The House of Gucci

by Sara G Forden

  Franchini met again with Signorina Parmigiani the next morning and again on Sunday at five in the evening, to review all the details of the transaction. In the process, Franchini learned that “Hagen” was an Italian named Delfo Zorzi who had fled to Japan in 1972, leaving behind a turbulent past and accusations of being a dangerous neofascist. Zorzi was wanted by Italian authorities for, among other things, the 1969 bombing of Milan’s Piazza Fontana that killed sixteen people and wounded eighty-seven. The bombing kicked off a decade of violence known as la strategia della tensione that plagued Italy throughout the 1970s in an effort by an extreme and violent neofascist faction to push the country to the right. Zorzi, who has denied any involvement in the bombing, saying he was a twenty-two-year-old student at the University of Naples at the time, was accused by two convicted terrorists of driving with the bomb in the trunk of his car to the scene of the explosion. His trial was set for the year 2000 in the bunker courtroom under Milan’s San Vittore prison.

  In Japan, Zorzi had married the daughter of a leading politician in Okinawa and set up a business exporting kimonos to Europe. He quickly diversified into the import and export of luxury goods between Europe and the Far East and became well known to executives in the fashion industry who needed to get rid of old stock.

  “Although nobody will admit it, Zorzi was seen as Santa Claus in the fashion business,” said a Milan fashion industry consultant who declined to be identified. “He took all that old stock off your hands and paid good money for it,” the source said.

  After checking with Maurizio, Franchini learned that Gucci already knew about Zorzi. In 1990, when Italian authorities opened several investigations into the massive exports of designer counterfeits, including Gucci products, they discovered that Zorzi commanded a sophisticated commercial network that shipped both the designer fakes and the old stock from Italy to the Far East through a network of Italian, Panamanian, Swiss, and English companies. In a few years, Zorzi became a millionaire, living his secret life in Tokyo in high style. When Maurizio quietly restarted the canvas business as a survival tactic to buy time with Investcorp, he made a deal to sell the merchandise through Zorzi’s operation.

  On Monday, May 10, Maurizio, Franchini, and Parmigiani met at 10 A.M. at the Lugano offices of Fidinam—the fiduciary company that held Maurizio’s shares and, coincidentally, also handled transactions for Zorzi’s operations. Fidinam executed a loan for Maurizio Gucci of 30 million Swiss francs, or about $40 million, at an interest payment of about $7 million and an agreement on paper to grant Zorzi distribution rights for Gucci in the Far East, though these were never formalized.

  Before noon, Franchini handed over 30 million Swiss francs to Gian Zanotta, the Swiss judicial officer, and resumed possession of Maurizio Gucci’s assets.

  “It was an incredible adventure,” said Franchini later, “but all in all, I have to say they were correct,” he said, referring to Zorzi and his associates. “In the end, I only gave them a letter as collateral that promised them the shares in case of default, but I couldn’t put up the shares themselves; that would have been a violation of the agreement with Investcorp.”

  Investcorp’s Swiss lawyers who were following the auction procedures, immediately called London to report that Maurizio had paid off his personal debts and gotten his shares back.

  Incredulous, Flanz and Swanson rushed to Milan. They waited for Maurizio in the gleaming wood-paneled conference room they knew so well. Maurizio, enjoying his moment, kept them waiting at least half an hour before he burst into the room, his old verve and enthusiasm back.

  “Rick, Bill, how nice to see you!” Maurizio said in his most gregarious manner. “So you’ve heard the news?” Maurizio asked with a broad smile. “I know you guys have your spies everywhere!”

  Maurizio called in Antonio, who poured out steaming cups of tea for the three of them. Finally, Flanz set down his porcelain teacup and took a deep breath.

  “Maurizio,” said Flanz, “where did you get the money?”

  “Well, Bill, it’s an incredible story!” Maurizio said with a twinkle in his eye. “I was trying to fall asleep in my home in Saint Moritz and I was worrying about everything and what I was going to do and I had a dream.” Flanz and Swanson looked at him blankly, wondering what his dream possibly had to do with anything.

