As the fashion set gathers in Europe this week to preview fall collections, cashmere sweatshirts and fur ponchos will dominate the runways. But looming in the background is a nasty battle that has erupted as one luxury goods maker, LVMH, tries to gain control of a smaller rival, Gucci.
On one level this battle has developed into a personal clash of style titans. Team Gucci consists of Domenico De Sole, its chief executive, and Tom Ford, the designer of the hour. Together they have rebuilt Gucci Group N.V. from near-bankruptcy to a fast-growing fashion darling, and they say they would rather leave than hand over partial control to an outsider.
In Bernard Arnault, chairman of LVMH Moet Hennessy Louis Vuitton S.A., they have a formidable opponent. Through a mix of savvy and ruthlessness, he has built a conglomerate of luxury brands that sell liquor and duty-free goods as well as clothing and perfume, and he has said he will not take no for an answer — even if winning Gucci means losing Mr. De Sole and Mr. Ford.
Although he has seen many a brutal takeover battle, Mr. Arnault (pronounced ar-NO) sounds naively perplexed and truly hurt that Mr. De Sole (day SO-lay) and Mr. Ford are resisting. ”What we want is so moderate,” Mr. Arnault said in a telephone interview last week from his Paris office. ”Why are they being so brutal?”
Beyond the personal pyrotechnics, larger stakes are at risk. Gucci is red hot right now, and buying it might give a needed jolt to Mr. Arnault’s staid empire, which has been hit hard by the Asian economic crises. But Gucci feels that being sucked into such a corporate culture could be deadly. Both may be right, but both cannot win.
Fortunes can reverse daily, as each side tries increasingly drastic tactics. The short version is this: Starting in January, LVMH swiftly brought its holdings of Gucci stock to 34.4 percent, from less than 5 percent, and moved to pick a Gucci director. Gucci, which is based in the Netherlands for tax reasons but has most of its operations in Italy, mounted a surprise defense, granting employees options to buy up to 37 million new shares with interest-free loans. The employee stock plan, whose trustees are appointed by Mr. De Sole, then moved to buy 20 million shares — a stake equal to LVMH’s. The tactic will dilute LVMH’s stake to about 25 percent.
LVMH, calling the move a usurpation of shareholder rights, is challenging it in court. The Enterprise Chamber of the Amsterdam Court of Appeals will hear the case tomorrow and could issue a ruling the same day that will determine whether Mr. Arnault will have the votes at a shareholder meeting on March 23 to lead the House of Gucci as he wants, or whether Mr. De Sole will have effectively warded off his attack.
In this upscale altercation, a lot of it comes down to Mr. Arnault’s motives. Mr. Arnault says his interest is simple: in the short term, acquiring a stake in a sound and growing business; in the long term, increasing Gucci’s profit margins by combining back-room operations like advertising and distribution. He brags that LVMH’s profit margins on leather goods are a staggering 48 percent, and he says LVMH and Gucci have something to teach each other about fashion management and merchandising.
Mr. Arnault makes little secret of wanting a piece of Gucci’s sex appeal. The Italians, led by houses like Gucci and Prada, have rivaled the French in fashion leadership lately. At LVMH’s ateliers, Mr. Arnault fought back by installing an army of talented, media-friendly young designers — like John Galliano at Christian Dior, Alexander McQueen at Givenchy, Narciso Rodriguez at Loewe and Michael Kors at Celine. While all have ignited headlines, none have generated the creative and commercial alchemy of Mr. Ford’s sexy 70’s-inspired clothes.
”We have a lot to gain being in touch with Italy as a creative world and as a business world,” Mr. Arnault conceded with as much grace as Gallic pride allowed. ”The Italians are very dynamic.”
In his view, Mr. Arnault has bent over backward to retain Gucci’s stellar management team. In interviews and press releases, the normally laconic French executive has praised Mr. Ford lavishly, even though the two have yet to meet.
In private talks with Mr. De Sole days before the stock plan was born, he said he agreed to Mr. De Sole’s demand that he nominate just one board member, not the two or three that he says he had intended to — and that any stake over 10 percent allowed him to. He further agreed to buy no more stock until a shareholder meeting could be held.
What Mr. De Sole says he wants is simple: fair play for all. Mr. Arnault wants eventually to take control of Gucci by buying a majority stake, not by making a tender offer to all shareholders. United States courts have rejected this strategy, known as a creeping takeover, because of its drawbacks for remaining stockholders. But it is common in Europe and, for Mr. Arnault, a favored method for taking control without paying a premium for all the stock.
Mr. De Sole, though born in Italy, was educated at Harvard Law School, married an American and is an American citizen. He says it offended his American sense of fair play that Mr. Arnault could jilt minority stakeholders. Mr. Arnault ”has never paid 100 percent for anything,” he said in an interview in New York last week. ”That is unacceptable,” he added.
Mr. De Sole also sees sinister motives in LVMH’s actions. Since Mr. Ford and Mr. De Sole took Gucci public in 1995, sales have exploded, to $1 billion in 1998 from $264 million. At the same time, sales for Louis Vuitton, the LVMH brand that Gucci most directly competes against, grew only to $1.4 billion, from $1.1 billion. ”Clearly,” Mr. De Sole said, ”there is great value on his part in just stopping Gucci.” He added: ”While Arnault was telling Tom and me how much he loved us, he went to one of our shareholders and told them he would have his ‘eyes and ears’ on our board. I can’t let them have it.”
