PART II – LVMH chairman Bernard Arnault returned the standstill agreement that Gucci had proposed in which LVMH would formally agree to stop buying Gucci shares in exchange for seats on the board of the Italian design house. It was sent back – by fax – at precisely 5:01 pm to Gucci CEO Domenico Del Sole.
It was blank. Arnault had not signed the document (as set out in Part I of this series). In refusing to agree to the deal, Arnault shattered any hopes that De Sole had of LVMH slowing its aggressive and thoroughly unwanted acquisition spree of Gucci's shares.
Fearing that LVMH had already acquired millions of shares without anyone outside of its inner circle knowing, in addition, of course, to the 34.4 percent that LVMH was publicly known to have on hand, De Sole sprang into action, and within twenty-four hours had a plan in motion. It was an unprecedented and utterly bold response to what De Sole anticipated would be an inevitable hostile takeover attempt from LVMH and its unpredictable and uncompromising chairman.
Under the watch of De Sole, Gucci created an Employee Stock Ownership Plan (“ESOP”). Such an instrument is typically used to provide a company's workforce with an ownership interest in the company; shares are typically allocated to employees and may be held in the trust until an employee retires or leaves the company.
Gucci, however, had an ulterior motive. The ESOP created a new 42 percent stake in Gucci, effectively diluting the stake of every existing stockholder, including LVMH. The French conglomerate’s ownership stake plummeted from 34.4 percent to roughly 20 percent in a matter of minutes.
This was a declaration of war, one that would be escalated exponentially just over a month later.
On March 19, despite miraculously ongoing negotiations between LVMH and Gucci, news broke that Gucci had agreed to sell the 42 percent equity stake created by the ESOP – the precise stake that LVMH was vying for – to PPR for $3 billion.
A formerly uninvolved PPR swooped in to “save” Gucci from LVMH. The rival conglomerate, headed up by François Pinault, was being hailed as a “white knight.”
This time, if reports are to be believed, LVMH found out about the deal – shortly before that scheduled meeting – in the same way as everyone else: In the news. LVMH’s executives were blindsided. On the same day as the world learned that Gucci had opted to sell a 42 percent stake to PPR, executives from Gucci and LVMH were scheduled to meet to resume talks about a potential LVMH, Gucci peacemaking deal. The parties had managed to continue their negotiations for LVMH to acquire Gucci, despite Gucci’s implementation of the ESOP, which set LVMH back a weighty 14.4 percent ownership stake.
Despite the revelation, Bob Singer – Gucci's then-chief financial officer – and Pierre Godé, Arnault’s “right hand,” arrived for their previously-scheduled meeting in Amsterdam. The encounter was brief, not lasting more than 30 minutes; Gucci had already made its choice, and it was LVMH’s view that it had been disrespected in the most striking way.
Not the End
Still yet, LVMH did not back down. Before the Gucci-PPR deal was finalized, the Arnault-owned entity made its fury known. After placing two (failed) bids to purchase 100 percent of Gucci outright, including the PPR shares, first for $81 and then $85 per share (ultimately, $10 more per share than PPR’s winning $75/share offer), LVMH sued to block the deal.
LVMH’s legal team argued that, among other things, the issuance of the Gucci "poison pill" shares (by way of the ESOP) – a tactic utilized by companies to prevent or discourage hostile takeovers, usually through the issuance of new preferred shares in order to make shares of the company’s stock look unattractive or less desirable to the acquiring firm – was nothing more than Gucci using "legal trickery" to "circumvent" LVMH’s bid for board representation and to deprive LVMH of its rightfully-owed voting rights.
Gucci needed to be held accountable for this legal wrongdoing immediately, LVMH’s counsel argued.
The deal between Gucci and PPR was essentially put on ice towards the end of April 1999, when the Enterprise Chamber of the Amsterdam Court of Appeals decided to freeze the $3 billion PPR paid to Gucci in exchange for a 42 percent stake in the company. Still not satisfied, LVMH then asked for an investigation into the management practices of Gucci, including the ESOP and the subsequent PPR deal transactions. LVMH was convinced that Gucci had engaged in acts of mismanagement.
In a proceeding in the Netherlands (where Gucci was incorporated and thus, where LVMH filed its numerous lawsuits), a Dutch judge held that Gucci was required to consider LVMH’s takeover bid and the parties needed to attempt to negotiate to achieve agreeable terms.
While it appeared as though LVMH and Gucci might just be able to reach an agreement, in early April, Gucci rejected LVMH’s generous $85/share bid. It did, however, say that it would entertain further offers from the French company.
A month later, in May 1999, Gucci and PPR formally got the go-ahead after a Dutch Court upheld Gucci’s sale of a 42 percent stake to PPR. In connection with the ruling, De Sole declared, “I’m very happy. It is a great victory for us."
Maybe with foresight that this battle was far from over, De Sole further told the press: "[LVMH can] continue to torment us but they’re not going to get very far.”
* Deal Dossier is a multi-part series that documents some of the most significant fashion acquisition developments of the past and present.