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The basic rule is to be there at the right moment, at the
right place, to seize a promising opportunity in an environment guaranteeing sufficient longer-term growth.
—Bernard Arnault, Chairman and CEO, LVMH.
Patrick Thomas focused intently on not letting his hands
shake as he quietly closed the phone. He had been riding hisbicycle in rural Auvergne, in south-central France, when hiscell phone had buzzed. He took a long deep
breath, closedhis eyes and tried to think. He had spent most of his professionallife working at Hermès International, SA and hadassumed the position of CEO in 2006
after the retirementofGean-Louis Dumas.The first non-family CEO to run thecompany was now facing the biggest threat to the familycontrolled company in its 173-year
history.
The LVMH PositionThe man on the other end of the phone had been noneother than Bernard Arnault, Chairman and CEO ofLVMH (Moët Hennessy Louis Vuitton), the world’s
largestluxury brand company, and the richest man in France.Arnault was calling to inform him that LVMH would beannouncing in two hours that they had acquired a
17.1%interest in Hermès. Thomas had simply not believed
Arnault for the first few minutes, thinking it impossible
that they could have gained control of that significant a
stake without him knowing about it.Arnault assured him it
was no joke and that he looked forward to participating in
the company’s continued success as a shareholder before
repeating again that the press release would be made in
two hours (Exhibit 1). Thomas snapped out of his stupor
and snatched up the phone; he needed to call Hermès’
Executive Chairman, Bertrand Puech, and begin assessing
the potential threat, if it was indeed a threat.
Hermès International. Hermès International, SA is a
multibillion dollar French company that makes and sells
luxury goods across a number of different product
categories including women and men’s apparel, watches,
leather goods, jewelry and perfume. Thierry Hermès, who
was known for making the best saddles and harnesses in
Paris, founded the company in 1837. The company’s
reputation soared as it began to provide its high-end
products to nobility throughout Europe, North Africa,
Russia, Asia and The Americas. As the years wore on, the
company began to expand its product line to include the
finest leather bags and the most luxurious silk scarves on
the market, all while passing the company down through
generations and maintaining family control.
Despite going public in 1993, roughly 60 direct descendantsof Thierry Hermès, comprising the 5th and 6th generations,still controlled approximately 73% of the
company.In 2006, the job of CEO had been passed, for the first time,to a nonfamily member, Patrick Thomas.
Bernard ArnaultArnault is a shrewd man. He has reviewed his portfolioand sees what he is missing—a company that still producestrue luxury—and he is going after it.
—Anonymous luxury brand CEOspeaking on the LVMH announcement.BernardArnault had made a very profitable career out ofhis penchant for taking over vulnerable familyowned
businesses(earning him the colorful nickname of “the wolf incashmere”). Originally born in Roubaix, France, to anupper class family, Arnault excelled as a student and
graduatedfrom France’s prestigiousengineering school, EcolePolytechnique, before working as an engineer and takingover his family’s construction business. When the
Frenchgovernment began looking for someone to acquire thebankrupt company, Boussac (and its luxury line, ChristianDior),Arnault promptly bought the company. It proved
thefirst step in building what would eventually become the luxurytitan,LVMH,and propel Arnault to the title of France’swealthiestman.From that point on, Arnault began
assembling what hiscompetitors referred to as “the evil empire,” by preying onsusceptible family-owned companies with premium names.His takeover of Louis Vuitton was
said to have gotten sopersonal and vicious that, after the last board meeting, theVuitton family packed their belongings and left the buildingin tears. In addition to
Louis Vuitton, Arnault had spent thelast three decades forcibly adding such family-owned luxurybrands as Krug (champagne), Pucci (fashion), Chateaud’Yquem (vineyard),
and Celine (fashion), among others.Arnault had nothing but success in his takeoverattempts until 1999, when his attempted takeover of Gucciwas stymied by Francois
Pinault, whose company PPRserved as the white knight for Gucci and effectively stolethe deal out fromunderArnault. It marked the one time
in LVMH’s history that it had failed in a takeover bid. It
remained a bitter memory for Arnault.
Autorité des Marchés Financiers (AMF).Arnault’s
announcement of LVMH’s ownership stake in Hermès
came as a shock to both the fashion industry and the
family shareholders of Hermès. Exhibit 2 is Hermès public
response to LVMH’s initiative. The French stock market
regulator, the Autorité des Marchés Financiers (AMF),
required any investor gaining a 5% or greater stake in a
publicly traded company to publicly file their ownership
percentage as well as a document of intent. But no such
notice had been filed, and Patrick Thomas was livid.
