S. Treasury Secretary Robert Rubin and the IMF, which had come under fire for their 

prescription of raising interest rates to counter speculative attacks on currencies. From now on, 

they would stick with the interest rate solution but would also try to make funds available 

quickly to defend worthy currencies before a collapse. The deal IMF approved on December 2 

did not hold off the attackers for long. 

With the start of the new year in 1999, newly-elected governors from seven Brazilian 

states found that their obligations under the IMF austerity plan left them unable to pay debts and 

public employees. Former President Itamar Franco, a Cardoso rival, now governor of Minas 

Gerais State, one of the richest in the country, refused to go along and stopped debt payments to 

the central government. Within days, the Real came under renewed assault, forcing the 

government to spend $1 billion a day from its $45 billion in reserves to prop it up. On Jan. 13, 

1999, the Central Bank President resigned and the Real was effectively devalued by nearly 9% 

through an expansion of its exchange rate band. The stock market dropped 10% that morning, 

halting trading in shares 24 . For the first time since the start of the Asia crisis, Washington had 

signaled that the defense of a currency should be abandoned. On Jan. 15, the Real was allowed to 

float on world currency markets. 

Surprisingly, the initial market reaction was relief. The Real briefly bounced back from 

its lows and the Brazilian stock market rose on news that the fall had been limited. But as 

20 The Wall Street Journal, Jan. 14, 1998 

21 Dow Jones News Service, April 3, 1998. 

22 Gazeta Mercantil, Nov. 16, 1998. 

23 Financial Times, Sept. 25, 1998. 

24 Reuters, Jan. 13, 1999 

4


worries about debt and deficits continued, the Real quickly fell into steep decline. By Feb. 23, it 

had dropped some 40% below its pre-devaluation level 25 . 

By June, the market had experienced yet another period of recovery followed by relapse 

as concerns in Argentina caused Brazil’s share prices to drop nearly 5% in one week in late May. 

But within days, Moody’s Investors Service signaled an apparent end to the 1999 crisis by 

upgrading its outlook on Brazil’s local currency bond rating from stable to positive. The rating 

agency noted that Brazil’s Congress had passed key legislation in the wake of the January 

devaluation. Stability in inflation and the exchange rate had followed, Moody’s said 26 . There 

seemed to be no end to the cycle of sudden shocks and buying opportunities that have 

characterized the country’s market history. 

As soon as the currency was devalued, analysts were predicting a return to higher 

inflation in 1999 of about 25%. As the year went by, these predictions were proved wrong with 

inflation in Brazil ending the year at a rate of about 10% per year. 

25 The Economist, Feb 27, 1999. 

26 Financial Times, June 4, 1999 

5

Grupo Garantia (C) 

GP Investimentos 

BAB008 

05/05/00 

Jorge Paulo Lemann, or Midas King as some have been known to call him from his 

native Brazil, was not a person to throw in the towel. Banco de Investimentos Garantia S.A, the 

investment bank that he founded and grew to be one of the largest in the world, fell into hard 

times with the restructuring of the economy of Brazil. With his investment bank bought by 

Credit Suisse in 1997, Jorge Paulo Lemann turned more of his attention to GP Investimentos, the 

investment company founded by Lemann and some of his most talented and trusted partners. 

This case study reports briefly on the progress of GP Investimentos’ controlling shareholder 

interests in Cia. Cervejaria Brahma, Brazil’s largest brewery, Lojas Americanas, a major 

hypermarket chain in Brazil, and describes the partners’ more recent investments in businesses 

engaging in electronic business in Brazil. At the end of 1999, GP Investimentos had total 

commitments of US$1.3 billion, of which approximately US$1.1 billion had already been 

invested. Some US$80 million had been invested in internet based businesses in roughly a 

twelve month period. 

Brahma 

On July 1 st 1999, Marcel Telles, Brahma’s CEO announced that and the company and its 

long-time rival Antarctica were to join forces in a new company – AMBEV – American 

Beverage Company. The new company was to have sales of $8.5 billion and annual cash flow of 

$730 million. 27 The combined company was to rank as the third largest beer company in the 

world. The new company also signed a distribution deal with Pepsico. 

