Case Study: The Battle for the Gucci Group

Just hours before two planes hit the Twins Towers in New York on Monday, September 11, 2001 as part of a larger series of coordinated terrorist attacks by the Islamic terrorist group al-Qaeda, news broke that “one of the most bitter fights in corporate history” had come to a head. The revelation followed from a weekend agreement – signed late on Sunday evening in Paris – between two of France’s richest men: François Pinault and Bernard Arnault. At issue: Who would claim ownership and control over one of the most famous fashion brands in the world, Gucci? To be exact, Pinault (father of current Kering chairman François-Henri Pinault) agreed in writing to pay rival scion Arnault, the chairman of LVMH Moët Hennessy Louis Vuitton, $806 million for 8.6 million Gucci shares. The deal followed from a vicious two-and-a-half-year war.

While Pinault and Arnault were able to agree on an owner for Gucci on that Sunday evening in Paris, it was hardly the end of what has been deemed the most momentous battle to ever take place between the two conglomerate-builders and their iron-clad inner circles.

Quietly Amassing a Stake in Gucci


In 1998, despite extensive fashion (and non-fashion) acquisition efforts by LVMH and Pinault-Printemps-Redoute (“PPR”), neither conglomerate boasted any publicly-known ownership stake in Gucci. PPR (which, since 2013, has been known as Kering) would not make its first move to acquire shares in Gucci until March 1999. However, the parties’ battle for the brand that Guccio Gucci built – which the New York Post has described as “the bloodiest fight in fashion” – would first rear its ugly head for the world to see in early 1999.

It was January 5th, and Gucci’s then-CEO Domenico De Sole was en route from New York to London when he received a phone call. Yves Carcelle, a longtime friend but more importantly, a Louis Vuitton director, was on the line. He was calling to inform De Sole that LVMH had acquired a 5 percent stake in Gucci. “He wanted De Sole to understand that the investment was purely ‘passive,’ that Arnault’s intent was nothing but ‘friendly.’ Maybe, Carcelle suggested, the two companies could find ways to work together,” according to Vanity Fair. De Sole hung up the phone. The 55-year old notoriously shrewd business mind and Harvard-trained lawyer was stunned.

The next day, on January 6, 1999, the news that Carcelle had shared with De Sole was revealed to the public: LVMH had quietly acquired a 5 percent stake in Gucci by way of the open market. Gucci’s board members came together almost immediately. This would proceed one of two ways, they decided: LVMH would make an outright play to purchase Gucci in its entirety, or it would slowly – and quietly – continue to build up its ownership stake until it could enact a complete takeover. Gucci, and the world, would come to learn that the latter would be LVMH’s move of choice, but they would not have to wait long to find out.

“Events developed quickly,” WWD wrote at the time. Within a matter of a few days, Arnault unabashedly escalated his acquisition efforts, buying out the 9.5 percent stake in Gucci that Prada chairman Patrizio Bertelli had previously acquired. Bertelli – who was busy building a luxury fashion empire of his own at the time, taking control of fashion companies Helmut Lang and Jil Sander and shoemaker Church & Co. – had acquired a 9.5 stake in Gucci some years prior for an estimated $260 million.

In January 1999, he sold his entire stake to Arnault for $398 million. If reports are true, there was more to that deal than a $140 million profit for Bertelli. According to Forbes, “Arnault may also have promised Bertelli marketing and production collaboration between LVMH and Prada; neither executive [was willing to] comment.” Either way, with Bertelli’s stake in hand, LVMH became Gucci’s largest single shareholder, and Arnault did not stop there. By mid-January, LVMH revealed that it had upped its stake in Gucci yet to 26.7 percent. Arnault had been busy buying shares from various sources, including Chicago-based Harris Associates’ Oakmark Select Fund.

The news of LVMH’s initial ownership and Arnault’s continued efforts to buy any – and every buy-able share in Gucci – came as a shock to both industry insiders and those within the ranks of Gucci. Among those taken aback by Arnault’s quietly cunning efforts? De Sole, who would soon come to learn that a 26.7 percent ownership stake was only just the beginning.

