fashion faux pas: gucci & lvmh

T

225Thunderbird International Business Review, Vol. 45(2) 225–239 • March–April 2003

Published by Wiley Periodicals, Inc. • Published online at Wiley InterScience (www.interscience.wiley.com).

DOI: 10.1002/tie.10064

casestudycasestudy

Fashion Faux Pas: Gucci& LVMH

Michael H. Moffett � Kannan Ramaswamy

Michael H. Moffett is a professor of finance at Thunderbird, The American Gradu-ate School of International Management, Glendale, Arizona. Kannan Ramaswamy isa professor of global strategy at Thunderbird.

revitalized the Gucci name.Domenico De Sole, dressed in adark suit, white shirt, with finelytrimmed beard, was the Italianlawyer-turned- businessman whohad returned Gucci to profitabili-ty and promise. The photograph,of course, by the famous fashionphotographer Annie Leibovitz.These two men represented thedefiant spirit of Gucci, a moltenmix of high-powered fashion andhigh-powered finance.

These two men had, in the firstsix months of 1999, been thecenterpiece of one of the mosthighly contested hostiletakeover battles ever seen on theEuropean continent. Underattack by LVMH Möet Hen-nessey Louis Vuitton, the

“The brewing battle for Gucci isemblematic of the New Europethat is taking shape with thelaunch of the common currencyand the globalization of industry:two Frenchmen squaring off forcontrol of a Dutch-based Italiancompany run by a U.S.-educatedlawyer and an American designerand advised by London-basedAmerican investment bankers.”

“Gucci Watch,” Wall Street Jour-nal, March 22, 1999.

he Gucci Group N.V. 2000 Annu-al Report really said it all. TomFord, Creative Director, andDomenico De Sole, President andCEO, stood side-by-side facingthe camera with eyes of steel.Ford, unshaven and shirt provoca-tively opened, was the Americandesigner who had single-handedly

© 2002 Thunderbird, The American Graduate School of International Management. All rights reserved.This case was prepared by Professors Michael H. Moffett and Kannan Ramaswamy for the purpose of class-room discussion only, and not to indicate either effective or ineffective management. A teaching note is avail-able by contacting tbe Thunderbird Case Clearing House, Professor Michael H. Moffet, (602) 978-7674.

French luxury goods conglom-erate, Gucci had implementedthe age-old strategy of “theenemy of an enemy is a friend.”Gucci successfully enticed Pinault-Printemps-Redoute ofFrance, a retailer, to act as awhite knight, grabbing Guccifrom LVMH’s clutches. Now, inSeptember of 2001, it appearedthis particular chapter of thefashion wars was finally over. Butin the end, when all was said anddone, had Gucci’s shareholdersbeen winners or losers?

GUCCI GROUP N.V.

Guccio Gucci founded Gucci in1923 after being inspired byextravagant and elegant baggagewhile working in a Londonhotel. Gucci’s expensive leathergoods (shoes, handbags, andready-to-wear)—and the Guccired and green logo—becameinternationally recognized forthe next half-century. The Guccifamily, however, sold its remain-ing interest in the company in1993 after a decade of turmoiland scandal.

Although always considered chicby international standards, theGucci business lines had grownold in the 1970s and 1980s.Gucci’s rebirth in the 1990s wascredited, strangely enough, totwo Americans, Domenico DeSole and Tom Ford. De Sole wasItalian by birth, but had attend-

ed Harvard Law School, marriedan American (gaining U.S. citi-zenship), and began his climb upthe corporate ladder in a Wash-ington D.C. law firm. De Solefirst worked for the Gucci fami-ly, then eventually headed GucciAmerica. When control of Guccipassed from Maurizio Gucci andthe Gucci family in 1993 to aBahraini investment bank,Investcorp, De Sole moved tothe corporate headquarters inFlorence, Italy, to head GucciInternational.

Gucci’s owner, Investcorp,spun out 49% ownership inOctober 1995 in an initial pub-lic offering in Amsterdam. Theoriginal issuance price averagedUS$22 per share. Investcorpsold its remaining stake sixmonths later for US$48 pershare. Gucci was now owned byeveryone and no one in particu-lar. The company was De Sole’sto run.

Upon his arrival in Florence,De Sole found a design teamwith one real remaining talent,Tom Ford, a transplantedTexan. De Sole allowed Ford afree hand in the revitalization ofGucci’s product line and opera-tions, naming him CreativeDirector in 1994 at the age of36. In the next five years, Fordsuccessfully transformed whatmany considered a tired and sadGucci image into a sexy of-the-moment revolution.


