Gucci and LVMH: brand strategies and market positioning

¶ … Gucci and LVMH

Gucci' was founded by Guccio Gucci in the year 1923, when he was completely inspired by the extravagant and also elegant baggage that he saw when he was working at a hotel in London. Gucci started a range of classy and expensively luxurious leather goods, including bags, shoes, and apparel. Gucci would become an internationally renowned household name over the next half century, but tragically enough, in 1993, the Gucci family had to sell off their remaining shares in Gucci after an entire decade of struggle. What had happened? It is stated that Gucci had become 'old' during the 1970's and 1980's, and when two enterprising Americans Domenico de Sole, an Italian by birth, and Tom Ford took over the still 'fashionable' company, they managed to give the company a virtual 'rebirth'. (Moffett; Ramaswamy, 159)

As a matter of fact, De Sole had worked for the Gucci family for a number of years before the takeover, and he eventually headed 'Gucci America', and when the control of Gucci had passed from the family in 1993, to a Bahraini Investment Bank named 'Investcorp', de Sole moved to Florence, to head Gucci International. When Investcorp gave out its first public offering in Amsterdam, for 49%, for $22 per share, and six months alter, sold its remaining stakes at $48 per share, Gucci became a company that was owned by everyone, and also by no one, and De Sole had to run it by himself. In 1994, when De Sole found that Gucci's one remaining talent was its designer Tom Ford, he allowed him a free hand in redesigning the entire product line, and within the next five years, Ford was able to bring about an amazing revolution in the designs of Gucci. (Moffett; Ramaswamy, 159)

In 1999, Gucci was considered by many to be a 'potential takeover target' and that although it possessed a great growth potential, it was undervalued, but well managed. Prada acquired a 9.5% interest in Gucci at this time, and this meant that this largest shareholder would well try to takeover the ailing company. It was in 1999 that LMVH Moet Hennessey Louis Vuitton, the widely recognized French luxury goods conglomerate stated that it had passed over the 5% shareholding level in Gucci, and because of the fact that both Gucci and LMVH were being traded in America, the regulations laid down by the U.S. Securities and Exchange Commission were considered applicable to both companies, and this meant that when a firm had acquired a 5% stake in another publicly held firm, then it would have to be announced publicly. This was why Gucci's share price in New York, at that time, moved from $50 to $70 per share. (Moffett; Ramaswamy, 160)

One must remember the fact that the President of LMVH Bernard Arnault had the reputation of acquiring fashion brands which were lagging behind, and adding them onto his company. He would build mass, as use it to launch his marketing campaigns, globally. In fact, Arnault had considered acquiring Gucci in 1994, but since the price seemed to be prohibitive, at a neat $350 million, had given it up. However, his acquisition of stakes in the company led to widespread speculation of a hostile takeover, soon in the anvil. When LMVH acquired an additional 9.5% stake in Gucci, for $398 million, an amount previously held by Prada, and within twelve days, announced that it had acquired a further stake, which now amounted to 34.4%, about 20.15 million shares in total, a 1.44 billon investment on the part of LMVH, everyone knew that there would be no 'tender offers' for Gucci. (Moffett; Ramaswamy, 160)

Under French law, a company was required to launch a general tender, if it had acquired a 33% share ownership of any company, but in the U.S.A., there was no such law, and Arnault always maintained that he was 'friendly' towards Gucci. A few days later, LMVH wrote to Gucci, stating that it wished to nominate its own member to the Board, but would remain as always, a 'passive investor'. De Sole publicly issued a statement that Arnault had used devious tactics to gradually acquire more and more shares, without ever paying the existing shareholders the premium that needed to be paid, if there was a change in ownership. A week later, Gucci launched its strategy, wherein it had created a 'new employee stock ownership plan', and a structure named the Employee Trust. The Trust was granted the right to buy up to 37 million newly issued shares, with no dividend rights, and the Trust immediately purchased 20,154,985 shares, thereby taking its ownership in Gucci to 25.6%, a figure that matched LMVH's ownership equally, and further diluted its ownership from 34.4% to 26%. (Moffett; Ramaswamy, 160-161)

The Trust had also been given the authority to purchase shares, with the faith that they would not be transferred to a third party. The new shares would not be included in the earnings per share of Gucci. This was termed a 'poison pill' by many experts, but De Sole defended his actions, stating that he had deemed it essential, in order to prevent the 'creeping acquisition' that had been happening, through which the controlling ownership of the company would well change without the shareholders receiving the payment or 'premium' to which they were entitled. De Sole then invited LMVH to launch a public tender, to which LMVH's answer was to file suit in the Enterprise Chamber of Amsterdam Court of Appeals, asking for an injunction that would strip the newly instituted Employee Trust voting rights, and also stop Gucci from acting more in the interest of the management, rather than in the interests of the shareholders. LMVH justified its actions by saying that the new share issuance had not succeeded in raising any capital, and therefore, it meant that the share issues were restricted, and employees could not trade in their shares for capital. (Moffett; Ramaswamy, 161)

It was at this time that Francois Pinault; the CEO of Pinault-Printemps-Redoute, a man known for his quick acquisitions, internationally, entered the picture, and when De Sole apprised him of his strategy of becoming a multi-brand luxury goods company, he showed keen interest, and also acquired, at the same time, Sanofi Beaute, of Yves St. Laurent, so that he could resell it to Gucci. Gucci therefore soon announced the role of Francois Pinault's PPR as a literal 'White Knight': Gucci would issue 39 million new shares to PPR, and at $75 per share, and this would give it a 40% stake in Gucci. PPR would also hold four of the nine seats on the Board, and three of five seats on the newly created strategic and financial committee. This meant that LMVH's stake was diluted yet again, and Pinault made no secret of the fact that he saw LMVH as his competitor. (Moffett; Ramaswamy, 162)

However, LMVH did not take matters lying down, and it approached the Amsterdam Courts once again, to seek an injunction to stop the capital infusion by PPR into Gucci, and to stop Gucci from acquiring Sanofi Beauty Products. LMVH also offered, if the PPR transaction were nullified by the Courts, $85 per share, and the Courts advised Gucci to consider this offer. Over the next few days, LMVH went to the extent of selling its investments in other firms so that it could acquire capital to purchase the shares in Gucci, and attempting to cash in on other ways too, and the fight became public. On April 22, Gucci attempted a reconciliation, wherein it stated that it would be willing to recommend to stockholders an unconditional $88 per share, to which LMVH said that it was not acceptable, because of PPR's continued interest in the firm. (Moffett; Ramaswamy, 163)

The Amsterdam Court released its findings in May, in which it upheld PPR's investments in Gucci, but at the same time, rejected Gucci's 'poison pill' defense, and clearly, this was a public defeat for LMVH, and Arnault immediately threatened to take legal action against Gucci, also saying that it owned at present 20% of the shares of Gucci. Gucci too moved immediately, and along with PPR, purchased from Francois Pinault, the Sanofi Beaute Division, and also the Yves St. Laurent's couture and fragrance businesses. Ford agreed to stay on for another four years, and the PPR investment was formally approved by 80% of Gucci shareholders. However, Gucci now had a new problem, in which PPR could control Gucci with Gucci's management, and LMVH also had a stake, with 20.7% interest. (Moffett; Ramaswamy, 163)