  “And my father came to me in this dream and he said, ‘Maurizio, you bischero, the solution to all your problems is in the parlor. Just look over there by the window, one of the floorboards is loose; pull it up, and underneath you will see.’ So when I woke up, I got up and looked under the loose board and it was incredible! There was more money than I could possibly ever know what to do with there, under the floor! So I didn’t want to be greedy, I took just enough to pay off my shares,” Maurizio said, looking happily first from Swanson to Flanz and back again, pleased with his tale.

  The two Investcorp executives slumped in their chairs. They knew that not only had they lost their leverage over Maurizio, but that he was thumbing his nose at them and relishing it. He had no intention of telling them where he got the money. The story was his humorous way of saying it was none of their business—and he didn’t need any charitable loan offers from Investcorp.

  “That’s great, Maurizio,” said Flanz, with a frozen smile on his face, his milky blue eyes blinking behind his glasses. “That’s really great.”

  Flanz said later, “I felt as though I had been punched in the stomach. I thought we had finally found our opening, our window of opportunity to get some leverage over Maurizio, and instead I had to stand there and smile. That’s the moment when I decided we were going to war.”

  Flanz and Swanson flew back to London, where they sat with Nemir in front of the fireplace and told him the story. The benevolent green eyes grew cold. This time, Kirdar—not Maurizio—turned off.

  “He is making fun of us!” Kirdar said angrily. “He thinks we are weak and he doesn’t respect us anymore.”

  “When Maurizio used up all his goodwill with Nemir, there was no turning back,” said Bill Flanz later. “When Nemir decided he was closing down negotiations and using force, he could be one of the toughest and coldest warriors around.”

  Kirdar had already called Bob Glaser, the “devil with the red beard,” to London from New York over the Labor Day weekend to head up an urgent, top-priority assignment: solve the Gucci problem.

  “Bob,” he had said, “you are the only person that Maurizio is afraid of. I need you to help me get him out!”

  That Monday morning he called Glaser, Elias Hallak, Bill Flanz, Rick Swanson, and Larry Kessler, Investcorp’s general counsel, and several corporate lawyers into his office and gave them strict instructions.

  “You people have nothing, nothing better to do—twenty-four hours a day—until you solve this problem,” Kirdar said, his green eyes intense. “We must rescue Gucci from Maurizio!”

  Glaser looked back at his boss. “OK, Nemir, we’ll do it, but you have to be willing to go to the brink and you have to be willing to back us up. Maurizio is going to sue us, he is going to embarrass us in the press, and he is going to push the company to the point of bankruptcy. We have to make him believe we will go to the edge. Otherwise you should not go down this path.”

  Nemir, pained and determined at the same time, nodded his consent.

  The four men set up a “war room” in the basement of Investcorp’s Brook Street offices, moving out people and desks and chairs and moving in long tables, chairs, boxes, and file cabinets full of legal and historical documents about Gucci. They hired top-notch lawyers and a high-priced investigative firm to find out where Maurizio had gotten the money.

  While the “war team” pored through documents, on June 22, in a move that startled observers on both sides of the Atlantic, Maurizio fired the first shot in the new war. Franchini, worried that Guccio Gucci hadn’t done all it should have to extract its credits from Gucci America, advised him to sue Gucci America for $63.9 million—the famous unpaid-f
or merchandise. Many thought Maurizio had gone crazy to sue his own company—but Franchini maintained that under Italian law, corporate administrators must do all they can to protect the interests of the company, even if it means suing a sister company.

  Bob Glaser saw it a little differently. “I saw it as an effort to suck the assets out of the American company,” Glaser said, explaining that if Gucci America hadn’t been able to pay what it owed the Italian company, Maurizio would have been able to make a claim for Gucci America’s assets—which primarily consisted of the Gucci trademark and the building on Fifth Avenue.