226 Thunderbird International Business Review • March–April 2003

. . . when all wassaid and done,had Gucci’sshareholdersbeen winners orlosers?

The new Gucci was, by 1999,considered a potential takeovertarget. Analysts believed the firmwas undervalued, well managed,and possessed significant growthpotential. Gucci was alsoextremely widely held. The Ital-ian fashion house Prada hadacquired a 9.5% interest in Gucciin June of 1998, making it thesingle largest shareholder.Prada’s move led to much specu-lation that it might attempt atakeover. Although silent as to itsintentions, Prada’s move waslater seen as the first move to putGucci into play.

CREEPING ACQUISITION

On January 6, 1999, LVMHMöet Hennessey Louis Vuitton,the French luxury-goods con-glomerate, announced that it hadpassed the 5% shareholding levelin Gucci Group N.V. Becauseboth Gucci and LVMH weretraded in the United States inaddition to their home markets(Gucci’s shares are traded inAmsterdam, LVMH in Paris),U.S. Securities and ExchangeCommission regulations applied,requiring public notification of afirm taking a 5% or more stake inanother publicly traded company.Gucci’s share price in New Yorkmoved from US$50 to US$70per share (see Appendix 1).

LVMH was inseparable from itsPresident and CEO, Bernard

Fashion Faux Pas: Gucci & LVMH

227Thunderbird International Business Review • March–April 2003

Arnault. Arnault was widelyknown for his aggressive andpersistent drive to continuallybuild the French luxury-goodsconglomerate through acquisi-tion. Arnault had pursued asteady strategy of buying uphundreds of small fashion brandsand business lines with estab-lished brands but lagging results.The acquisitions were then fold-ed into the LVMH conglomer-ate, building mass and exertingits size in marketing and posi-tioning negotiations globally.Arnault had considered buyingGucci back in 1994, but the ask-ing price, US$350 million, hadbeen too much.

LVMH’s surprising move onGucci led quickly to widespreadspeculation that this was onlythe first step in a hostile takeoverof Gucci. LVMH was ten timesthe size (by sales) of Gucci. Sixdays later, LVMH announcedthat it had acquired an addition-al 9.5%—the shares previouslyheld by Prada—for US$398 mil-lion.1 Two days later, on January14, LVMH stated, “in the pres-ent circumstances it has nointention of making a tenderoffer” for Gucci.

But Bernard Arnault andLVMH were not through yet.On January 26, LVMH con-firmed that it had now

1 Prada’s investment return was impressive.Prada’s original investment of US$258 million net-ted a profit of US$140 million, a 54% return inapproximately six months.

Arnault had pur-sued a steady

strategy of buy-ing up hundredsof small fashion

brands and busi-ness lines with

establishedbrands but lag-

ging results.

increased its stake in Gucci to34.4%. As illustrated in Exhibit1, Arnault was buying Guccishares rapidly and globally.Arnault’s 34.4% totaled 20.15million shares and representedan investment estimated atUS$1.44 billion. This last stepwas significant, in that underFrench law, LVMH’s home, acompany was required tolaunch a general tender—anoffer for all of the shares heldpublicly—of any company oncea 33% share ownership positionwas attained. U.S. law had nosuch requirement. BernardArnault described his intentionstowards Gucci as “notunfriendly.”2

On Wednesday, February 11,LVMH informed Gucci by let-ter that it was requesting ashareholder meeting to vote onits proposal to add its ownnominee to Gucci’s board,expanding it from eight to ninemembers. Bernard Arnault



again assured both Gucci’smanagement and shareholdersthat his interests were onlythose of a passive investor—Gucci’s largest investor.

“I reiterate my complete faith inthe creative talent of Tom Ford andin the development strategy imple-mented by Gucci’s managementteam. Our proposal today is provid-ed for within the statutes of Gucci,allowing LVMH to exercise itsrights as a shareholder withoutaltering in any way the independ-ence of the company.”

Gucci’s corporate bylaws, asincorporated under Netherlandslaw, stipulated that a shareholderwith a stake of 10% or more wasentitled to call a special share-holder meeting to implementboard changes. The meeting mustthen be held within six weeks ofthe request. Gucci’s CEO,Domenico De Sole, publiclyadmonished Bernard Arnault’smoves and characterized the strat-egy as a “creeping takeover” inwhich LVMH gradually acquiredmore and more shares of Gucciuntil it gained effective controlwithout ever paying existingshareholders any premium for thechange in ownership.

