Case 1 the Gucci - Lvmh Battle

8/10/2019 Case 1 the Gucci - Lvmh Battle

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The GUCCI - LVMH Battle

The case gives a detailed account of the dispute between two

of the world's leading luxury good companies, Gucci and

LVMH. The case examines how Gucci managed to thwart the

takeover efforts of its rival LVMH.

The case is so structured as to enable students to understand

the tactics Gucci used to avoid being taken over by its rival

LVMH. The case explains how the Gucci management usedthe ESOP poison pill and the PPR white knight.

They should be able to look at the controversy from Gucci's

as well as LVMH's point of view. The case is aimed at

MBA/PGDBA students as part of the Business Strategy

curriculum.


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Arnault is trying to steal this company.

- Gucci President, Domenico De Sole on LVMHs takeover attemptsin 1999.

The Poison Pill

In March 1999, a $ 3 billion stock deal was announced between luxury goods major

Gucci N V and the Pinault-Printemps-Redoute (PPR) group of France. The news of

PPR acquiring a 40% stake in Gucci came as a surprise for Bernard Arnault (Arnault),

Chairman of the Moet Hennessy Louis Vuitton (LVMH) group, who had been trying

to acquire Gucci through open market stock acquisitions.

Gucci announced that it would issue more shares if LVMH tried to further increase itsstake in the group. Gucci President Domenico De Sole (De Sole) said that he had the

support of Gucci staff, suppliers and independent shareholders to keep LVMH off the

board. Earlier, Gucci had approved an employee stock option scheme (ESOP) to

counter LVMHs acquisition tactics. Not only did LVMH remain powerless in Gucci

despite spending $ 1.4 billion, but its share prices also began sliding on the Paris stock

market.

LVMH charged that the sole purpose of Guccis move was to deprive LVMH of its

voting rights. The same day PPR announced its deal with Gucci, it paid $ 1 billion

for Sanofi Beaute, the French owner of brands like Yves Saint Laurent cosmetics

and perfumes. This was another setback for LVMH as Arnault had been trying to

acquire Sanofi. As a result of these deals, overnight the Gucci/PPR combinationbecame a major competitor for LVMH. LVMH now made a full takeover bid for

Gucci at $ 81 a share, $ 6 more than what PPR had paid. At the same time, it

dragged Gucci to the court to annul the deal with PPR and replace its board with an

independent overseer.

The Gucci-LVMH battle took the global fashion industry by surprise. More so,

because in 1994, it was Arnault himself, who had turned down an offer to buy Gucci

for $ 400 million. However, in just five years the same man had spent $ 1.4 billion in

building up a 34% stake in Gucci. A media report said, How a $ 400 million reject

became a highly desirable $ 8 billion company is one of the greatest comeback stories

in the fashion business.

Background Note

Guccis history goes back to 1923, when Gucci Guccio started selling expensive

leather goods in Florence, Italy. By 2001, the Gucci Group had emerged as one of the

worlds leading multi-brand luxury goods companies. The company designed,

produced and distributed high-quality personal luxury goods, including ready to wear

garments, handbags, luggage, small leather goods, shoes, timepieces, jewellery, ties

and scarves, perfume, cosmetics and skincare products. Some of its important brands

were Gucci, Yves Saint Laurent, Sergio Rossi and Boucheron The group directly


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Mergers & Acquisitions, and Strategic Alliances

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operated stores in major markets throughout the world and also sold their products

through franchise stores, duty-free boutiques and leading department and specialty

stores.

De Sole had joined Gucci in 1982 and quickly moved up the ranks, becoming

the President of Gucci US. In the early 1980s, around 50% of the companys

stock was owned by an Arab company, Investcorp. During the 1970s and 1980s,

the Gucci label was seen on almost every imaginable product: scotch,

leatherwear, key chains, watches, T-shirts, etc. Also, the company was spending

more than $ 4 million a year to combat a flood of fake Gucci merchandise. In

1990, Gucci hired Tom Ford (Ford), an actor-model with a degree in interior

architecture and some experience in fashion design for its designing needs. By

1993, Gucci was on the verge of bankruptcy. In 1994, it was reported that the

company was offered to Arnault for $ 400 million, but he backed off at the last

minute. Investcorp then bought the remaining 50% stake in a desperate effort to

recoup its investment.

