BERNARD ARNAULT: Are you familiar with a
man named Bernard Arnault? He’s the richest man in the world and the CEO and Chairman of luxury
fashion brand Louis Vuitton Moet Hennessy. On the outside, his company is iconic for
their flamboyant purses and bags coming in at thousands of dollars each. But, on the inside,
there’s nothing flamboyant about the company or Bernard whatsoever. This makes sense because
Bernard didn’t found a single one of the dozens of fashion brands that he owns today. He actually got
his start in his family’s construction business which gave him enough money to buyout the parent
company of Christian Dior. From there, he would engage in constant corporate raiding,
hostile takeovers, and brutal backstabbing to build the empire that is LVMH today. They’ve
bought out everyone from Tiffany and Bulgari to Sephora and Hermes. In fact, here’s a list of
all the brands that LVMH currently owns or has owned in the past. With each and every
one of these brands, Bernard followed a very simple formula. Buy a substantial predatory
stake in the business of your liking, promise that you’re not looking to takeover the company,
engineer internal strife amongst the existing team, and finally make an offer that they can’t
refuse. In the meantime, he’s also been keen to ensure that he doesn’t get overthrown himself.
One of the first things he did after taking over LVMH was acquire enough shares to form a blocking
minority which means that no one can successfully challenge his power over the company. While toxic,
this strategy has played out in Bernard’s favor way more often than not. I mean, that’s why he’s
the richest person in the world, but there are a few notable exceptions as was the case
with Gucci. Bernard approached Gucci just like he did with any other brand, but little did he know,
Gucci would put up the fight of their lives and this takeover would end up being one of Bernard’s
most public failures. So, here’s how Louis Vuitton got humiliated trying to takeover Gucci.
FRIENDLY FIRE:
Taking a look back, the bloody battle for Gucci dates back to early 1999. The CEO of Gucci,
Domenico De Sole, had just put in a stellar year with Gucci. He had nearly doubled the stock price
from $32 to $56 and their star designer, Tom Ford, was making heads turn around the world. Gucci was
no longer the struggling business desperate for a bailout that they were just 5 years earlier when
De Sole tookover. But, De Sole was just getting started. Yes, he had successfully rescued the
company from bankruptcy, but he wasn’t just looking to save the company. What he wanted to
do was make Gucci a fashion giant that was feared and respected around the world. And last year’s
stock performance was exactly the momentum that De Sole needed to make this evolution,
but there was one fear in the back of his mind: Bernard Arnault. For the past year,
rumors had gone rampant that Bernard was looking to takeover Gucci. On the outside,
De Sole would put on a brave man facade that he wasn’t worried Bernard or his predatory
hobby. But, internally, De Sole was petrified. He had only been CEO for 5 years, but he had
been involved with gucci since the early 1980s, and this was by far his life’s greatest work. So,
you can bet that De Sole had no intention of giving Gucci up to some French wolf just
so that he could add it onto his endless list of brands. As a result, De Sole was keeping a
close pulse on the situation. He would regularly call Gucci’s investment banker, Morgan Stanley,
and inquire if any outsized purchases of Gucci stock had been made. In fact, he would make one
such call on this fateful day: January 5, 1999. But, something was different today as De Sole felt
that they were finally out of the woods. Instead of inquiring about any large purchases, he would
proudly tell the banker “it looks like we’re in the clear now!” But, it was only hours later that
he would get a frantic call from his assistant. Louis Vuitton’s president, Yves Carcelle,
an old friend of De Sole, was on the line. But, almost instantaneously, De Sole could tell that
Carcelle wasn’t calling to get drinks or discuss the fashion industry, Carcelle was calling to
inform. He was calling to inform that LVMH had acquired a 5% stake in Gucci and that the news
was gonna go public later that day. He went onto assure De Sole that Bernard’s purchase was nothing
but passive and that he wanted the two brands to work together. But, knowing Bernard’s history,
De Sole knew that this was complete and utter BS. He would hang up the phone and rush into
the London Gucci office calling everyone he could think of. He called Morgan Stanley,
he called their anti-takeover specialist, and then his heart sunk. The anti-takeover
specialist that they had been working with forever just happened to have a 1 year long
sabbatical starting in just 1 week. At this point, De Sole lost it. He hung up the phone and hollered
“If Arnault wants the company, he can have it! I don’t give a blank. I’ll just go sailing!”