Exhibit 1. LVMH’s Creeping Acquisition of Gucci Group

Gucci, total shares outstanding (January 31, 1999) 58,510,700LVMH’s accumulation of shares:

Purchased on the open market before Jan 19 10,068,185Purchased from Prada of Italy on Jan 14 5,560,000Purchased on the NYSE, Jan 19–22 919,800Purchased on the Amsterdam stock exchange, Jan 19–22 47,000Purchased from private transactions with Capital Research 3,550,000

Total holdings in Gucci 20,144,985LVMH’s proportional ownership of Gucci 34.4%

2 Details of Tom Ford’s contract with Gucci asfiled with the U.S. Securities and Exchange Com-mission included a provision that in the event of anyone shareholder gaining a 35% stake in Gucci, Fordcould sever his relationship with Gucci and a varietyof specified salary, bonus, and stock options couldbe exercised.

THE POISON PILL

Gucci reacted quickly and radi-cally. Less than one week later,on February 18, Gucciannounced the creation of a newemployee stock ownership plan(ESOP) and structure, theEmployee Trust. Gucci grantedthe Trust the right to purchaseup to 37 million newly issuedshares. The Trust instantly pur-chased 20,154,985 shares.

The Trust’s ownership in Gucciwas now 25.6% (if it exercised itsright to purchase all 37 million,its stake in Gucci would rise to38.7%). This matched LVMH’sownership, and diluted LVMH’sposition from 34.4% to 26% bythe issuance. Gucci had extendedan interest-free loan to theEmployee Trust to purchase theshares (a Note), with the stipula-tion that the shares could not betransferred to a third party.3



Exhibit 2 details the new sharestructure. A subtle yet significantfeature of the ESOP plan wasthat it did not dilute earnings.Because the ESOP shares wereissued to a Trust, the shares car-ried no dividend rights. The newshares would not be included inGucci’s earnings per share (EPS)calculations.

Gucci CEO De Sole defendedthe action as necessary. It wasnot a poison pill in Gucci’s opin-ion. It was instituted in order toprevent a creeping acquisition inwhich the controlling ownershipof Gucci would change handswithout all shareholders receiv-ing a payment—a premium—forthat control. Gucci continued tooppose LVMH’s advances onthe basis that having a competi-tor as a part owner and directorwas not consistent with Gucci’sbest interests. De Sole went onto invite LVMH to make a pub-lic tender:

“We are telling them they canmake a takeover bid for 100% ofthe company’s shares any time theywant. . . We’ve had a lot of contactswith LVMH in the past month. Wemade it very clear that a minority

Exhibit 2. Gucci’s Share Ownership After the ESOP

Prior to ESOP Post ESOP Shares Percent Shares Percent

LVMH’s 20,144,985 34.4 20,144,985 25.6Employee trust* —— —— 20,154,985 25.6Free floating shares 38,365,715 65.6 38,365,715 48.8Total shares in Gucci 58,510,700 100.0 78,665,685 100.0

* The employee stock ownership plan was authorized to issue up to 37 million shares; 20 million wereactually exercised upon initiation of the program.

3 There is some disagreement on the roots of theESOP plan. The creation of an ESOP was providedfor in Gucci’s prospectus in its 1995 initial publicoffering. But Gucci CEO Domenico De Solereportedly had an American law firm design the spe-cific employee share issuance structure used the pre-vious fall (1998) after Prada of Italy had purchasedits 9.5% interest in Gucci. The plan could be trig-gered on the first sign of a hostile takeover.

position held by a major competitoris an impossible situation. It’s likeCoke having a seat on Pepsi’sboard.”

LVMH’s response was equally asquick and as defiant.

“Far from raising new cash, thisamounts to creating virtual shares,without putting a cent into the com-pany. They’re not issuing shares;they’re issuing voting rights to con-trol . . . to management.”

One week later, on February 25,LVMH filed suit in the EnterpriseChamber of the AmsterdamCourt of Appeals seeking aninjunction that would strip thenewly issued Employee Trustshare voting rights and barGucci’s management from issuingnew shares. LVMH’s argumentwas that Gucci’s management wasnot acting in the interests ofshareholders (of which LVMHwas arguably the largest), butrather acting in the best interestsof management. LVMH went onto point out that the new shareissuance had not raised any capi-tal, and that the shares issues were



restricted (could not be sold to athird party, for example, LVMH),preventing employees fromredeeming their newly acquiredshares for capital.

One week later, the Amsterdamcourt postponed any decision onthe legitimacy of Gucci’s defenseuntil May, but did invoke a vot-ing rights injunction on both thenewly issued employee shares andLVMH’s shares. The court statedthat the suspension of LVMH’svoting rights was based on thecompany not acting as a respon-sible shareholder in that it hadfailed to fully disclose its inten-tions. Both sides claimed victory,and the battle moved into a two-week period in which calm wasquickly replaced with a newharsher and more personal battle.

THE WHITE KNIGHT

Gucci had retained MorganStanley Dean Witter’s Londonoffice in February to aid in itsdefense strategy. Joseph Perella

Exhibit 3. Excerpt from CIBC Oppenheimer’s Equity Research on Gucci

Finally, on a fundamental basis, would the acquisition of Gucci by LVMH reallymake sense anyway? We don’t think it would, and here’s why. Louis Vuitton (whichin imitation of Gucci now has an American designer, Marc Jacobs, and has added aclothing line) really is the jewel in LVMH’s crown, and it has seen a renaissance ofsorts in the last year or so, but its still not Gucci in a fashion or design sense.LVMH’s other fashion brands, Kenzo, LaCroix, Givenchy (Alexander McQueen),Celine (Narcisco Rodriguez) and Loewe’s, are even lesser stars. Gucci and LouisVuitton would still need to compete against one another—in design, for real estate(whether for owned stores or for space in department stores) and for advertisingspace (where Gucci excels). So where are the synergies? Frankly, we don’t see any.

Source: “Specialty Retailing: Gucci Group NV,” CIBC Oppenheimer Equity Research, March 4, 1999, p. 4.

of Morgan Stanley had immedi-ately contacted Mr. Francois Pin-ault, the President and CEO ofPinault-Printemps-Redoute(PPR), a French retail conglom-erate. Pinault controlled 42.6%of PPR via his personal invest-ment vehicle, Artemis. Pinaulthad been on an acquisition bingerecently, including the famedLondon auction house Christie’sin 1998. Pinault told MorganStanley he would think about it.

Pinault flew to New York wherehe visited Gucci’s Fifth Avenueshowplace. After returning fromNew York, he met in London withDe Sole of Gucci. In the meeting,De Sole explained Gucci’s emerg-ing strategy of becoming a multi-brand luxury-goods company.This goal fit neatly with Pinault’sown goal of expanding PPR’sbusiness breadth to include luxurygoods. Negotiations began imme-diately with the two parties dis-cussing the size of PPR’s potentialinvestment, managerial implica-tions, and of course, price.

Francois Pinault, known for hisrapid moves, simultaneouslyundertook the acquisition ofSanofi Beauté, the beauty-prod-ucts division of the French firmSanofi. Beauté owned the YvesSaint Laurent brand. Pinaultintended to buy the divisionand resell the business toGucci.4 Pinault followed thewords of his favorite Frenchpoet Rene Char, “Think strate-gically, act primitively.”



On March 19, Gucci announcedthe entry of Francois Pinault’sPPR in the role of white knight.5

Gucci would issue 39 millionnew shares to PPR for US$75 pershare (US$2.9 billion), giving it a40% stake in Gucci. PPR wouldhold four of the nine seats on theGucci board, and three of the fiveseats on the newly created strate-gic and financial committee.LVMH’s share in Gucci was onceagain diluted (as were the sharesof all shareholders), falling to21%, as illustrated in Exhibit 4.Gucci’s share price jumped onFriday, March 19, from US$70to US$81 per share, a 15.7%increase in one day.6 See Appen-dix 2 for share price movementsaround this date.

Francois Pinault was consideredthe richest man in France; BernardArnault was considered to be thesecond richest. The entry of Pin-ault made the issue as much per-sonal as it was business. Pinaultmade no secret that he sawLVMH as his new competitor:

“We want to make Gucci ourbeachhead for development in the

4 Ironically, both Gucci and LVMH had previ-ously considered buying Sanofi’s beauty productsline. LVMH had come very close, deciding againstthe purchase only minutes before signing papersmaking the acquisition. Both Gucci and LVMH hadbacked away from Sanofi on the basis of price.

5 The move was particularly galling to LVMH asthe two parties were scheduled to meet that very dayin Amsterdam to search for an amicable solution toLVMH’s request for managerial influence at Gucci.

6 The strategic investment agreement contained afive-year standstill clause which restricted PPR’sholdings to 42% in Gucci. The standstill agreementcould only be terminated by either a vote of Gucci’sboard or by a full public tender offer by a thirdparty. In the event of a third-party bid, PPR couldpurchase additional shares only if it were to make afull and open tender offer for all shares outstanding.

Pinault followedthe words of hisfavorite French

poet Rene Char,“Think strategi-

cally, act primitively.”

luxury sector and create a rival toLVMH. LVMH was practically amonopoly. There’s room for twoin this business.”

Arnault and Pinault were veryrich, very French, but ultimatelyvery different. The 50-year-oldArnault was born into a familyreal estate business, and a gradu-ate of the elite Ecole Polytech-nique. The 62-year-old Pinaultwas a high school drop out,starting from the ground up in asmall family partnership runninga sawmill. Both had obviouslybuilt personal financial empiresover many years of hard work.And in a truly French touch,both owned wineries; Pinaultowned Chateau Latour andArnault, in a partnership,Chateau Cheval Blanc.

Morgan Stanley’s Londonoffices provided most of thefinancing behind PPR’s entry.Morgan Stanley extended aUS$3 billion bridge loan toPPR in order for it to purchasethe agreed upon stake in Gucci.US$2 billion of the loan wasbased on a refinancing of exist-



ing credit lines held by PPR,and the additional US$1 billionwas funded through theissuance of a convertible bond(issuance led by Morgan Stan-ley). The bonds were convert-ible into PPR’s ordinary shares.

Within hours LVMH was onceagain in the Amsterdam courtsasking for injunctions to stopthe capital infusion by PPR intoGucci and block Gucci’s acqui-sition of Sanofi’s beauty-prod-ucts division. LVMH nowstated that if the PPR transac-tion was nullified it could “envi-sion” an offer at US$85 pershare for those shares neededfor control. It did not definecontrol. Four days later, theDutch courts ordered Gucci toconsider LVMH’s offer(s). Overthe following weeks, LVMHsold investments it held in othercompanies in order to put suffi-cient funds in place to makeadditional offers. Over the firsttwo weeks of April 1999,LVMH continued to come for-ward with alternative offers of avariety of kinds, at one pointhaving four different offers on

Exhibit 4. Gucci’s Share Ownership After the Strategic Investment of PPR

Without ESOP Shares With ESOP SharesShares Percent Shares Percent

LVMH’s 20,144,985 20.7 20,144,985 17.1Employee trust* —— —— 20,154,985 17.1PPR’s strategic investment 39,007,133 40.0 39,007,133 33.1Free-floating shares 38,365,715 39.3 38,365,715 32.6Total shares in Gucci 97,517,833 100.0 117,672,818 100.0

* The ESOP shares were typically not included in most discussions of Gucci’s new share ownership(“without ESOP shares”) structure after the investment by PPR.

the table.7 The fight was increas-ingly public, as both sides con-tinued to make accusationsregarding the practices of theother.

On April 20, Gucci’s board, hop-ing to quell the feud, toldLVMH that it would be willingto recommend to stockholders anunconditional offer for the com-pany at US$88 per share. LVMHresponded that the position wasuntenable because of PPR’s con-tinuing stake in the firm.8

On April 22, the Amsterdam courtheard arguments over the legalityof Gucci’s defensive maneuvers.The court postponed any rulinguntil June, putting the debate onice for a month.9 During the inter-im, all parties were busy. LVMHand Gucci continued to wage apublic fight in which both urgedGucci shareholders to supporttheir disparate initiatives.

More than anyone else, De Sole islooked to as the man who cansave the heart of Gucci, keep it



from becoming just another prof-itable listing in a voluminous cor-porate annual report. He is theman who can salvage the swaggerof Gucci as a fashion house found-ed on Italian craftsmanship andsignifying classic Italian chic. Andhe is the American who candefend Gucci against the French,making sure that the companyremains Italian. This is a matter ofnational pride, supported by folkssuch as Santo Versace, presidentof Italy’s fashion industry associa-tion and the financial brainsbehind the Versace empire.

“Gucci’s Strong Suit: CEODomenico Is Defending the FirmAgainst Takeover Designs,”TheWashington Post, May 6, 1999, byRobin Givhan.

The Amsterdam court releasedits findings on May 27, uphold-ing PPR’s investment in Gucci,but rejecting the poison-pilldefense used by Gucci in theissuance of employee shares tothe Employee Trust. By mostprinciples the court’s decisionsignaled a clear defeat forLVMH. Arnault then threatenedfurther legal actions, and alsopointed out that LVMH owned20% of the Gucci Group andexpected “to see superior resultsfrom Gucci’s management.”