De Sole and Ford then began working towards canceling Guccis numerous licensing

agreements and went on to build its image as a premier luxury brand. Though initially

De Sole had reservations regarding Fords competence, over the years, Ford emerged

as the single most important factor behind Guccis success. From $ 264 million in

1994, Guccis sales increased to $ 1 billion in 1999.

LVMH had been formed by the merger of the cognac and champagne business of the

France-based Moet and Hennessy families with the fashion holdings business of Louis

Vuitton. Such agreements between European family owned businesses had become

rather common, who tried to avoid takeovers by combining their strengths. Still,

fearing hostile bids, the Moet and Hennessy families suggested that their distributionally Guinness be invited to acquire a 20% stake in the company. However, this was

not acceptable to the Vuitton family, who sought the help of Arnault. However,

Arnault switched camps and made a deal with the Moet-Hennessy faction instead. He

formed a new organization and ended up buying a 37% stake in LVMH. The Vuitton

family battled Arnault for years afterwards, accusing him of financial misdeeds and

bad faith.

By 2001, LVMH had become a $ 23 billion fashion major dealing in leather,

perfume, and champagne. The group controlled the fashion and perfume labels

Louis Vuitton, Christian Dior, Givenchy, Christian Lacroix, Loewe, Kenzo,

Guerlain, Berluti, and Celine, the jewellery brand Fred and the watch brands

Ebel and Tag Heuer. The groups world famous liquor brands included

Hennessy cognac, Moet et Chandon, Dom Perignon, Pommery, Krug, and Veuve

Clicquot. LVMH was also reported to be planning to acquire fashion labels such

as Prada of Italy and Giorgio Armani. The company was the market leader in the

world luxury leather goods and accessories market with a 19% market share.

More than half its operating earnings of $ 1.2 billion in 2000 were from the

Louis Vuitton brand.

Arnault was believed to be the architect of LVMHs success. His rise to fame began

with his 1984 acquisition of the bankrupt French textile conglomerate Boussac, which


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owned the Christian Dior couture1house. Later, he managed to persuade the French

government to sell him the rest of the company as well. Within five years, he laid off

8000 workers and sold off almost all of its manufacturing assets for about $ 500

million. This made Arnault one of the wealthiest men in France, though he also made

many enemies among the French labor groups. The French government eventually

forced him to repay about $ 60 million of the money it had invested in Boussac. By

now, Arnault had begun dreaming of creating the number one luxury product group in

the world. To fulfill this aim, he had been buying stock in LVMH in the open market

since 1988. The deal with the Moet-Hennessy families thus came as a boon for

Arnault.

Having made a success of the LVMH venture, Arnault began looking for more

luxury brands to acquire. One reason for zeroing in on Gucci was the problem

LVMH was facing because of declining spending power in the Asian markets.

From the mid 1970s, US and European luxury products companies had come to

rely on Japanese and other Asian consumers for a major part of their sales. Until

the mid 1990s, the Asian market for LVMH products, such as Vuitton knapsacks

and Lady Dior bags had been doing extremely well. However, the Asian

financial crisis2 changed all that and suddenly LVMH had to look west to the

American market, where spending on luxury goods was growing four times as

fast as in the global markets.

Another reason for the interest in Gucci was the fact that LVMHs flamboyant

garments had never been very popular in the US. Guccis creations, which were priced

in the same range as LVMH garments, wee more sleek and urbane, and hence more

popular with clients in the US, who patronized haute couture. Even as LVMH saw its

sales decline, Guccis sales went up 10% from 1997 to 1998. Arnault decided that heneeded Gucci to increase sales and build a strong base in the US market for LVMH

products.

The Battle for GUCCI

LVMH had begun stalking Gucci since the beginning of January 1999 by acquiring

more than 5% of its shares. By the end of January 1999, LVMHs stake in Gucci had

increased to 34%.

1 Couture denotes fashion. A couture garment is made to order for an individual client, in aprocess that involves interactive design and several fittings. The couture garment relies onthe most exquisite fabrics, meticulously cut and impeccably constructed into a sophisticated,one-of-a-kind design.

2 The Asian financial crisis started in early July 1997, when international currency speculatorsas well as many Thai nationals were trying to sell Thailands currency, the Baht to buy USdollars, causing a flight of capital out of the country. As a result, capital became scarce andinterest rates on borrowed money rose sharply, leading to the Baht losing about 20% of itsvalue. Then the Thailand stock and real markets collapsed, pushing the country into itsworstrecession as production decreased, unemployment rose sharply and businesses failedand went bankrupt. The crisis spread quickly to other countries in the Southeast Asianregion like Indonesia, South Korea, Japan and China, significantly damaging the economichealth of the region.
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On January 27th, 1999, Arnault arranged a meeting with De Sole, at which he

proposed that, since he was now one of Guccis largest shareholders, he be allowed to

name a director to its board. De Sole however believed that Arnaults people should

not be put on the Gucci board, since they were from the rival fashion house Louis

Vuitton. De Sole could not afford to let them have access to inside information

regarding store space, publicity, and designers.

De Sole alleged that Arnault was plotting a creeping takeover by gradually buying

enough shares to dominate Guccis board. De Sole then asked Arnault to buy the

remaining shares. He said, We will be reasonable about the price and myself and

Tom Ford would be delighted to stay if you desire. The price De Sole quoted was $

85 a share, more than $ 30 a share above Guccis price before Arnault began buying.

Shocked at this, Arnault warned De Sole that LVMH could drag Gucci into a big legal

battle. De Sole claimed that Arnault even tried to bribe him by offering a deal in

exchange for lowering the price3.

Arnault claimed that Gucci would also benefit from the deal from the various

synergies arising out of the deal. De Sole however said, We dont believe his

synergies. I find it preposterous that he thinks he can come and help us. He should fix

his own brands. Except for Vuitton, his fashion brands are doing terribly. The only

synergy that would exist would be for myself and Mr. Ford to come over and fix

Christian Dior!

After Arnault tried to force De Sole to let him name a director to Guccis board,

De Sole used a poison pill 4 in the form of an ESOP scheme in February 1999. In

July 1999, shareholders authorized 1.5 million shares for grant under Guccis

ESOP, and in June 2000 authorized an additional 6 million shares. This move

resulted in LVMHs stake getting diluted. Arnault alleged that there were

inappropriate grants of stock options to certain members of senior management,

particularly De Sole and Ford.

After De Sole refused to let Arnault nominate a board member, LVMH sued Gucci for

mismanagement in a Dutch court in Amsterdam. Meanwhile, De Sole assembled a

team of lawyers and bankers to search for a white knight5 - this was where PPR, a

rival French financier came in. PPR was a 24.8 billion Euro6French conglomerate

involved in retailing, credit and financial services, business-to-business services and

luxury goods. Gucci issued more shares in the group in favor of PPR, whose stake at

the end of the deal was 40% of the total Gucci equity. This move effectively diluted

LVMHs stake to 22% from 34%.

3 This was however strongly denied by Arnault as being completely untrue and concocted for

a lawsuit. He said that they discussed nothing more than what the boards wanted and how

the companies could work together.

4 A device designed to prevent a hostile takeover by increasing the takeover cost usually

through the issuance of new preferred shares that carry severe redemption provisions.

5 A potential acquirer who is sought out by a target companys management to take over the

company to avoid a hostile takeover.

6 2000 figure.


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Arnault was shocked at Guccis surprise defense tactic. Immediately, LVMH made an

open offer to acquire 100% stake in Gucci, including the PPR shares, for $ 85 per

share, provided that the Gucci Supervisory Board took appropriate measures to make

it possible for such an offer to have a fair chance of success. Alternatively, LVMH

proposed to acquire all Gucci shares for $ 91 per share, on the condition that the PPR

transaction was rescinded.

Commenting on De Soles moves, Arnault said, We never understood why De Sole

was so hostile. Just look at Gucci versus Louis Vuitton. Vuittons profit margins are

double Guccis - 48% against 24%. The reason is clear, and it is size. We could help

move Gucci in that direction. He also said, We were struck by the brutality of the

response and the lack of transparency. LVMH filed a suit against Gucci claiming that

its decision was an unacceptable maneuver.

Towards the end of March 1999, a Dutch court ruled that Gucci must consider

LVMHs takeover deal without interference from PPR. However, it refused to appointan independent overseer for the board and upheld PPRs stake in Gucci.

In the second week of April 1999, Gucci summarily rejected LVMHs open offer.

Towards the end of April 1999, the Enterprise Chamber of the Amsterdam Court of

Appeals decided to freeze the $ 3 billion held by Gucci as a result of the stake sale to

PPR. LVMH then asked for an investigation into the management practices of Gucci,

including the ESOP and PPR transactions.

In May 1999, the Enterprise Chamber of the Amsterdam Court of Appeals stated that the

PPR share capital increase was a violation of Guccis obligat ions under Dutch law to act

reasonably and fairly towards its shareholders. LVMHs request to annul the ESOP was

also accepted. LVMH then filed an action in the Amsterdam District Court requesting the

cancellation of the PPR share capital increase and the transfer of control. Gucci appealed

against this decision, and in May 1999, a Dutch court approved the PPR deal, while

ordering the company to dismantle the ESOP. The court however rejected LVMHs

demand for a probe of Guccis move against the takeover attempt by LVMH. LVMH

again appealed against the ruling and asked the Dutch court to annul the stock issued to

PPR.

In October 2000, Gucci filed its defense to the LVMH charges and also filed a

counterclaim asking the Court to approve a divestiture of LVMHs shareholding in the

company. Towards the end of November 2000, Gucci confirmed that 83% of the

employee stock options, authorized by the shareholders, which were for present and

future officers, directors and employees, were in fact granted to De Sole and Ford.This confirmed the allegations made by LVMH with the Enterprise Chamber of the

Amsterdam Court of Appeals.

As this deal, involving more than $ 400 million in shares, was kept secret from the

shareholders, LVMH called it a violation of the most fu ndamental rules of

transparency. LVMH claimed to have evidence that Gucci had agreed to grant

these options in June 1999, immediately after the agreement between Gucci and

PPR. LVMH then filed another lawsuit against Gucci over the ESOP scheme.

Gucci in turn filed a counter-claim saying that LVMH was abusing its position

by exercising an anti-competitive influence over Guccis business. It brought

another suit against LVMH for alleged defamation. Gucci sources said that the


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options packages had been decided with the help of a leading compensation expert

and that it had been unanimously approved by the board, which had a majority of

independent members. The sources also said that the options were given as

incentives to De Sole and Ford to retain them at Gucci. Gucci strongly denied that

there was any agreement linking the options and the PPR deal. Moreover, under

Dutch law, Gucci was not obligated to reveal the De Sole and Ford deal to the

shareholders.

Gucci sources said that the stock option deal was necessary, for had Gucci just

increased the total number of shares, resource rich LVMH could have bought all

of the additional shares. To cover this risk, the Gucci management needed to

control the additional Gucci shares. Thus, the management decided to

implement an ESOP scheme and gave employees an option to purchase up to

approximately 37 million new shares. Of this, 20,154,985 shares were

immediately subscribed to. The ESOP did not have any material impact on

Guccis profitability, financial condition or c ash flows, and, because of its

structure, did not result in any dilution of reported earnings per share. As the

Gucci management directly controlled the ESOP shares, the takeover threat was

removed.

In March 2001, a Dutch court ordered detailed investigations into the Gucci-PPR deal

as well as the ESOP. The court eventually dismissed the charges against the ESOP

and its implementation was declared completely legal.

