“Arnault is trying to steal this company.”

- Gucci President, Domenico De Sole on LVMH’s takeover attempts in 1999.

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 its stake 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 LVMH's 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 Gucci's 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 combination became 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.”

Gucci's 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 world's 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 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 company's 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 Gucci's numerous licensing agreements and went on to build its image as a premier luxury brand. Though initially De Sole had reservations regarding Ford's competence, over the years, Ford emerged as the single most important factor behind Gucci's success. From $ 264 million in 1994, Gucci's 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 distribution ally 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 group's 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 LVMH's success. His rise to fame began with his 1984 acquisition of the bankrupt French textile conglomerate Boussac, which owned the Christian Dior couture1 house. 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 crisis 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 LVMH's flamboyant garments had never been very popular in the US. Gucci's 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, Gucci's sales went up 10% from 1997 to 1998. Arnault decided that he needed Gucci to increase sales and build a strong base in the US market for LVMH products.

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, LVMH's stake in Gucci had increased to 34%. On January 27th, 1999, Arnault arranged a meeting with De Sole, at which he proposed that, since he was now one of Gucci's largest shareholders, he be allowed to name a director to its board. De Sole however believed that Arnault's 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 Gucci's 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 Gucci's 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 price.

Arnault claimed that Gucci would also benefit from the deal from the various synergies arising out of the deal. De Sole however said, “We don't 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 Gucci's board, De Sole used a poison pill in the form of an ESOP scheme in February 1999. In July 1999, shareholders authorized 1.5 million shares for grant under Gucci's ESOP, and in June 2000 authorized an additional 6 million shares. This move resulted in LVMH's 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 Euro6 French 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 LVMH's stake to 22% from 34%.

Arnault was shocked at Gucci's 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 Sole's moves, Arnault said, “We never understood why De Sole was so hostile. Just look at Gucci versus Louis Vuitton. Vuitton's profit margins are double Gucci's - 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 LVMH's takeover deal without interference from PPR. However, it refused to appoint an independent overseer for the board and upheld PPR's stake in Gucci.

In the second week of April 1999, Gucci summarily rejected LVMH's 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 Gucci's obligations under Dutch law to act reasonably and fairly towards its shareholders. LVMH's 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 LVMH's demand for a probe of Gucci's 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 LVMH's 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 fundamental 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 Gucci's business.' It brought another suit against LVMH for alleged defamation. Gucci sources said that the 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 Gucci's profitability, financial condition or cash 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. 

In July 2001, followers of the Gucci-LVMH tussle were surprised to see media reports 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 LVMH's 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 unified Europe. Though Arnault said that his moves were part of LVMH's 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.

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, “It's a fair deal. We can all get on with our businesses.”

1. Why was LVMH interested in acquiring Gucci? Was Gucci justified in claiming that there would be no synergies from the Gucci-LVMH alliance?

2. Comment on the defense strategies adopted by Gucci. Wasn?t the PPR stake acquisition also a form of takeover, even if it had Gucci's approval?