Gucci and PPR moved quickly.Gucci used the capital injectionsfrom PPR to purchase—fromFrancois Pinault—the SanofiBeauté division and the Yves SaintLaurent’s couture and fragrancebusiness. At PPR’s annual share-holder meeting it was announcedthat Tom Ford had agreed to stay

7 Most of the offers had a clause specifically stat-ing that the offers were only applicable if the PPRtransaction was nullified and Gucci Creative Direc-tor Tom Ford agreed to stay on at Gucci for at leasttwo years following the closure of LVMH's newcontrolling position.

8 If PPR’s investment was canceled, a full bid forGucci would require LVMH to purchase all sharesoutstanding which it did not already own,38,365,715 shares. This assumed the ESOP shareswere also canceled. If, however, the PPR investmentwas not canceled, the share total would rise to77,372,848 shares, which would double the price.

9 The two principals filled the interval with legalsuits and countersuits. Pinault first filed suit in Parisaccusing Arnault of libel in a published interview inParis Match. In the interview, Arnault describedPinault’s actions as “defrauding minority sharehold-ers.” Arnault responded in-kind with a countersuitagainst Pinault.

The fight wasincreasingly pub-lic, as both sides

continued tomake accusa-

tions regardingthe practices of

the other.

on at Gucci for at least anotherfour years. The PPR investmentwas formally approved by 80% ofGucci’s shareholders at the regu-larly scheduled stockholder meet-ing in July 1999.

THE DENOUEMENT

The problem Gucci now hadwas an awkward one. PPR nowcontrolled Gucci in cooperationwith Gucci’s management. ButLVMH still held a 20.7% inter-est. The question was how to getLVMH out, while simultaneous-ly making good on the long-term promise that stockholderswere entitled to a premiumwhen ownership had changed.LVMH, given the intensifyingconsolidation of luxury goodsbrands in the European market-place, wanted to free its US$1.4billion invested in Gucci. Nego-tiations continued.

• In September 1999,Gucci/PPR and LVMH(with Prada of Italy) oncemore entered into a biddingwar, this time for a thirdparty, the Fendi Italian fash-ion house. Both parties hadoffered the same US$850million in the end, butFendi chose LVMH/Pradaover Gucci because Fendidesigner Karl Lagerfeld pre-ferred LVMH/Prada’s man-agement teams. Pradaeventually sold its interest inFendi to LVMH.



• In May and June 2000, repre-sentatives of Francois Pinaultand Bernard Arnault triedonce again to find a resolutionto the ownership impasse.“Impossibility of commonground” was given in lateJune for breaking off talks.

• All parties were back in courtin November 2000, whenLVMH charged that TomFord and Domenico De Solewere secretly granted Guccistock options in the spring of1999 as part of the PPRstrategic investment. Guccidenied the charges. Thecharge was part of a new filing by LVMH in Amster-dam’s Enterprise Court claim-ing that PPR’s purchase of theGucci shares short-changedminority shareholders andconstituted mismanagement.This would be grounds forrescinding the PPR invest-ment. (The Dutch court wasrehearing many of the previ-ous arguments as part of aDutch Supreme Court rul-ing that the Amsterdamlower court had failed toconduct a thorough investi-gation of the mismanage-ment charge prior to itsruling in May of 1999.)

• In March 2001, the Amster-dam Enterprise Court agreedto a new demand for an inves-tigation into Gucci’s manage-ment practices. The probewas expected to take betweenthree and six months. PPRshares fell 3% on the

The problemGucci now hadwas an awkwardone.

announcement of the rulingas speculation increased thatPPR might eventually have tosell its 40% share in Gucci.The court, however, urgedthe parties to reach a settle-ment on their own.

More than two and half yearsafter it started, it ended. On Sep-tember 11, 2001, PPR, Gucci,and LVMH reached a termina-tion agreement. LVMH wouldbe able to cash out of Gucci at aprofit, and the minority share-holders of Gucci would indeed—finally—reap a premium fromthe change in ownership.

LVMH’s exit. PPR would payUS$812 million to raise its stakein Gucci to 53.2% by acquiring8.6 million Gucci shares fromLVMH for US$94 per share.This was a US$2 premium overthe closing price on the Amster-dam close on the previous Fri-day. This left LVMH with 12%interest in the Gucci Group.