Many Gucci shareholders agree with Mr. De Sole’s foreboding, and several are almost apoplectic about LVMH’s machinations. Sewall F. Hodges, a senior vice president of Scudder Kemper Investments, which holds 4 percent of Gucci, said, ”The risk posed by a competitor on the board, particularly someone from LVMH, which has shown it can’t keep pace, is enormous.”
Mr. Arnault scoffs at the notion that this is a plot to thwart Gucci. ”Would you put $1.5 billion in something that you want to destroy?” he asked. ”I think what is happening is Mr. De Sole does not want the pressure of being pressured to improve profit margins.”
Mr. Ford and Mr. De Sole say they would agree to work for LVMH if Mr. Arnault made a ”fair offer” for all the stock. Mr. De Sole gave Mr. Arnault a dollar figure, which he would not disclose but which is surely far higher than $68.875 a share, the market price as of yesterday on the New York Stock Exchange for Gucci’s registered shares, each of which represents one ordinary share.
Both have said flatly that independence would be preferable. And now, at least, both can barely conceal their distaste at the idea of working for Mr. Arnault. Mr. De Sole bristles at the thought that he could learn from Mr. Arnault’s management style, saying that his leather goods margins are better than 48 percent and that LVMH’s total profit margins were 9 percent, well below Gucci’s 18 percent, for 1997, the last year for which annual figures are available for both companies.
Since there is no precedent under Dutch law for Gucci’s stock plan tactic, it is hard to predict how the court might decide. If the five-judge panel rules in Gucci’s favor, it would be hard for Mr. Arnault to acquire more shares. Still, he has said that he will not disappear. ”We’ll be there a long time after Mr. De Sole retires,” he said. ”We are still Gucci’s No. 1 shareholder.”
But if the court does rule in Mr. Arnault’s favor, he is likely to continue increasing his stake and push through his nominations to the board. It is questionable under such circumstances whether Mr. De Sole would be asked to stay on. The once cordial relationship between Mr. Arnault and Mr. De Sole is in shreds. ”Ask him if he will stay,” Mr. Arnault snapped, then softened and added: ”We’ll try to work with him. We’ll give him a chance.”
In any case, Mr. Arnault hopes Mr. Ford will stay on. ”He’s exceptionally good for Gucci,” he said. ”Without him, it’s less of a good investment.” Although Mr. Arnault and Mr. De Sole have had several communications in person and by phone and fax in the last two months, Mr. Arnault has yet to speak with Mr. Ford. ”I sent him a memo,” he said. ”He gave it to M. De Sole.”
That raises the question of whether fashion’s dynamic duo could be split up. Mr. De Sole does not think it is possible. He says he and the designer are ”best friends.” When Gucci started getting red hot, Mr. De Sole told his two daughters that tickets to the biannual runway shows were too precious to give to family. They went around his back to Mr. Ford, who let them in backstage and allowed them to drape models and otherwise soak up the glamour.
In an interview last week, Mr. Ford confirmed the magic of the relationship, saying he could not imagine working in the industry without Mr. De Sole. But asked bluntly if he would quit if LVMH raised its stake in Gucci, Mr. Ford paused. ”I’d have to evaluate the situation,” he said. ”Not only do I feel loyalty to shareholders, but we have built this company. I hired a lot of these people. It would be a hard decision.”
Mr. Ford’s position is tougher than it appeared at first. He enjoys an extraordinary amount of creative freedom for someone whose name is not on the door of a fashion company. He designs Gucci’s women’s collection, men’s wear, accessories and store layout, and he directs the company’s advertising and public relations. This would be hard to replicate elsewhere. For that matter, it might be hard to replicate at LVMH. Mr. Arnault has made it clear that he believes not every designer deserves to be so involved. ”It’s one thing to design fantastic clothes and hype them,” he said. ”It’s something else to meet the customer, look at shoes, buy leather.”
One thing is certain. Mr. Arnault, who fought a brutal battle for LVMH years ago, is not prepared to walk away even if all of Gucci’s talent does. ”We have already invested a lot of money,” he explained.
Industry executives, used to sudden entrances and exits of designers, foresee a diminished, though not finished, Gucci without Mr. Ford.
Gucci is an important resource at most luxury stores. ”We’d be concerned if he left because Tom has given the brand the personality that appeals to customers,” said Dawn Mello, president of Bergdorf Goodman, a subsidiary of Neiman Marcus. As head of Gucci in the early 90’s, it was Ms. Mello who set the stage for Gucci’s rebirth as a coveted brand, and who hired Mr. Ford.
Still, plenty of companies thrive beyond their creators. In fact, one need look no further than Gucci, which was founded by the Gucci family in 1923. ”You look at great companies, and they go on,” said Michael Gould, chairman of Bloomingdale’s, a unit of Federated Department Stores. ”When people have a vision and they build a business on a solid foundation, it will continue to grow.”