1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Articles (296) 

The Prototype of 3G

Garantia case study: Lemann's 1st business venture

October 02, 2017

In my previous article I summarized the 10 lessons that Jim Collins has learned from the three partners at 3G. In the next few articles I will explore how they were applied to 3G’s three partners’ business operations. There’s no better start than the first business that Jorge Paulo Lemann built – Garantia.

After graduating from Harvard, Lemann worked a few jobs before deciding to start his own. He had learned that meritocracy is essential and surrounding himself with the right people is also essential. It’s important to have talent and sweat. “Friendship or blood relations had no value and could even be a problem at times.”

With capital provided by somebody else, Lemann founded Garantia – a brokerage firm. He was looking for a particular kind of professional – the PSDs – Poor, Smart, Deep Desire to Get Rich. Lemann also thought that there should be no barriers within the company. Therefore, the office was a large open room, with no divisions between employees and partners. This made work more flexible and reduced the hierarchy in the organization. Garantia also had an informal atmosphere – no need to wear suits and ties.

Lemann modeled Garantia after Goldman Sachs, which values meritocracy and thrift. Goldman Sachs also has a culture of putting the bank’s success above personal luxuries and encouraging internal competition.

In terms of compensation, Garantia was an avant-garde in Brazil. Multinational companies in Brazil paid high salaries and offered generous benefits such as chauffeur-driven cars and club memberships. Garantia, however, paid salaries that were below the market level but the bonus could amount to four or five extra salaries if the employees beat the targets and the bonus was paid twice a year to encourage people even more. Everything depended on performance. Lemann also believed it was essential that everybody, even those at the very bottom, felt like “owners” of the business. Commissioned workers also receive a small percentage of the company’s total profit.

The very top people would become partners who, on top of bonus and commissions, would also receive dividends. Garantia did not give the equity stake to the partners; it sold it to them. In order to acquire the equity stakes, the partners very often had to take on initial debt, sometimes a large amount, which would be paid off from profit sharing, commissions and dividends at annual interest rates of 6%. The mechanism served to retain talent and prevented the partners becoming rich too quickly.

The meritocracy culture was powerful – those who were good rose and got paid a lot. Those who were not good were fired – in fact, the practice was to get rid of around 10% of the head count annually. The pressure and merciless pursuit of results become the norm. Garantia employees would work at least 12 to 14 hours a day, and weekend work was expected. Focus and dedication was absolutely expected at Garantia.

Competent people crave meritocracy while mediocre people fear it. Hiring the right people is extremely important. Garantia’s hiring process was very rigorous. Each candidate had to go through a dozen evaluations before being hired. The interviewers always included the senior partners, and the candidates “were required to have a gung-ho attitude and fire in their eyes and nobody was spared the ordeal.”

Meritocracy also means there’s no place for hierarchy. Subordinates could go over the heads of their bosses, and speaking directly to the boss was also part of the practice.

The combination of meritocracy, partnership, competitive environment, half-yearly evaluations and aggressive bonuses made Garantia remarkably successful. At the peak, Garantia was responsible for 7% of all the trading on the Bovespa and net income amounted to almost $1 billion. Garantia seemed unbeatable.

Things turned at Garantia. The employees had become so rich that the culture of frugality and simplicity was under serious threat. The three partners  Lemann, Marcel HerrmannTelles and Carlos Alberto Sicupira – were less involved in the daily operations as Telles and Sicupira were occupied with the operating businesses that Garantia bought and Lemann took a leave after he had a serious health issue. Reflecting on the subject, Lemann said that he regretted having distributed so much profit in one go among the partners and commissioned staff. Instead, he would have reinvested the earnings in other businesses.

With a deteriorating culture came deteriorating performance. In the end, Credit Suisse First Boston bought Garantia on June 9, 1998, for $675 million.

About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 4.6/5 (8 votes)



Please leave your comment:

Performances of the stocks mentioned by Grahamites

User Generated Screeners

CoeusBig Money -1
pbarker46Owner earnings and FCF
jeffjultydomMy first screen
pbarker46dividend start
marcjstubbsAUS EVM
blovedaySmall Good Cheap 5
HOLKLSUQuick Look Group 2018 Late Sta
HOLKLSUQuick Look Group 2018 Late Sta
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat