Just two hours before the world would learn that LVMH Moët Hennessy Louis Vuitton had been secretly building up a stake in Hermès – in furtherance of what the Birkin bag-maker would come to call a “hostile takeover” effort – 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 mere moments away from making landfall.
The impending attack, as analysts would later discern, “was so secretive and sophisticated that Mr. Thomas couldn’t have foreseen it.” That is why, on October 23, 2010, just hours before news wires alerted publications with headlines that LVMH was in the process of making a discreet – yet inherently aggressive – play for control of Hermès, Thomas was surprised to be interrupted mid-ride by a phone call. On the line was Bernard Arnault, the chairman of LVMH and the richest man in France.
The call, which Thomas answered while standing beside his bike on the side of the road, was extraordinarily brief. It was made purely to alert him that LVMH would be announcing it had acquired a 14.2 percent stake in Hermès – the almost-exclusively family-owned company in which the Puech, Dumas, and Guerrand families held a controlling 73.4 percent stake.
An otherwise impeccably even-tempered gentleman, Thomas was – at that moment – engulfed in rage. 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 swiftly hung up and got back on his bike.
Thomas, then 62 years old, 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 moved on to William Grant & Sons Ltd., a family-owned Scottish spirits company, where he became the first non-family member to take the helm. Ultimately, however, Thomas returned to Hermès in 2003. Following unanimous approval from the board, he was tapped to succeed Jean-Louis Dumas, who retired after a 28-year reign as the head of the family business – founded in 1837 by Thierry Hermès, primarily as a leather saddlery manufacturer.
After a year as co-CEO alongside Dumas, Thomas took the reins as sole CEO in 2006, and in doing so, made his intentions clear: “This is a family company with a long-term vision. There will be no revolution [under my watch].” The sandy-haired French businessman may have been an outsider – one of the few in Hermès’ upper echelon – but he was as devoted to the company’s vision as any bona fide Puech, Dumas, or Guerrand. With such marked devotion at play, the news of LVMH’s stake-building exercise was categorically “an attack,” according to Thomas – and it was personal.
As for his makeshift family, who comprised a significant portion of the Hermès board, they saw Arnault as an unwanted interloper – “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 unrelenting arch-rival as one of its largest external shareholders.
Such collective sentiment intensified further when, less than a week and a half later, it came to light that Arnault had increased LVMH’s ownership stake even further. His conglomerate now controlled 17.1 percent of Hermès – 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, foreshadowing 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 question on the minds of Hermès, Mr. Thomas, and business-minded laypeople alike was this: How – exactly – did LVMH come to possess an undetected 17.1 percent stake in the closely held Hermès? It would not be long before it became clear that LVMH’s stake was the result of a handful of meticulously crafted deals.
The transactions themselves involved a small percentage of Hermès shares that had been 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 Hermès’ 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 portion of its shares while still maintaining majority ownership.
Having “tried and failed to buy shares from Hermès family members” in the past, the notoriously merciless Arnault carefully seized these publicly held shares in an effort to noiselessly assemble LVMH’s arsenal of Hermès stock. Between 2001 and 2002, LVMH acquired an initial 4.9 percent stake through a handful of its subsidiaries. That 4.9 percent stake was far from random. According to French securities laws, companies are only required to disclose when they acquire 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 might not be disastrous for the carefully held Hermès after all. Had Hermès’ executives been aware of the early acquisitions, they could have breathed a temporary sigh of relief, as LVMH made no further attempts to increase its stake for the next five years. In reality, however, the powers that be at Hermès were blissfully unaware of their rogue rival’s acquisition activities. As for LVMH, it was not slowing; it was merely lying in wait – going dark for a bit, perhaps to avoid attention.
Then, in 2007, it sprang back into action, engaging in a string of complex, cash-settled equity swaps through financial intermediaries and subsidiaries, once again keeping individual transactions below the 5 percent threshold to avoid detection.
These small, undisclosed transactions went on for several years and, if considered in isolation, were within French securities laws, as the French financial services watchdog, the Autorité des marchés financiers (“AMF”), would hold over a year later. However, LVMH’s June 2010 stock swaps with subsidiaries – which brought its stake in Hermès to an accumulated 14.2 percent – did require disclosure. So, on the morning of October 23 (four months late, according to the AMF), Mr. Arnault made his phone call to a then-cycling Thomas, and the international media declared 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 had 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 deemed a far-fetched improbability at best and a malicious falsehood at worst. In light of widespread press speculation that a hostile takeover was underway, LVMH flatly denied that it was entertaining ambitions to slowly gain control of Hermès, despite firm protests from the Puech, Dumas, and Guerrand families.