Arnault, then aged 50, was not content to merely hold the title of one of Gucci’s largest shareholders; a natural businessman, known for his “American style of aggressive corporate raiding and ruthless decision-making,” the LVMH chairman wanted more. So, he saw that a meeting with De Sole was arranged. It took several days for both sides’ teams to agree to a viable date and an appropriate location for the meeting. The men ultimately met at Morgan Stanley’s offices in Paris. That was De Sole’s venue of choice; Arnault, on the other hand, had proposed a dinner. In that meeting, which lasted just over an hour, Arnault, at times reportedly reading from a typed-up document, “lavished praise on Gucci’s management,” according to Vanity Fair. “It would be ‘a disaster’ if De Sole and [Gucci’s mega-star creative director Tom] Ford resigned,” according to Arnault, who “insisted that the last thing he wanted was ‘to go to war’ with Gucci.”

Arnault then proposed that he be allotted three seats on Gucci’s board, given his significant ownership stake. De Sole, who had also been heavily prepped for the meeting, reacted firmly to his opponent’s proposition and niceties: three seats on the board was out of the question. As a rival, he argued, no one from LVMH would be given a place on Gucci’s board. The meeting ended without compromise. Instead, De Sole made Arnault a counter-offer a few days later on January 27, 1999, one day after another bout of unforeseen news for Gucci: Arnault had increased LVMH’s stake in Gucci again. The result saw LVMH with a whopping 34.4 percent ownership stake in Gucci. That number was significant. A 34.4 percent stake was a calculated power move that demonstrated that Arnault was well-aware that Gucci’s star creative director Tom Ford’s contract included language enabling him to resign without breaching his lucrative deal with the brand if any individual shareholder amassed a 35 percent ownership stake. LVMH was inching dangerously close.

Ford – with the of De Sole – had managed in just a few short years to take Gucci from its position as a brand on the brink of bankruptcy to one of the most in-demand fashion houses in the world. At the time, Gucci was nothing without Tom Ford, and Arnault knew this. “I was furious!,” Ford told Vanity Fair in 2014, reflecting on LVMH’s too-close-for-comfort 34.4 percent stake.

On January 27, the day after he got wind of LVMH’s latest stake, De Sole met with Arnault and made his counter-offer. The Gucci CEO proposed that LVMH be given two – not three – seats on Gucci’s board. In return, however, LVMH would be required to reduce its 34.4 percent stake to 20 percent. LVMH would also have to guarantee that Gucci would be able to operate independently of LVMH, and LVMH would be required to ensure that De Sole and Ford – and De Sole and Ford, alone – would remain in control of the brand. De Sole and Arnault parted ways, again, without resolution.

A few days later, in early February, Arnault rejected De Sole’s offer, and wasted little time in going straight to Gucci’s board to demand a special meeting of the company’s most prominent shareholders. Uninterested in negotiating any further, the Frenchman would nominate a ninth member to the company’s existing eight-member board, someone to represent the interests of LVMH. This was well within his rights. Yes, as noted by the New York Times, it was in line with Gucci’s bylaws that “anyone with a stake of 10 percent or more can ask for a special meeting and that the meeting must be held within six weeks.” LVMH had a 34.4 percent stake, and so, Arnault’s camp was entitled to much more than an honorary title in the company. It was entitled to voting rights.

That special meeting of the Gucci board never happened, as just four days later, De Sole made Arnault an offer: Buy the entire company for $85 per share. Arnault did not take the bait. He did, however, agree to read – and consider entering into – an acquisition standstill (an agreement to halt plans to further increase LVMH’s ownership of Gucci) in exchange for a number of seats on Gucci’s board.

For De Sole, Arnault’s willingness to entertain the deal was a surprise and a pleasant one. It was a show of civility between the two men, perhaps. More generally, it was a promising indication for the future of the parties’ negotiations, particularly since a standstill was imperative in De Sole’s view. Unbeknownst to anyone, he was actively harboring suspicions that Arnault had come to secretly possess some undeclared three million shares of Gucci stock over the previous year. With that in mind, he certainly was not comforted by Arnault’s adamant assertions that LVMH was merely building a “passive stake” in Gucci and not fashioning a creeping takeover designed to enable the conglomerate to stealthily gain control of the Italian fashion brand without its knowledge or approval.