PPR would then offer to buy outall of Gucci’s remaining minorityshareholders, including LVMH’s12%, in March 2004 at a price setat US$101.50 per share.10 (Theassumption was that LVMHwould take PPR up on its offer inMarch 2004, but many minorityshareholders may not.)11 A mem-ber of Gucci’s management teamtermed the exit agreement forLVMH greenmail. LVMH inreturn agreed to forego all legalclaims against PPR and Gucci.



Shareholder buyout premium.Gucci agreed to distribute a spe-cial dividend of US$7 per shareto all shareholders except thoseheld by PPR. A number ofinvestment analysts were publiclyannoyed, noting that the premi-um should be at least 15%, or adividend of about US$15 pershare, not US$7.

Gucci Group continues to referto LVMH’s large investment asan “uninvited acquisition of a34.4% stock interest in the Com-pany.” Gucci consider’s PPR’scurrent dominant ownershipposition as a strategic investment.

In 2000, our strategy of unparal-leled product design and quality,global distribution, and outstandingcommunication had its natural pro-gression to other brands. For ourdevelopment in this direction, weare fortunate to have had the part-nership of Pinault-Printemps-Red-oute (PPR), which in the Spring of1999, not only brought us the cap-ital to move in this direction, butthe cultural breadth to enable us toacquire on proper terms and condi-tions the pre-eminent Frenchbrand, Yves Saint Laurent, andwhich more recently assisted us inthe acquisition of Boucheron.

President and CEO’s Letter toShareholders,Gucci Group N.V. Annual Report2000, 14–15.

10 PPR, in order to fund the completion of itstakeover of Gucci, announced an additional issuanceof 700 million of new shares and 700 million in con-vertible bonds. Francois Pinault’s private investmentcompany Artemis committed to subscribing to bothto maintain Pinault’s 45% control of PPR.

11 LVMH arranged a bank securitization of itsremaining 12% share holdings against the March2004 sale, allowing it to receive the money up frontand declare a capital gain immediately.

Gucci Groupcontinues to

refer to LVMH’slarge investmentas an “uninvitedacquisition of a

34.4% stockinterest in the

Company.”



Appendix 2. Gucci Group’s Share Price Movements During Key Events of the LVMH Bid

Date Closing Share Price Percent ChangeEvent (1999) Day (US$) in Share PriceLVMH takes position in Gucci First trading day of year Jan 4 Mon 53.00 9.0

Jan 5 Tue 55.81 5.3Jan 6 Wed 68.63 23.0Jan 7 Thu 67.44 – 1.7

(Peak price until March) Jan 8 Fri 74.88 11.0Jan 11 Mon 71.06 – 5.1

LVMH purchases Prada’s 9.5% Jan 12 Tue 70.06 – 1.4Jan 13 Wed 70.00 – 0.1

LVMH: “no intention of tender offer” Jan 14 Thu 72.00 2.9Jan 15 Fri 72.63 0.9

PPR Enters as White Knight March 15 Mon 63.81 – 1.8March 16 Tue 65.25 2.3March 17 Wed 65.63 0.6March 18 Thu 70.00 6.7

Gucci announces PPR investment March 19 Fri 81.00 15.7March 22 Mon 83.13 2.6March 23 Tue 80.13 – 3.6March 24 Wed 82.00 2.3March 25 Thu 83.00 1.2

(Peak price until August) March 26 Fri 84.56 1.9Amsterdam Court makes final rulings

May 24 Mon 74.50 – 0.3May 25 Tue 73.56 – 1.3May 26 Wed 70.50 – 4.2

Court confirms PPR, rejects LVMH May 27 Thu 65.94 – 6.5May 28 Fri 66.13 0.3

Appendix 1. Gucci Group’s Share Price, January–June 1999

APPENDICES



Appendix 3. Time Line of Events in the LVMH–Gucci Controversy

Date EventJan 6, 1999 Gucci is informed that LVMH has increased its holdings in Gucci above 5%.

Jan 12, 1999 Gucci announces that it has not been consulted by LVMH regarding LVMH’s stake in Gucci. LVMH increases its stake in Gucci by purchasing Prada’s (Italy) 9.5% stake in Gucci.

Jan 13, 1999 Arnault praises Gucci management, CEO De Sole and Creative Director Ford.

Jan 25, 1999 LVMH increases its stake (over previous weeks) to 34.4%. LVMH does not “rule out” additional share purchases.

Feb 10, 1999 Gucci Group receives request from LVMH for special shareholder meeting to approve a request for gaining a seat on Gucci’s board.