  Glaser decided he had to get to the bottom of why Gucci America owed Guccio Gucci so much money and called for a meeting of the board of directors of Gucci America. “How can Gucci America owe Guccio Gucci so much money?” he queried the board, which included Maurizio, his four representatives, and four representatives of Investcorp. “This makes us look bad!” Glaser continued, noting that under U.S. corporate law, as a representative of the board of directors he had an obligation to Gucci’s shareholders to protect their interests. “How can management be doing a good job?” he asked. “I demand an investigation!”

  Maurizio stared at Glaser, dumbfounded. He never dreamed his toughest critic and worst adversary through the trying negotiations with Investcorp, the “devil with the red beard,” could actually be taking his side. Glaser insisted and the board nominated him to a subcommittee to investigate the matter of the unpaid credits Gucci America owed the Italian company, which by then amounted to more than $50 million. That nomination gave Glaser full access to the company records. After completing his report, Glaser decided that the latest price structure Guccio Gucci had imposed on Gucci America in 1992 involved artificially inflated prices designed to sustain the dizzyingly high costs the Italian company had racked up over the past few years. “I did not see that money owed by Gucci America to Guccio Gucci as a legitimate debt,” Glaser said. That the pricing policy had been intended as a scam to drain the resources from Gucci America—as Glaser believed—seems unlikely. More likely, it was another one of Maurizio’s desperate efforts to keep the Italian company afloat. Regardless, Glaser’s report provided plenty of material for Gucci America to defend itself from the lawsuit.

  In the meantime, in his desperate quest for money to keep the company on its feet, Maurizio had hatched a deal with Severin Wunderman. Wunderman had agreed to give Gucci a lump sum for a long-term extension of his watch license, which was to expire on May 31, 1994. But to Investcorp’s Gucci team, giving an extended license to Wunderman meant giving away the watch business, at that time the only moneymaker in the tattered Gucci empire.

  Weeks before the upcoming meeting of the board of Gucci America at which Investcorp expected Maurizio to push through the Wunderman deal, Investcorp’s Rick Swanson started calling Domenico De Sole to urge the Gucci America chief to change sides and vote against the agreement. If he changed sides, he could break Maurizio’s control of the board.

  “Domenico, this is Rick. We need to know. Can we trust you?”

  “Listen, Rick,” said De Sole from Gucci’s offices in New York. “You are the only one who really understands. This company is being run by three-year-olds. This cannot go on or the company is going to collapse. You can trust me.”

  Swanson called again.

  “Domenico, this is important. Can we trust you?”

  “Yes,” De Sole said. “Yes!”

  The morning of July 3, 1993, Flanz called De Sole to a secret breakfast meeting in a private dining room downstairs at the Four Seasons Hotel in Milan. Bob Glaser, Elias Hallak, Rick Swanson, and Sencar Toker had gathered around the table.

  They asked De Sole if he would vote with them against the agreement.

  “Look, I truly feel that what is going on is destroying the company,” De Sole said, scanning the tense faces of the Investcorp team. “If something isn’t done, the company is going to go bust!”

  “If you stand up to Maurizio, we will back you up all the way,” said Hallak, looking De Sole in the eye.

  “Maurizio is going to hate Domenico for this, if he doesn’t already,” Swanson interjected. Swanson explained to the group that De Sole had lent Maurizio $4 million of his own money in two separate installments during the past few years, in addition to the $800,000 of company funds he had paid back himself, and had little hope of ever getting that money back—especially if he sided with Investcorp.

  “I give you my word of honor on behalf of Investcorp that we will do our best to include this in our negotiations and make sure you get paid,” said Hallak.

  A few hours later, the directors of the board of Gucci America settled into chairs in Maurizio’s office, instead of the usual conference room. Maurizio had expected the meeting to be confrontational and he wanted to encourage a more intimate atmosphere but be able to preside from behind his own desk. He waved his butler, Antonio, in to take orders for cappuccino.

  Mario Massetti, who had never met Glaser before, turned to De Sole to ask who the man with the red beard was.

  “That’s Bob Glaser,” De Sole replied. “He is the only one at Investcorp Maurizio is really afraid of.”