Within just a few short hours, De Sole saw that a standstill agreement was drafted and sent to Arnault’s “right hand,” Pierre Godé. In exchange for multiple seats on Gucci’s board, LVMH had two days to read, sign, and return the agreement. The due date was February 17. There would be no exceptions, and no such offer would be extended to Arnault again. He had one shot and this was it. At precisely 5:01 pm on the 17th, the agreement was faxed back to De Sole’s office in Milan. It was unsigned. Arnault had changed his mind.


A “Hostile Takeover” & a “Poison Pill”

LVMH chairman Bernard Arnault returned the standstill agreement that Gucci CEO Domenico Del Sole had drafted. In furtherance of the deal, LVMH would formally agree to stop buying Gucci shares, and LVMH would be given seats on the board of the Italian design house. The agreement was sent back – by fax – at precisely 5:01 pm on February 17 to Del Sole – right on deadline. It was blank. Arnault had not signed the document. 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 by 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 from Gucci, and one that would be escalated exponentially in just a month’s time.

On March 19, despite miraculously ongoing negotiations between LVMH and Gucci as to the ownership of the 42 percent equity stake created by the ESOP and LVMH’s entitlement to seats on its board, news broke that Gucci had agreed to sell the 42 percent stake – precisely what LVMH was vying for – to Paris-based luxury conglomerate PPR for $3 billion.

A formerly uninvolved PPR swooped in to “save” Gucci from LVMH, and as a result, the rival conglomerate, headed up by François Pinault, was being hailed as a “white knight” to LVMH’s role as the ugly and greedy antagonist. This time, if reports are to be believed, LVMH found out about the deal – shortly before a scheduled meeting between Gucci and LVMH executives in furtherance of their negotiations – in the same way as everyone else: in the news. LVMH was blindsided.

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 by Guci in the most striking way.

Not the End for Gucci

LVMH did not back down, though. 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 the brand 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.”

The Ugly Aftermath

In February 1999, the Gucci Group abruptly issued 37 million new shares in its company, creating a brand new 42 percent equity stake. No one was more surprised by the move than LVMH. In the preceding months, LVMH, the mighty Paris-based luxury goods conglomerate and its aggressive chairman Bernard Arnault, had very quietly amassed a whopping 34.4 percent stake in Gucci and was – Gucci’s executives feared – planning a hostile takeover of the Italian design house. In an attempt to fend off what it viewed as an inevitable “corporate raid,” Gucci issued the new shares, all 37 million of them, a move that diluted LVMH’s ownership stake to a mere 20 percent. In a matter of minutes, Gucci essentially robbed LVMH of a 14.4 percent stake.

This was a declaration of war, and Gucci was just getting started. Roughly a month later, the brand, under the watch of then-CEO Domenico De Sole (and with Tom Ford at the helm selling sex by a Gucci label), agreed to sell that newly-created 42 percent equity stake to PPR … instead of LVMH … for $3 billion. To make matters worse for LVMH, on the same day as the news of the Gucci Group/PPR deal broke, Bernard Arnault’s “right hand,” Pierre Godé was scheduled to continue negotiations with Bob Singer – Gucci’s then-chief financial officer – in furtherance of an LVMH, Gucci deal.

“Next week,” wrote the New York Times on March 12, 1999, “both companies will send representatives to Amsterdam in an attempt to settle their differences … Gucci and LVMH are expected to discuss ways to insure Gucci’s independence [in light of a proposed LVMH takeover]. De Sole, has said that a bid by LVMH for the rest of Gucci would be the preferred solution; barring that, a noninterference agreement might be negotiable.” If reports are to be believed, LVMH had found out about the deal – shortly before that scheduled meeting – in the same way as everyone else: in the news.

In light of the Gucci/PPR deal, which was revealed in March 1999, LVMH did not back down. In fact, it did just the opposite. After placing two failed bids to purchase 100 percent of Gucci, including the PPR shares, first for $81 and then $85 per share (ultimately, $10 more per share than PPR’s $75/share offer), LVMH sued to block the Gucci, PPR deal.

LVMH alleged that Gucci had run afoul of the law by issuing the “poison pill” shares, 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. The move 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, according to LVMH.

The Italian design house needed to be held accountable for this legal wrongdoing immediately, LVMH’s counsel argued. After roughly two months in court, Gucci and PPR formally got the go-ahead after a Dutch Court upheld Gucci’s sale of a 42 percent stake to PPR. “I’m very happy. It is a great victory for us. [LVMH can] continue to torment us but they’re not going to get very far,” De Sole declared.