In the days following the October 23 press release,
LVMH confirmed through additional announcements that
the company had complied with all current rules and regulationsin the transactions, and that it would file all the necessarydocumentation within the allotted time. The
AMF
announced that it would be opening up a formalinvestigationof LVMH’s acquisition of the Hermès stock, but thiswas little consolation to Thomas and the
Hermèsfamily,since even if the AMF found LVMH in violation, the onlypenalty would be a loss of voting rights for two years.Equity Swaps. In the days following LVMH’s
announcement,new reports and evidence came to light documentinghow the company had attained such a large
ownership position under the radar of the Hermès family,
company management, and industry analysts. The culprit
was equity swaps.Equity Swaps are derivative contracts whereby two partiesenter into a contract to swap future cash flows at a presetdate.The cash flows are referred
to as “legs” of the swap.
In most equity swaps, one leg is tied to a floating rate like
LIBOR (the floating leg), and the other leg is tied to the
performance of a stock or stock index (the equity leg). It is
also possible for an equity swap to have two equity legs.
Under current French law a company must acknowledge
when they attain a 5% or more equity stake in anothercompany, or the rights to purchase a 5% or more stake viaderivatives like equity swaps.
However, equity swaps can be structured in such a way
that only their value is tied to the equity instrument; at
close-out the contract may be settled in cash, not shares.
Using this structure, the swap holder is not required to file
with the AMF, since they will never actually own the stock.
The LVMH Purchase. It was widely known that Arnault
had long coveted Hermès as a brand. In fact, Mr. Arnault
had previously owned 15% of Hermès when he first took
over LVMH in the 1990s. At the time, Mr. Arnault had his
hands full with reorganizing and redirecting LVMH after
his takeover of the company, so he agreed to sell the
shares to then Hermès CEO Jean-Louis Dumas when he
wanted to take the company public.
But things had changed for LVMH and Arnault since
1990. Mr. Arnault had grown his company to the largest
luxury conglomerate in the world, with over $55 billion in
annual sales. He accomplished this through organic growth
of brands and strategic purchases. Known for his patience
and shrewd business acumen, when he saw an opportunity
to target a long coveted prize, he took advantage.
The attack on Hermès shares was one of Arnault’s
most closely kept secrets, with only three people in his
empire aware of the equity swap contracts. Arnault began
making his move in 2008 when three blocks of Hermès
shares—totaling 12.8 million shares—were quietly placed
on the market by three separate French banks.The origins
of these shares are still unknown, but with such a large
number of shares in question, many suspected they had
come from Hermès family members.
It is believed that Arnault was contacted by the banks
and was given 24 hours to decide whether he would like to
purchase them or not. At the time, Arnault was hesitant to
take such a large ownership stake in Hermès, particularly
one requiring registration with the AMF. Arnault and the
banks then developed the strategy whereby he would hold
rights to the shares via equity swaps, but only as long as he
put up the cash. At contract maturity, LVMH would realize
the profit/loss on any movement in the share price. As
part of the agreement with the banks, however, LVMH
would have the option to take the shares instead. Had the
contracts required share settlement, under French law
LVMH would have to acknowledge its potential equity
position in Hermès publicly.
The design of these contracts prevented LVMH from
actually holding the shares until October 2010, when they
publicly announced their ownership stake in Hermès. Duringthe period the swap contracts were in-place, Hermès
share price floated between 60 and 102.This explained
how LVMH was able to acquire its shares in Hermès at an
average price of 80 per share, nearly a 54% discount on
the closing price of 176.2 on Friday, October 22.
LVMH could have actually held its swap contracts
longer and postponed settlement and therefore disclosure,
but the rapid rise in Hermès share price over the previous
months forced the decision last year (which many analysts
attributed to market speculations of an LVMH takeover
plot). If LVMH had postponed settlement, it would have
had to account for 2 billion in paper profit, or more,
earned on the contracts when publishing their year-end
accounts in February 2011.The Battle Goes Public
Although the original press release by LVMH made it very
clear that the company had no greater designs on controllingmoved quickly. After a quick conference call amongst Hermèsleadership, Patrick Thomas and Puech gave an
uncharacteristicinterview with Le Figaro on October 27.It’s clear his [Mr. Arnault] intention is to take over thecompany and the family will resist that.
—Patrick Thomas, CEO Hermès,Le Figaro, October 27, 2010.
We would like to convince him [Mr. Arnault] that this is
not the right way to operate and that it’s not friendly. If
he entered in a friendly way, then we would like him to
leave in a friendly way.
—Mr. Puech, Executive Chairman of Emile
Hermés SARL, Le Figaro, October 27, 2010.
Arnault wasted no time in responding in an interview
given to the same newspaper the following day:
I do not see how the head of a listed company can be
qualified to ask a shareholder to sell his shares. On the
contrary he is supposed to defend the interests of all
shareholders.—Bernard Arnault, CEO LVMH,
Le Figaro, October 28, 2010.
Pierre Godé, Vice President LVMH. On November 10,
after much speculation regarding LVMH’s intent, Pierre
Godé, an LVMH Vice President, gave an interview with
Les Echos newspaper (itself owned by LVMH) to discuss
how and why the transactions took place the way they did,
as well as to dispel media speculation about a potential
hostile takeover attempt from LVMH. In the interview,
Godé was questioned about why LVMH chose to
purchase the equity swap contracts against Hermès in the
first place, and why LVMH chose to close those contracts
inHermès shares rather than in cash.
