Image: Hermès

PART II – 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.

 You can find Part III of the Battle Over Hermès here.

* Deal Dossier is a multi-part series that documents some of the most significant fashion acquisition developments of the past and present.