Case Study: The Battle Over Hermès

Just two hours before the entire world would find 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” 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 just mere moments away from first hitting land.

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 the news wires alerted publications of 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 accepted 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 that it had acquired a 14.2 percent stake in Hermès, the almost-exclusively family-owned company, in which the French families –Puech, Dumas and Guerrand – held a controlling 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 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 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 board, he was tapped to succeed Jean-Louis Dumas, who would retire following a 28-year reign as the head of the family business, the one that was founded in 1837 by Thierry Hermès primarily as a leather saddlery manufacturing company.

After a year as co-CEO alongside Dumas, Thomas took the reins as CEO in 2006, in doing so made his intentions known: “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 and 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, 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 unrelenting arch-rival as one of its largest external shareholders. Such collective sentiments intensified further when, less than a week and a half later, it came to light that Arnault had further increased LVMH’s ownership stake. 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 Initial Acquisitions

The question in the minds of the 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 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, 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 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 the carefully-held Hermès after all. Had Hermès’ executives been aware of the early acquisitions, they 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, though, the powers-that-be at Hermès were blissfully unaware of their rogue rival’s acquisition activities, and as for LVMH, it was not slowing; no, it was merely sitting 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, again, keeping the individual transactions below 5 percent to avoid detection.

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 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 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 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 flatly 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, 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. 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.

With Friends Like These, Who Needs Enemies?

Thanks 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 were sold to the public under the watch of the now-late Jean-Louis Dumas, who had 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 to 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 by LVMH 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 2007 that it would immediately initiate an investigation of LVMH’s investment in Hermès. Unwilling to simply allow the future of Hermès to rest in the hands of the AMF, Hermès’ CEO Patrick Thomas took matters upon himself. “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 upwards of 50 family members agreed to pool all of their shares, a total of almost 51 percent of the company (hence, the H51 code name), 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 the shares of its members should a family member decide to offload his/her shares. This would ensure that 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 regards to the appointment of directors to the Hermès board and top management, yet another mechanism to keep non-family members out of the board room.

According to a statement from Hermès on the heels of the formation of H21, “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, which became even more obvious when the conglomerate continued to build upon its ownership stake by securing shares that existed outside of the H21 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? Well, that “means we end up with a shareholder we don’t like and we don’t want,” Puech stated, not of a disposition to mince words with his family’s company on the line.

Thomas’ demand was slightly more diplomatic. It was a direct play upon 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 with action: Yet another increase on LVMH’s behalf. By the end of 2011, LVMH revealed that it had raised its ownership in Hermès to a whopping 22.6 percent. If Peuch and Thomas thought that at this point they had seen it all, they would be wrong.

“The Battle of My Generation”

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 of LVMH’s investment in November 2007. 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” on behalf of 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 in furtherance of a larger 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 in Hermès. Additionally, Hermès sought the annulment of the financial contracts, demanding that LVMH resell the shares back to three banks, Societe Generale SA, Natixis SA and Credit 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 that LVMH had conducted “fraudulent” activity in its Hermès stake-building exercise.

On the heels of LVMH’s filing, Pierre Godé, who, by June 2013, was serving in the role of LVMH 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 reveal the 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 that LVMH 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 FT – 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 – and within the same month, it was revealed with the release of 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 its 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 that was completed by December 2014), agreeing not to buy more shares in Hermès for the next five years. Less than six months after that, in February 2014, Thomas retired, making way for Axel Dumas, a sixth generation 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 expires in 2018.