The Battle Ends

In July 2001, followers of the Gucci-LVMH tussle were surprised to see mediareports that claimed that the battle was over. LVMH had agreed to sell its 20%

stake in Gucci to PPR for $ 2 billion under a condition that PPR forfeit voting

rights on this stake. PPR bought the LVMH stake at $ 94 per share, raising its

stake in Gucci to 53.2%. As a first step, PPR was to buy half of LVMHs 20%

stake for $ 975 million. Then, Gucci was to pay a special dividend of $ 7 per share

to all shareholders except PPR in November 2001. Next, PPR was to launch a full

public offer for all Gucci shares at $ 101.50 per share in March 2004. PPR, Gucci

and LVMH also agreed to release all outstanding claims and withdraw all pending

litigation. PPR was planning to finance the deal by issuing equity and convertible

bonds. Media reports revealed that the deal was struck at the behest of Dutch

investigators, who urged the three parties to reach an agreement without seeking

legal intervention.

The battle for Gucci came to be seen as one of the takeover deals that were

becoming increasingly common in the new unif ied Europe. Though Arnault said

that his moves were part of LVMHs global strategy of making selective

investments in several firms to optimize resources, analysts were quick to remark

that he was better at acquiring brands than running them. What the Gucci-LVMH

affair really seemed to highlight was the difficulty small family-owned groups

faced in remaining independent in the global marketplace. Analysts pointed out

that survival had become very hard for these companies, which faced takeover

threats from business conglomerates.


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LVMH made a profit of $ 700 million in the Gucci deal. The company claimed that it

had won the battle: Getting PPR to make a full bid for Gucci is a victory for all

shareholders. As a whole, the deal was a legal and financial success for LVMH.

Sources at Gucci meanwhile were relieved that the whole issue was finally over.

A company spokesperson said, Its a fair deal. We can all get on with our

businesses.


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Additional Readings & References:

1. Gucci under takeover threat,www.news.bbc.co.uk, January 26, 1999.

2. Gene G. Marcial, Gucci: Will the Other Shoe Drop?, Business week,February 15, 1999.

3. Fashion Fracas,www.news.bbc.co.uk, February 19, 1999.

4. Pinault blows Gucci has LVMH,www.humanite.presse.jr, March 20, 1999.

5. LVMH investment in Gucci is strategic, www.cgl.bu.edu, February 26,1999.

6. Thomas Dana & Dogar Rana, Brawling for Beauty, Newsweek, April 5,1999.

7. Gucci rejects LVMH proposals,www.news.bbc.co.uk, April 8, 1999.

8.

Kirkpatrick D. David, The Luxury Wars,www.newyorkmag.com, April 26,1999.

9. LVMH to Bring Action,www.lvmh.com, May 27, 1999.

10. Gucci court victory over French rival,www.news.bbc.co.uk, May 27, 1999,

11. LVMH may abandon Gucci bid, www.news.bbc.co.uk, May 28, 1999,

12. The truth about LVMHs talks with PPR,www.ppractionnaire.com, June20, 2000.

13. Gucci files its defense,www.news.bbc.co.uk, 11 October 2000.

14. Gucci intends to challenge LVMH proceedings in the Dutch enterprisechamber,www.pf-online.com, November 27, 2000.

15. Guccis confirms secret and enormous options,www.lvmh.com, November29, 2000.

16. Milner Mark, Gucci takes LVMH to court, The Guardian, November 30,2000.

17. Goldstein Lauren, The Guys from Gucci,www.leocigar.com, July 15, 2001.

18. LVMH to sell Gucci stake,www.smh.com.au, July 31, 2001.

19. Battle for Gucci nears end,www.news.bbc.co.uk, September 5, 2001.

20. Gee Francesca, PPR agrees to buy LVMHs Gucci stake, www.cbsmarketwatch.com, September 10, 2001.

21.

Guccis handbag war over,www.news.bbc.co.uk, September 10, 2001.

22. Marsh Lisa, Its over,New York Post, September 11, 2001

23. Guccis Poison Pill,www.webcheckers.com.

Documents

Case 1 the Gucci - Lvmh Battle