PART I – Just two hours before the entire world found out that LVMH Moët Hennessy Louis Vuitton had been secretly building up a stake in Hermès in furtherance of what the Birkin bag-maker came to call a “hostile takeover,” Hermès' then-CEO Patrick Thomas was cycling through France’s rural Auvergne region on a Saturday completely unaware of the mega-storm that had been quietly brewing and was just mere moments away from striking.
The impending attack, according to analysts, “was so secretive and sophisticated that Thomas couldn’t have foreseen it.” This is why, on October 23, 2010, just hours before the publication of headlines that LVMH was in the process of making a discreet, yet inherently aggressive, play for control of Hermès, Mr. Thomas was surprised to be interrupted mid-ride by a phone call; on the line was Bernard Arnault, chairman of LVMH and the richest man in France.
The call was extraordinarily brief, made purely to alert him that LVMH would be announcing that it had acquired a 14.2 percent stake in Hermès, the almost-exclusively family-controlled company, in which the Puech, Dumas and Guerrand families held a 73.4 percent stake.
An otherwise impeccably even-tempered gentleman, Thomas was – in that moment – engulfed in raged. His response to Arnault was simply this: “If you want to seduce a beautiful woman, you don’t start by raping her from behind.” He hung up and got back on his bike.
Thomas, then 62, had joined Hermès in 1989 as Chief Operating Officer, making him the first non-family member to lead the then-173-year old luxury brand; he left in 1997 to become chief executive of Lancaster, the cosmetics company, and then on to William Grant & Sons Ltd., a family-owned Scottish spirits company, where he became the first non-family member to take the helm of the liquor group.
Ultimately, however, Thomas returned to Hermès in 2003. Following unanimous approval from the Hermès board, he was tapped to succeed Jean-Louis Dumas, who would retire following a 28-year reign of the head of the family business, the one that was founded in 1837 by Thierry Hermès primarily as a leather harness manufacturing company.
A graduate of Paris Ecole Supérieure de Commerce, Thomas was as devoted to the company’s vision as any bona fide Puech, Dumas and Guerrand. Upon taking the reigns as CEO in 2006, he made his intentions known: "This is a family company with a long-term vision. There will be no revolution [under my watch]."
With this in mind, the news of LVMH’s stake building exercise was categorically “an attack,” according to Thomas, and it was personal. As for the majority of his makeshift family, who made up a significant portion of the Hermès board, they saw Arnault as an unwanted interloper, as “being ruthlessly aggressive, with a formula for success – mixing glitzy advertising and publicity stunts – entirely unsuited to the Hermès culture.”
The families vehemently protested the thought of having the company’s arch-rival as one of its largest external shareholders.
These sentiments intensified even further when, less than a week and a half later, it was revealed that Arnault had further increased LVMH’s ownership stake in Hermès. His conglomerate now controlled 17.1 percent, a stake acquired at what Reuters called “a major discount to recent market levels.”
“Nobody knows where LVMH bought the shares from or when,” a hedge fund manager told Reuters at the time. The publication noted, seeming to foreshadow the impropriety that was afoot, “It was not clear how LVMH bought its holding at an average price of 80.5 euros, a 54 percent discount to Friday’s closing price of 176.2 euros.”
The Initial Acquisitions
So, how – exactly – did LVMH come to possess an undetected 17.1 percent stake in the closely-held Hermès? It was the result of a handful of meticulously crafted deals.
The transactions, themselves, involved a small percentage of Hermès shares that were sold to the public under the watch of the now-late Jean-Louis Dumas, who served as Hermès’ CEO from 1978 to 2006. In order to finance the expansion of Hermes’ reach beyond France and bring its now-$10,000+ Birkin and Kelly bags to a global audience, Dumas engineered a structure that allowed Hermès to sell a percentage of its shares while still maintaining majority ownership.
Having “tried and failed to buy shares from Hermès family members” in the past, Arnault carefully seized these publicly-held shares to an effort to noiselessly assemble LVMH’s arsenal of Hermès stock. Between 2001 and 2002, LVMH acquired an initial 4.9 percent stake in Hermès through a handful of its subsidiaries. That 4.9 percent stake was far from random, of course. According to French securities laws, companies are only required to disclose when they take more than 5 percent of another company's capital, and to clarify their intentions once that stake reaches 10 percent. At just 4.9 percent, LVMH was in the clear.
To further obscure its tracks, “LVMH disguised its identity by having banks in Luxembourg and Panama purchase the shares on their behalf. It then paid the banks in cash, in order to avoid discovery. Its identity — and mounting dominance — went undetected,” according to business consulting firm, Creaghan McConnell Group.
That year-long buying spree came to an abrupt halt at the end of 2002, suggesting that LVMH’s initial interest may not be of disastrous proportions for Hermès after all. Had Hermès been aware of the early acquisitions, it could have breathed a temporary sigh of relief to see that for the next five years, LVMH made no further attempts to increase its stake.
In reality, however, Hermès’ executives were completely in the dark at this point in time, as to their rogue rival’s acquisition activities, and as for LVMH, it was not slowing; no, it was merely sitting in wait. In 2007, it sprang back into action, engaging in a string of complex cash-settled equity swaps through financial intermediaries and subsidiaries, again, keeping the individual transactions below 5 percent.
These small, undisclosed transactions went on for several years, and if considered in isolation, were within French securities laws, the French financial services watchdog, Autorité des marchés financiers ("AMF"), would hold over a year later. However, LVMH’s June 2010 stock swaps with subsidiaries – which brought LVMH’s stake in Hermès to an accumulated 14.2 percent – would certainly require disclosure. So, on October 23 (four months late, according to the AMF), Arnault made his phone call to a then-cycling Thomas and the international media would declare the news shortly thereafter: “LVMH Takes Minority Stake in Hermès.”
Seventy-two hours later, LVMH made headlines again. The empire that Arnault built revealed by way of a markedly short press release that in addition to its 14.2 percent stake in Hermès, a sudden conversion of cash equity swaps into shares upped its stake to “a total of 18,017,246 Hermès International shares, representing 17.1 percent of its capital.”
In case this bout of news was not striking enough, LVMH made public a pledge; one the Hermès families must have deemed a farfetched improbability, at best, and a malicious falsehood, at worst. In light of widespread press speculation that a hostile takeover was in play, LVMH denied that it was entertaining ambitions to slowly gain control and take over Hermès, despite firm protests from the Puech, Dumas and Guerrand families.
LVMH’s then-Vice President Pierre Godé attempted to drive home this point with a statement of his own, saying: “It would be folly on our part to hamper the success of this great brand. LVMH has no intention of aggressively taking control of Hermès. I make the wish that these artificial, sterile and groundless quarrels stop.”
Still yet, the group took the opportunity to set the record straight regarding its stake-building methods of choice, asserting that it had “scrupulously respected the rules” in its acquisitions. The AMF, however, was seemingly unpersuaded, and announced in November that it would immediately initiate an investigation of LVMH's investment in Hermès.
* Deal Dossier is a multi-part series that documents some of the most significant fashion acquisition developments of the past and present.