  The meeting opened with a discussion of Gucci America’s operations, which had a negative net worth of $17.4 million in 1992, when sales slumped to $70.2 million. Bob Glaser surprised De Sole by putting on his tough-guy hat and firing questions at him.

  “Do you run a company called Gucci America?”

  “Yes, I do,” De Sole replied, taken aback.

  “And what do you do when you get a product that in your view is over-priced?”

  “There is nothing I can do,” said De Sole. “I complain all the time. We are a captive company and you guys have never supported us,” said De Sole, heatedly. “All you guys have ever done is just try to get along with Maurizio.”

  Maurizio grew incensed. “Are you saying that Gucci America overpays for the merchandise?” he shot over to De Sole.

  “Yes, I have been saying that for years!” fired back De Sole. “You are overcharging Gucci America just to support your cost structure. Look at this building! What do we really need this building for?”

  Maurizio, visibly upset at De Sole’s allegations as well as Glaser’s provocation, jumped up and paced the green carpet behind his desk as the other directors debated his proposed agreement with Wunderman, which would have secured Gucci some $20 million in exchange for renewing the watch license with Wunderman for some twenty years.

  When it came time to vote, De Sole voted against the deal. Maurizio, angry and dismayed, spun around and looked straight at De Sole, his face white, his mouth set in a thin line. De Sole stared back at him and raised his hands, palms up, fingers spread.

  “Look, Maurizio, this is what I have to do,” De Sole said simply. “I am voting for the company, it is my duty. We can’t just give away a license because we are running out of money…”

  De Sole felt he had done the right thing for the company; Maurizio felt he had been stabbed in the back.

  Once they had left Maurizio’s office, Glaser took De Sole aside. “How are you planning to defend Gucci America from this lawsuit?” he asked.

  De Sole looked at him skeptically. “I can’t hire a law firm to represent the company without approval from the board of directors,” De Sole protested, knowing full well that now Maurizio and his representatives—who had launched the lawsuit in the first place—would never approve the move. Glaser looked De Sole in the eye. “Oh, yes, you can!” he said, studying the executive’s initially surprised reaction. Glaser, who had spent weeks hammering out the rules of corporate governance, had insisted on a clause in case of emergencies that would give the CEO the power to do whatever is in the interest of the company in the absence of a board meeting. De Sole understood in a flash what Glaser was telling him.

  “You can’t convene a board meeting without a quorum and we just couldn’t ever seem to get our schedules together,” Glaser recalled. “It just nev
er happened!” he said glibly. “And that’s how we hired a law firm to defend Gucci America.”

  Glaser was also aware that as a result of the vicious battle now raging between the two companies, Gucci America had no chance of receiving merchandise—and therefore had nothing to sell in its stores. He suggested something more to De Sole. “Why don’t you go and commission your own product?” he asked.

  “I can’t do that without Maurizio’s approval!” De Sole replied.

  “Gucci America has the trademark, doesn’t it? Your job is to do whatever is in the best interest of the company in the absence of a board meeting,” Glaser reiterated. De Sole nodded—and went off to Italy to meet with leather goods manufacturers. Glaser’s goal was to try to keep Gucci America autonomous and solvent despite the intensifying battle with Maurizio.

  Meanwhile, Maurizio felt as though a conspiracy had closed around him. He could not believe that De Sole had turned against him and voted against his proposal. He truly thought, despite their differences and their arguments, that De Sole was his firm ally—almost as though he were part of the family. In April he had approved a $200,000 bonus for De Sole. Without De Sole’s vote, Maurizio knew, it was the beginning of the end for him. If he could no longer control the board, his power in Gucci was finished.

  After the meeting, still pacing, Maurizio poured out his dismay to Franchini. “In the beginning, De Sole was nothing to anyone and I took him in. He had patches on the seat of his pants! Now he is going to ruin me!”

  “Maurizio!” said Franchini seriously. “This is war! You have fifty percent of Gucci, which is now equal to zero. I can help you, but you must be ready to risk it all. You have to be ready to sink the ship and make them believe you will sink the ship, otherwise they will take it from you for nothing!”