HOPELESS DEFENSE:
Though De Sole had a little outburst there, he by no means meant what he said. Though he did love
sailing, he wasn’t gonna sit back and let this French tycoon bully Gucci. So, he would call back
Morgan Stanley and ask to get in contact with the boss of his former anti takeover specialist. This
got him in contact with a man named Michael Zaoui who was the head of Morgan Stanley’s
European merger-advisory group. Normally, such a defense would have been under his pay grade,
but Zaoui was more than happy to help because he had his own vendetta against Arnault. You see,
he had previously represented the Guinness Brewery in their own fight against LVMH just a few years
ago. And that fight didn’t go as well as Zaoui had hoped, so this was his chance to get revenge. He
would come over to the Gucci office in a matter of minutes bringing with him Morgan Stanley’s
defense. But, when they opened up the file, they would be met with another bombshell. It turns
out that the anti-takeover specialist wasn’t just going on a sabbatical but he hadn’t done
jack in terms of creating a defense. In fact, the entire defense consisted of just two clauses. One,
De Sole was allowed to resign from the company in the event of a hostile takeover. And two, Tom Ford
was also allowed to resign if someone acquired more than 35%. Zaoui couldn’t believe it. He would
call up his employee and yell “Where is the fing defense? What have you guys been doing all this
time?” To this, the employee didn’t really have a response. It wouldn’t be surprising if this guy’s
sabbatical turned into a permanent one, but that didn’t really help Gucci’s case. As Gucci’s CFO
observed, “You guys are toast.” For Gucci, there was really only way out of this. They would have
to find someone else to buy a large enough stake in Gucci before LVMH tookover. This way, LVMH
wouldn’t be able to acquire a majority, but this was much easier said than down. Here’s the thing,
Gucci was worth $8.7 billion and while this was cheap money for Bernard, for everyone else in the
fashion industry, this was serious business and they couldn’t just make an investment decision
overnight. So, De Sole only had one option, try his best to stall Bernard, but Bernard
had no intention of moving slow. Just a few days after his initial purchase, LVMH would acquire
another 9.5% in Gucci. And within 10 days, Bernard would own over a quarter of the company. In the
meantime, De Sole was desperately calling every CEO in the fashion industry pleading for them to
invest in Gucci or at the very least not sell off any stake that they may already have. But,
call after call, De Sole was politely refused. For all the other CEOs, making Bernard into an enemy
was simply a road they didn’t want to go down. Given that no one else wanted to help Gucci,
De Sole knew that there was only one more person to ask: Bernard himself. He would setup a meeting
with Bernard at Morgan Stanley and request that he slow down his buying and let Gucci
stay independent. Bernard was open to the request, but in return he wanted 3 full seats on the Gucci
board. It became clear to De Sole right then an there that Bernard wasn’t here for a compromise.
He was just looking to grow his control in Gucci through another avenue. De Sole would of course
reject this offer, but this simply led to Bernard upping his stake to 34.4%. Bernard was taunting
Gucci. Just another 0.6% and Tom Ford could leave with no repercussions. Despite Bernard’s charming
personality, this was no friendly deal. This was war and it was now do or die for Gucci.
FIGHT FIRE WITH FIRE: De
Sole was done begging everyone in the fashion industry. Even if someone was willing to help,
Bernard would probably just destroy them as well. So, what Gucci had to do was fight fire with fire,
and after consulting with a slew of lawyers, he knew exactly what he had to do. He was gonna
dilute LVMH into oblivion. You know how companies like to buyback their shares to
increase their stock price. Well, they can do the opposite too and issue a bunch of shares.
For obvious reasons companies try to avoid doing this unless they really to need to raise money.
Gucci didn’t need money, but they could issue a crap ton of shares to dilute Bernard. Bernard,
on the other hand was well aware of this strategy, but he thought he was protected. You see,
American regulation specifies that companies can’t dilute more than 20% of their company
without a special waiver. This is obviously to protect shareholders from over dilution. So,
Bernard figured, worst case scenario, if Gucci tried to pull this stunt,
he’d have to pay another 20% for the company, no big deal. Also, there was no way Gucci would get
a waiver just to stop an acquisition. Waivers are reserved for truly dire situations as in,
this company will go bankrupt if they don’t dilute more. Gucci was obviously not in that position,
so Bernard was quite confident in his own position. But, it turns out that Bernard’s
lawyers had missed some fine print. You see, that 20% rule only applied to American companies. So,
technically, Gucci was legally allowed to dilute themselves into oblivion. Of course, this would
hurt all Gucci shareholders, but given that LVMH was the biggest one, they would be hurt the most.