27 

Ambev’s Web site: www.ambev.com.br 


assistance of David Wylie, Director of Babson College Case Publishing, and Susan Ellis, adjunct research associate, as a 

basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. 

The authors would like to express thanks to the Arthur D. Little School of Management for a paper written for them by 

Maria Luisa Rodenbeck MSM’97, upon which major portions of this case are based, to Andres Kriger Babson MBA2000 

for commenting in detail on drafts, and to Professor U. Srinivasa Rangan, Babson College, for allowing inclusion of 

material from his case “Brazil 1995: Fernando Cardoso and the Petrobras Crisis” and to the Institute for Latin American 

Business Studies at Babson College for its generous support 


Copyright © by Jeffry Ellis, 1999 and licensed for publication to Harvard Business School Publishing. To order copies or 

request permission to reproduce materials, call (800) 545-7685 or write Harvard Business School Publishing, Boston, MA 

02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in 

any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of 

copyright holder or licensee.

Grupo Garantia (C) – GP Investimentos BAB008 

Lojas Americanos 

In 1999, Lojas Americanos (LASA) was still struggling to recover from its past financial 

problems. In the beginning of 1998, GP Investimentos hired a turnaround consultant, Claudio 

Galeazzi, to put the company back on its feet financially. Galeazzi had a reputation for helping 

companies in trouble. Galeazzi was the third CEO of LASA in less then 3 years. His mission is 

to do what the other executives could not, bring the company back to profitability. Mr. Galeazzi 

was concentrating his efforts on cutting operational costs. 

Also, LASA was developing an e-commerce strategy. www.americanas.com.br planned 

to make 5,000 products available to consumers. The virtual store was also to have non-traditional 

products that took too much space to be economic in a physical store such as gymnasium 

equipment. The company had set up an exclusive distribution center in Alphaville, near Sao 

Paulo. Also, a system was developed exclusively for this venture, integrating the back-end 

warehouse with the front-end system. The creation of the website involved 35 dedicated 

personnel. Company personnel announced a focus on developing content geared towards 

teenagers and women. In the words of a manager: “We don’t want to be a portal, we want to be 

an arrival site.” 28 

GP Investimentos’ Internet Interests 

Meanwhile, GP was refocusing its investments towards the Internet, mainly in electronic 

commerce. At the beginning of 1999, GP Investimentos partners had the opportunity of 

investing in Patagon.com. This was an Internet based business started by young Argentinians 

that used the Spanish language. The founders of Patagon.com offered GP Investimentos a 

significant proportion of the equity in this Internet business for US$5 million. The partners of GP 

Investimentos declined this request. Within a year, Patagon.com was sold to Banco Santander of 

Spain for a total of about US$700 million. Although GP Investimentos partners missed the first 

opportunity to invest in this company one year before the acquisition by Banco Santander, they 

were able later to make a small investment in Patagon.com and made a 350% return in four 

months. Naturally, the partners of GP Investimentos were alerted immediately to the potential of 

investing in companies like Patagon.com. The company had acquired shares in many companies 

in 1999 and the beginning of 2000 29 : 

Immediately, a dedicated team was formed for investing in Internet related companies. Marcelo 

Ballon, ex-Vice President at Yahoo! Brasil, joined GP Investimentos to search for other 

opportunities in this area. Within a year, eighty million dollars had already been invested in a 

portfolio of Internet start-ups. As Jorge Paulo Lemann noted in his presentation to graduate 

students at Babson College on April 19 th , 2000: 

The approach was to scramble very fast and do a lot of things. We just hoped that 

it would somehow workout. If only one venture succeeded, we would recoup our 

US$80 million. If two ventures got through to a successful IPO our return would 

be one hundred percent. If we were to be successful with three, then a two 

hundred percent return was imaginable. 