LVMH’s then-Vice President, Pierre Godé, attempted to drive this point home 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, LVMH 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. While such a proclamation may have been well received by much of the media, the AMF was unpersuaded. Days later, it would initiate an investigation into LVMH’s investment in Hermès.
Thanks to a handful of meticulously crafted deals, LVMH came to possess an undetected 17.1 percent stake in the closely held Hermès. The transactions themselves involved a small percentage of Hermès shares that had been sold to the public under the watch of the now-late Jean-Louis Dumas, who served as Hermès’ CEO from 1978 to 2006 and helped position the closely held company as a bona fide global luxury powerhouse.
Having “tried and failed to buy shares from Hermès family members” in the past, LVMH’s aggressive chairman Bernard Arnault was forced to look elsewhere. So, he scoured the market, carefully seizing these publicly held shares in an effort to assemble an arsenal of Hermès stock in lieu of the blessing of the foremost Hermès owners.
Upon learning of LVMH’s quiet tactics, the Hermès family members believed a hostile takeover was afoot. LVMH publicly denied that it was entertaining ambitions to slowly gain control and take over Hermès, but the French financial services watchdog, Autorité des marchés financiers (“AMF”), was seemingly unpersuaded. It announced in November 2010 that it would immediately initiate an investigation into LVMH’s investment in Hermès. Unwilling to allow the future of Hermès to rest solely in the hands of the AMF, Hermès CEO Patrick Thomas took matters into his own hands. “I’m not a man of conflict,” Thomas told The Globe & Mail in 2013, “but I can fight from time to time, if necessary.” That is what he intended to do ahead of what he feared would be an inevitable “hostile move” by LVMH.
Under Thomas’ watch, Hermès executives came together to quietly set up “H51.” A private holding company, H51 was formed when more than 50 family members agreed to pool all of their shares – totaling nearly 51 percent of the company (hence the code name H51) – and vowed to keep them in the company for at least 20 years.
Fully functional by December 2010, the H51 holding company – which was established specifically to counter the stake-building by billionaire Arnault, the group’s unwanted new shareholder – would have the right to purchase shares from its members should a family member decide to sell. This would ensure the shares remained within the company and out of the hands of unwanted outsiders, such as Arnault. Moreover, explicit in the new bylaws of the holding company was a provision effectively limiting voting power with regard to appointments to the Hermès board and top management – yet another mechanism to keep non-family members out of the boardroom.
According to a statement from Hermès on the heels of the formation of H51, “Despite the suddenness of the [LVMH] attack, the family has never doubted the solidity of its control. The creation of this structure confirms the unity of the family in its commitment to defend Hermès’ independence to preserve its values and culture.”
LVMH, of course, did not back down. LVMH’s Chief Financial Officer Jean-Jacques Guiony confirmed in February 2011 that LVMH had no plans to sell its Hermès stake – a stance that became even clearer when the conglomerate continued to build on its holdings by acquiring shares that existed outside of the H51 holding company.
By May 2011, LVMH had increased its stake to 21 percent, prompting Thomas and Bertrand Puech – Hermès chairman and a fifth-generation family member – to speak out. Thomas, who viewed the entire affair as “ungentlemanly,” told the French newspaper Le Figaro that Hermès’ “culture is fundamentally incompatible with that of a conglomerate such as LVMH. This battle [with LVMH] is not financial but rather it is a clash of cultures.” Puech, then aged 75, told the publication, “After six months, we are the target of incessant attacks of the kind we’ve never seen in 174 years, even though LVMH says its approach to us is friendly. With friends like these, who needs enemies?”
In that same interview, Puech called upon Arnault to withdraw; with the family controlling more than 70 percent of the Hermès company, “it is not normal,” Puech said, for Arnault to hold 21 percent. “We want him to reduce his stake to less than 10 percent.” And if Arnault refused? That “means we end up with a shareholder we don’t like and we don’t want,” Puech stated – clearly not inclined to mince words with his family’s company on the line.
Thomas’ demand was slightly more diplomatic. It was a direct play on Arnault’s claims that LVMH was seeking nothing more than to be a “friendly” investor: “If you are indeed friendly, Mr. Arnault, you’ll have to go.” Arnault’s response came not by way of words, but through action: yet another increase in LVMH’s stake. By the end of 2011, LVMH revealed that it had raised its ownership in Hermès to a whopping 22.6 percent.