The Legal Fallout

“Torment” Gucci is just what LVMH intended to do. The Gucci/PPR deal may have been considered closed as of May 1999, but the ugly aftermath carried on for years in and out of court. Something needed to be done with the 34.4 percent of LVMH-owned Gucci shares, for one thing. And Gucci, displeased with LVMH’s allegations that it had acted in a less-than-transparent manner in furtherance of its deal with PPR, filed suit in late 2000 in Paris. The company accused LVMH of ”defamation and dissemination of false information” and said it was taking action in response to “the unsubstantiated and baseless accusations made by LVMH earlier this week attacking the integrity of key Gucci executives.”

One of PPR’s key qualms: LVMH’s assertion that De Sole and Gucci’s then-creative director Tom Ford received a secret kickback – by way of hundreds of millions of dollars in Gucci options – for selling control of the company to French conglomerate PPR. ‘There was no secret plan,” said a Gucci spokesperson in conjunction with the lawsuit. “The [stock] options were granted after the deal was done.” LVMH responded to PPR’s accusations by announcing that it would also file a criminal defamation action of its own, naming Serge Weinberg the CEO of PPR, and De Sole as defendants, in connection with statements made to the press in late November 2000.

In March 2001, a Dutch court ordered detailed investigations into the Gucci-PPR deal, as well as the ESOP. The court ultimately dismissed the charges against the ESOP, and its implementation was declared completely legal. At the urging of Dutch investigators, the LVMH and PPR managed to resolve their dispute over Gucci out of court by way of a settlement agreement, according to a Securities and Exchange filing made by LVMH for the fiscal year that ended on December 31, 2002.

According to that filing, “In September 2001, the PPR, Gucci and LVMH groups resolved this dispute through a settlement agreement providing for the following: PPR’s purchase from LVMH in October 2001 of 8.6 million Gucci shares at $94 dollars per share, for a total of $806 million dollars;  the payment by Gucci in December 2001 of an exceptional dividend of 7 US dollars per share; given LVMH’s residual interest on that date, this resulted in earnings of $81 million dollars; a takeover bid by PPR in March 2004 for all of Gucci stock at a price of $101.5 dollars per share.”

It further noted that, “In December 2001, LVMH sold its residual interest of 11.6 million shares to Crédit Lyonnais for 1,037 million US dollars (approximately $89.6 dollars per share). The share sale agreement also contains an earn-out provision entitling LVMH, where applicable, to a price supplement until March 2004 that depends on the price of Gucci shares and the dividends paid by Gucci during that period.”

Also central to the settlement agreement: PPR, Gucci and LVMH agreed to release all outstanding claims and withdraw all pending litigation, and no lawsuits have been filed since. Interestingly, when the parties agreed to settle the matter in its entirety, LVMH, having made a profit of $700 million from its Gucci shares, declared victory. “As a whole, the deal was a legal and financial success for LVMH,” a spokesman for the conglomerate said at the time.

Shortly after the settlement agreement, De Sole told the Guardian that while he felt no personal animosity towards Arnault – “We have a lot of competitors, and some of them are friends” – the battle led to “things becom[ing] very nasty and very personal on their part.” The official statement from an allegedly relieved Gucci team stated: “We can all get on with our businesses.”


The Last Chapter

The last chapter of this book did not close until March 2004, when PPR offered to buy the final remaining shares of the Gucci Group that it did not already own. Shortly after the completion of PPR’s long-awaited $8.8 billion buyout of the company, Domenico De Sole and Tom Ford each resigned, having failed to reach an agreement for a new contract with their French parent. They went on to launch Ford’s eponymous label together.

Reflecting on the battle in an interview with Vanity Fair ten years later, Tom Ford said: “Frankly, I think we could teach Bernard Arnault a few things about this business. His designers, you know, they’re great designers—don’t get me wrong—but they don’t have a vision.” As for Arnault, if he was concerned with Pinault’s efforts to expand the PPR empire, he did not indicate that in 2001, when he told Time, “If I understand it properly, [Pinault’s] efforts consist of trying to imitate what we have done with LVMH, on a smaller scale. It is always flattering to be imitated.”