28 INFO Exame, December 1999. 

29 INFO Exame. January, 2000 

2


The portfolio was diverse to include the following ventures, among others: 

• Submarino: This was a business to consumer site for Latin America present in Brazil, 

Spain, Mexico, and Argentina. “For this venture, we bought a small company in July 

1999 called Booknet, the biggest bookselling site in Brazil and set up someone to 

manage it. We rebranded the site as Submarino and added toys, CDs and gifts, for a 

total investment of US$12 million. We expect to take Submarino to an IPO in the 

middle of 2000” commented Lehman. 

• IG: Internet Gratis: This was a free Internet service provider and portal for Portuguese 

speaking countries. Within a month this grew to be the second largest internet service 

provider in Brazil. “We thought we’d get 750,000 subscribers within a year, but we 

had over 1.5 million in 75 days.” Commented Lemann. The revenue model was 

advertising and e-commerce. The IPO was expected before the end of 2000. This 

venture was a partnership with Opportunity Bank (another major “Grupo” in Brazil) 

and Aleksander Mandic, the founder of an internet service provider that was bought 

and sold by GP Investimentos in 1996 / 1997 and sold to ElSitio.com 30 of Argentina. 

• Lokau.com: This was a customer to customer online auction site. Revenues came 

from customers posting their items for a fee and also a fee for a successful 

transaction. The GP Investimentos investment in Lokau.com was US$ 11 million. 

• Webmotors: This was an automobile dealer portal with revenue that came from 

posting fees, advertising, and e-commerce. The possibility was being explored of 

packaging this portal with others in Mexico and Argentina. This investment was for 

US$14 million. 

• Mercado Eletronico: This was a business to business horizontal marketplace. The 

business was already matching buyers to sellers in physical world. “We went to them 

and helped them to transform their business base to e-commerce” said Lemann. 

• Shoptime: This was a business to consumer e-business venture also involving home 

shopping TV and catalog sales. “We expected to sell this to Globo,” commented 

Lemann. GP Investimentos held 28% of the shares in this company. 

• Viajo.com: This was the leading travel portal in Portuguese and Spanish speaking 

countries. 

• Elefante: This was online reminding and calendaring services. The company’s 

partners invested in 10% of the shares of this company. 

• Ibest: This business rated Brazilian web sites. GP Investimentos held 15% of this 

company. 

Except for Submarino and IG, all the businesses listed above were started before GP 

Investimentos invested in them. 

By their own admission, partners at GP Investimentos were candid about their limited 

understanding of the potential of Internet ventures. As Lemann remarked: 

30 IDGNow.com.br 

3


“We were sometimes not sure whether we were in the brewing or finance 

business, but we all were certain that we were in the people business. For many 

years, we evaluated 10 to 15 business ideas every week. We were able to back 

good ideas with capable entrepreneurs. We seemed to know winning 

management teams when we met them.” 

It was this ability to evaluate people and soundness of business ideas that gave the 

partners at GP Investimentos the confidence to invest in the unfamiliar world of internet 

business. 

Of the progress of the internet based funds, Lemann commented: 

We began to move more slowly and entered a more thoughtful period. We felt it 

was important to buy in during 1999, but as we entered the second quarter of 

2000, we were wondering how we might package companies together in some 

way. Perhaps we could have taken IPOs to the market as a collection of 

companies. One huge potential we thought we had was linking the IG site to 

Telemar, our telephone company. For example, this might have allowed the sale 

of internet services with telephone services and taking IG to cellular telephones 

for e-commerce. 

If we had lost all of the money we invested in the internet business, we would still 

have survived. Our biggest investment was still in brewing and we expected to 

get 15 percent economic value added per year for that business. We planned to 

take Brahma worldwide, already Brahma was the third largest brewery in the 

world. 

Business was like tennis. You don’t win all the points and all the sets, but if you 

keep pushing and focusing you can win overall. 

Once again the skies over Mr. Jorge Paulo Lehmann and his partners at GP Investimentos 

started to clear, as the group was beginning to plan Initial Public Offerings of its Internet 

investments. Mr. Lemman had managed to turn the tide once more against his main detractors. 

Just one year before, the comment was that he had lost his “Midas touch” (based on the legend of 

King Midas that whatever he touched would turn into Gold). Now most people thought that Mr. 

Lemann was about to have the last laugh after all . . . 

4

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