Feb 18, 1999 Gucci launches a poison pill, an employee stock option plan, which dilutes LVMH’s share in Gucci to 26%.

Feb 25, 1999 LVMH files suit in the Enterprise Chamber of the Amsterdam Court of Appeals seeking a stop to the Gucci ESOP defense.

March 1, 1999 Gucci announces a special shareholder meeting, to be held on March 25th, in accordance with the Gucci Group’s bylaws and a request presented by LVMHfor a special shareholder meeting.

March 3, 1999 Amsterdam court postpones any decision on the LVMH suit until a subse-quent hearing to be held on April 22nd, but imposes an injunction on the voting rights held by both the ESOP and LVMH.

March 4, 1999 LVMH withdraws its request for a special shareholder meeting and its nomi-nee to the Supervisory Board of Gucci.

March 19, 1999 Gucci announces that the Pinault-Printemps-Redoute Group has made a strategic investment of $2.9 billion in Gucci. This is to represent 40% of Gucci’s capital. PPR signs a 5-year standstill agreement in which PPR agrees not to increase its ownership position in Gucci past 42%. Stock issued to PPR totals 39 million shares at $75 per share, a 13% premium over the average share price of the preceding 10 days. Domenico De Sole and Tom Ford are said to be “fully committed to new alliance.”

March 22, 1999 LVMH’s request that Gucci’s management be removed is denied by the Ams-terdam court. Gucci’s Supervisory Board is given approval to consider LVMH’s proposed $81 per share offered.

April 15, 1999 LVMH publicizes a five page “Letter to Gucci Shareholders” and other corre-spondence with Gucci management. LVMH charges Gucci’s board with “totallack of good faith and sincerity in negotiations.” LVMH again accuses Gucci’smanagement of violating the rights of minority shareholders. LVMH repeats its offer to make a full bid if PPR’s investment is canceled.

April 19, 1999 Gucci’s board tells LVMH it will recommend to stockholders an uncondition-al offer for the company at $88 per share. LVMH responds that this position is untenable with PPR’s presence.

May 27, 1999 Amsterdam court releases its findings that the PPR investment is legal, but rejects the poison-pill ESOP issuance.

October 1999 Gucci officially acquires Sanofi Beauté from PPR for US$1 billion.

Sept 11, 2001 Gucci, LVMH, and PPR reach a termination agreement whereby PPR will buy out LVMH’s investment in Gucci and PPR will make a tender offer to allremaining minority shareholders.



Appendix 4. LVMH’s Alternative Bids in April 1999

1. If PPR’s investment was rescinded, US$91/share.2. US$85/share for all outstanding shares, but under which Gucci would help

LVMH pass the 50% threshold in share ownership through a reserved capi-tal increase if LVMH obtained a majority of shares held by independent shareholders, but not those of PPR.

3. US$85/share under which LVMH would have the same rights and board representation as PPR if it ended up with less than 50%.

4. US$85/share including PPR’s stake, but only if Gucci helped deliver PPR’s stake and guaranteed that most of Gucci’s top management stayed on for at least two years.

Source: “Gucci Board Invites Unconditional Bid from LVMH of $88 a Share to End Battle,” Wall StreetJournal, April 20, 1999.

Appendix 5. A Brief Overview of Takeover Laws in Selected EuropeanCountries

Great Britain• Decisions are made by a takeover panel and not appealable to courts• A final offer is generally final• Threshold of 30% where an acquirer has to make a full offer France• Threshold of 33% beyond which an acquirer has to launch a full offer• Some defensive measures allowed during a bid• Regulatory decisions appealable to courts Germany• A voluntary takeover code lets companies opt in or out

Netherlands• Allows companies to adopt a broad array of defenses during a bid • No rules requiring a company to launch a full offer at a certain threshold

Italy• Limits the defenses a company can employ during a takeover

Switzerland• Allows a broad array of defensive steps to a hostile takeover• An acquirer can force a cash buyout of minority shareholders only after it

achieves 98% control

Spain• Panoply of defenses that can be put in place before a takeover is launched• Limited defenses after takeover offer is made• No compulsory buyout of minority shareholders

Source: “Pressure Grows to Unify Europe’s Takeover Laws—Mazes of Rules Baffle Investors, Hurt Share-holders,” Wall Street Journal, December 13, 1999.



Appendix 6. Gucci Group Special Dividend Announcement

Source: www.guccigroup.com/press

fashion faux pas: gucci & lvmh

Documents