Godé confided that LVMH had begun looking at Hermès
in 2007 when the financial crisis started and the stock
exchange began to fall. LVMH was looking for financial
investments in the luxury industry—as that is where their
expertise lies—and took the position that Hermès would
weather the financial crisis better than other potential investments.It was for this reason alone that LVMH chose to purchaseequity swaps with Hermès shares as the
equity leg.Godé argued that equity swaps with cash payment and
settlement were trendy at that time, and virtually every bankoffered this derivative. Even though LVMH already had justunder a 5% stake of Hermès stock at the time the
derivativeswere being set up, Godé stated that LVMH never evenconsidered the possibility of closing out the swaps in shares.
For one thing, it was something they couldn’t do contractually(according to Godé), nor did LVMH want to ask thebanks for equity settlements. But by 2010, the situation
hadchanged, prompting LVMH to reassess their Hermèsequityswapcontracts.The contracts themselves were running out,and LVMH had a premium of nearly 1 billion on them.
According to Godé, the banks that had covered their contractswith LVMH were now tempted to sell the shares,
which represented 12% of Hermès’ capital.
Godé explained that the selling of the shares in and of
itself did not concern LVMH.What they did worry about
however, was where the shares might end up. Godé
stressed that at that time there were rumors that a “powerful
group from another industry,” and Chinese investment
funds were interested in the Hermès shares. LVMH
management felt the rising share price of Hermès lent
support to these rumors. Additionally, the market had
been improving and LVMH had the financial means to be
able to pay for the contracts and settle in shares. As a
result, LVMH spoke with the banks to assess their position,
and after several weeks of talks LVMH reached an
agreement with them in October for part of the shares.
At this time “the Board had to choose between receiving
a considerable amount on the equity swaps or take a minorityparticipation in this promising group but where our powerwould be very limited as the family controlled
everything.
There was an intense debate and finally the Board chose to
have share payments.” Godé completed the interview by
stating that LVMH was surprised by the strong negative
response from Hermès, especially considering that LVMH
had owned a 15% stake in the company in the early 1990s.
Evolution of Hermès International and Its Control.
Hermès was structured as a Société en Commandite, the
French version of a limited partnership in the United
States. In the case of Hermès, this structure concentrates
power in the hands of a ruling committee which is
controlled by the family.
In addition to the Société en Commandite structure of
the company, former Hermès CEO Jean-Louis Dumas
established a partner company, Hermès SARL, in 1989.Thiscompany represented the interests of family shareholders(only direct Hermès descendants could be owners), and
wasthe sole authority to appoint management and set companystrategy. This unusual structure allowed the Hermèsfamilythe ability to retain decision making power even if
only onefamily member were to remain a shareholder.Thestructurehad been adopted as protection against a hostile takeoverafter Dumas saw the way Bernard Arnault had
dealt withthe Vuitton family when he acquired their company.
In a further attempt to placate family members and minimizefamily infighting, Dumas listed 25% of HermèsSAon the French stock market in 1993. This was done to
providefamily members with a means to value their stake in
the company as well as partially cash-out if they felt their
family dividends were not enough (several family members
were known to live large, and Dumas feared their lifestyles
may exceed their means). Dumas believed—at least at that
time—that his two-tier structure would insulate Hermès
from a potential hostile takeover.
Hermès, Hermès management did not believe it, and
However, analysts were now speculating that Hermès
SARL may only provide protection through the 6th generation,and that with just a 0.1% stake in the company beingworth approximately 18 million at current market
prices,there was reason to fear some family members “defecting.”This concern was made all the more real when it becameknown through AMF filings that Laurent
Mommeja,brother to Hermès supervisory board member Renaud fe,sold 1.8 million worth of shares on October 25, at a shareprice of 189 per share.After considerable
debate, the Hermès family decidedto consolidate their shares into a trust in the form of aholding company that would insure that their 73%ownership stake would always
vote as one voice andultimately secure the family’s continued control of the company.
On December 21, LVMH announced that it had raised
its total stake in Hermès to 20.21%, and had filed all
required documents with AMF once passing the 20%
threshold. LVMH also reiterated that it had no intention of
taking control of Hermès or making a public offer for its
shares. Under French law, once LVMH reached one-third
share ownership it would have to make a public tender for
all remaining shares. Hermès share price, as illustrated in
Exhibit 4, continued to calm—at least for the moment—
following the extended fight for corporate control.
1. Hermès International was a family-owned business
for many years. Why did it then list its shares on a
public market? What risks and rewards come from a
public listing?
2. Bernard Arnault and LVMH acquired a large position
inHermès shares without anyone knowing.
How did they do it and how did they avoid the
French regulations requiring disclosure of such
positions?
3. The Hermès family defended themselves by
forming a holding company of their family shares.
How will this work and how long do you think it
will last?
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