And with that De Sole started printing shares left and right. Little to say, Bernard was truly
pissed and he would decide to leverage some fine print himself. According to Gucci’s own bylaws,
anyone with a stake larger than 10% could request a special shareholder meeting. At this meeting,
Bernard wanted to nominate a new person to the Gucci board and essentially stage a coup.
Things were getting heated and De Sole needed a power play to get the upper hand. While printing
shares could stall, it didn’t solve the issue of not having a large stakeholder that could block
out LVMH. Gucci’s resilience and willingness to fight LVMH did pique the interest of more
potential buyers, but no one was willing to pull the trigger yet. And De Sole didn’t have
time to burn so he decided, if I can’t find a shareholder I’ll create one. I’ll just give
all the shares to Gucci employees through a massive Employee Stock Ownership Plan or ESOP.
And that’s exactly what he did. In late Febraury of 1999, Gucci issued 20 million shares to their
employees which effectively diluted Bernard from 35% down to 25%. For the first time,
Bernard could feel Gucci slipping from his grips but the fight was far from over.
THE FINAL BATTLE:
This brilliant move from Gucci turned heads not just within the fashion industry but the
business world as a whole. But, while this was a great victory for Gucci, De Sole didn’t let
this distract him from his end goal which was to escape the clutches of Bernard by finding
an investor. And Gucci’s ability to hold their own against one of the most ruthless businessmen
in the world gave potential investors much more confidence. And this is when a man named Francois
Pinault would enter the scene. De Sole admits that he had no clue who Pinault was, but not wanting to
ignore any leads, De Sole agreed to meet up with Pinault in early March. It turns out that Pinault
was one France’s wealthiest business men and owned classics like Christie’s auction house, Converse
shoes, and Samsonite luggage. At the meeting De Sole would give his classic speech about
how he and Tom Ford saved Gucci from bankruptcy and how they were trying to now save Gucci from
yet another demon. Pinault was impressed with the first meeting itself, but after a second
meeting that included Tom Ford, Pinault was sold. He too wanted to move fast. In fact, he wanted to
move even faster than Gucci as he didn’t want to lose the company to LVMH. So, he gave Gucci an
ultimatum. Finish the deal in a week or I’m out. De Sole still had an inkling of doubt if this was
the right choice, but Tom Ford was confident that this was the way forward which gave De Sole the
confidence to agree to a multi billion dollar deal in a matter of hours. By that evening, De Sole
would put together a confidential team of investment bankers and lawyers all working to
complete this deal. Speaking of the deal, the deal was that De Sole would issue another 40 million
shares of stock which Pinault would purchase for $75 per share. This would cost a total of
$3 billion and give Pinault a 42% stake in Gucci while simultaneously diluting Bernard down to
19.6%. This would essentially block out Bernard from being able to acquire a majority stake. But,
the deal didn’t stop right there either. You see, Pinault had another ace up his sleeve.
He suggested buying YSL and letting De Sole and Tom run that company as well. This itself was an
extremely generous offer but what made it even more satisfying was that Bernard had just passed
up on buying YSL a few months ago so that he could focus on getting Gucci. And now, Bernard was gonna
lose on out Gucci and YSL. De Sole and Tom would of course take Pinault up on this offer and in
the blink of an eye, Gucci would go from trying to escape Louis Vuitton’s clutches to insulting
Louis Vuitton. Bernard would of course throw a tantrum. He would sue to block this deal and
offer to buy the entire company for $8.7 billion. But now, Gucci had the upperhand, and they weren’t
gonna tolerate any more of Bernard’s antics. And eventually, Bernard had no choice but to keep his
minority stake or just sell it off and move on and that’s exactly what he finally do in late 2001.
THE AFTERMATH:
In the end, Bernard’s hostility actually ended up working in Gucci’s favor. Not only were they
able to escape LVMH, but they were able to find someone that was willing to back them and truly
form a mutually beneficial partnership. And let’s just say Pinault made an awesome deal as Gucci now
accounts of 60% of his company’s revenue and 70% of his company’s profits. It ended up working out
just fine for Bernard as well as he is now the world’s richest man. But, with that being said,
that doesn’t change that he was shown up and outsmarted by a small company that had
just recovered from bankruptcy. And that’s how Louis Vuitton got humiliated trying to acquire
Gucci. Did you know about this corporate blood bath? Comment that down below. Also,
drop a like if you’re glad that Louis Vuitton got a taste of their own medicine. And of course,
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