If Puech and Thomas thought they had seen it all by then, they would be wrong.
Upon learning of LVMH’s quiet 17.1 percent stake in the closely held Hermès, the French financial services watchdog, Autorité des marchés financiers (“AMF”), initiated an investigation into LVMH’s investment in November 2010. The following year was occupied largely by a formal investigation by the AMF, as well as strongly worded legal battles initiated by both LVMH and Hermès. In July 2012, Hermès – which called LVMH’s acquisition “the largest fraud in the history of the French stock market” – filed a criminal complaint against LVMH in a French court, accusing the luxury conglomerate of insider trading, collusion, and manipulating stock prices. LVMH responded by countersuing, citing claims of slander, blackmail, and unfair competition.
A month after LVMH lodged its countersuit, the AMF – whose investigation was underway and separate from the Hermès and LVMH lawsuits – announced that it had uncovered evidence of “wrongdoing” by LVMH in its acquisition of Hermès stock, and requested that its sanctions committee decide whether to impose monetary penalties.
In the spring of 2013, the AMF sanctions committee confirmed that there was, in fact, insider trading and share price manipulation at play in LVMH’s acquisition of Hermès shares. The committee found that LVMH had secretly bought shares in rival Hermès as part of a broader plan to build a stake in the Paris-based design house, despite chairman Bernard Arnault’s public claims that LVMH had, much to its surprise, come into its holding in Hermès. Speaking at LVMH’s annual general meeting in Paris in April 2013, Arnault told shareholders: “We found ourselves owning shares in this company unexpectedly. We had not planned to be shareholders in this firm. We made a financial investment and that financial investment had an outcome that we had not expected.”
At Hermès’ own annual meeting shortly thereafter, CEO Patrick Thomas called foul on Arnault’s remarks, stating that “either LVMH is disorganized” for not knowing about the conglomerate’s growing stake in Hermès … or had acted “fraudulently.” Thomas declined to say which one it was, telling the group, “I’ll let you decide.”
At this point, both LVMH and Hermès filed additional lawsuits. Hermès filed suit seeking the outright cancellation of the equity swaps that LVMH allegedly used to secretly acquire a significant portion of its stake. Additionally, Hermès sought the annulment of the financial contracts, demanding that LVMH resell the shares back to three banks – Société Générale SA, Natixis SA, and Crédit Agricole SA – so that they could be placed back on the market. Thomas said the “ultimate aim is to have the swaps declared [legally] invalid.” LVMH, on the other hand, initiated litigation against an unnamed manager at Hermès (almost certainly Thomas) in response to public comments that implied LVMH had engaged in “fraudulent” activity during its stake-building exercise.
On the heels of LVMH’s filing, Pierre Godé, who by June 2013 was serving as LVMH’s deputy chairman, told Le Figaro, “Hermès is multiplying its campaign aimed at destabilizing us. Our patience has its limits. It’s time that the public learns the truth.”
In July, the AMF sanctions committee revealed that truth, condemning the “unusual” way LVMH had amassed its shares – “buying equity swaps with a number of banks so as to avoid disclosure requirements and using foreign subsidiaries that were not listed as consolidated units until its 2010 annual report.” It ordered LVMH to pay $10.4 million in damages in connection with what it called the “seriousness of the successive breaches of public disclosure requirements, which consisted in concealing each stage of LVMH’s stake-building in Hermès.”
Thomas – who was met by the Hermès board with “a long ovation as the main figurehead in the bitter tussle with LVMH,” per the Financial Times – praised the regulator’s findings as “confirm[ing] what we have been saying for the past two years.”
Despite the ruling – which LVMH immediately announced it would appeal, citing a lack of proof that it had run afoul of the law – it was revealed, within the same month via LVMH’s first-half financial report, that the Paris-based luxury conglomerate had increased its stake in Hermès even further … from 22.6 percent to a final tally of 23.1 percent.
The parties were unable to resolve their differences, which played out in French courts for years to follow – even after LVMH announced in September 2013 that it would distribute its 23 percent stake in Hermès to its shareholders and institutional investors (a transaction completed by December 2014), agreeing not to buy more shares in Hermès for the next five years. Less than six months later, in February 2014, Thomas retired, making way for Axel Dumas, a sixth-generation member of the Hermès family, to take over the role of CEO.
Reflecting on the battle for his family’s company, Dumas called it “the battle of my generation.” As for LVMH, its settlement agreement not to acquire additional shares in Hermès was set to expire in 2018.