The House of Gucci

by Sara G Forden

  That morning, De Sole uncharacteristically wanted to get a little sleep before going to the office, which was in temporary quarters Gucci had rented on Grafton Street, a few paces from Gucci’s Old Bond Street store. He expected the day to be a quiet one, especially since businesses were closed in Italy for Epiphany. For the first time since last June, when rival fashion company Prada had announced it had bought a 9.5 percent stake in Gucci, the largest held by a single shareholder, De Sole felt relaxed. Prada had apparently stopped buying below 10 percent and its representative had voted with management at the latest shareholders meeting. De Sole thought Gucci was in the clear.

  Prada had rocked the fashion industry and stunned De Sole when it first announced having acquired the Gucci stake the summer before. Some thought that Prada, smaller than Gucci and inexperienced in takeover raids, might have been an advance runner for a larger group. But as the months passed with no new developments, De Sole reasoned that Prada had neither the financial muscle nor the larger alliances needed to take over Gucci, which at that point was valued at more than $3 billion.

  In little more than ten years, Patrizio Bertelli, the crusty, volatile Tuscan married to Mario Prada’s descendant and chief designer, Miuccia Prada, had ingeniously transformed Prada from a sleepy, unknown luggage manufacturer into a global fashion and accessories powerhouse that had become one of Gucci’s toughest rivals. Bertelli, steeped in Tuscany’s leatherworking traditions and a former Gucci supplier himself, bristled at Gucci’s expansion under new management and its growing control over the regional manufacturers. Prada consolidated its business and design headquarters in Milan and its production operations in Terranova, near Arezzo, about an hour from Florence. Both Gucci and Prada had begun to demand exclusive contracts from their suppliers, to ensure production capacity and discourage copies and fakes. Bertelli felt the encroachment and didn’t like it. An explosive man known for his violent outbursts, he was often the subject of outrageous tales in fashion circles. The story that he smashed the windshields of cars irregularly parked in Prada’s reserved spaces became lore in Milan. Another episode even splashed into the papers. One day a handbag suddenly flew out of an overhead window and struck a woman walking down the sidewalk outside Prada’s offices. Bertelli, rushed out, apologizing profusely. He admitted to the woman he had thrown the bag in a fit of rage.

  As Gucci recovered, Bertelli criticized everything he could about his Florentine competitor. He dismissed Dawn Mello as arrogant, accused Ford of copying the looks that had brought Prada success; granted, Prada did pioneer the black nylon handbag, but soon everybody produced it, Gucci included. Bertelli, an admirer of LVMH’s Bernard Arnault, dreamed of expanding Prada’s reach through acquisitions in the fashion and luxury goods sector.

  “Arnault has built a luxury goods empire with financial logic. I don’t see why it can’t be done with hands-on industrial logic,” he said. When Bertelli decided to make his first move, he lunged at Gucci, taking mischievous delight in De Sole’s discomfort about his new shareholder. Bertelli called up De Sole, suggesting the two groups could exploit their “synergies” in areas such as finding prime store locations at competitive prices or media buying.

  De Sole spurned Bertelli. “Patrizio, this is not my company. I have to talk to my board. We can’t make this pizza together,” De Sole told Bertelli.

  The Gucci camp downplayed their discomfort over the attack and code-named Prada “Pizza.” One Gucci employee sent De Sole a large geriatric bandage, commonly sold in Italian pharmacies for arthritis and rheumatism under the brand name Bertelli. He glued the bandage onto a giant-sized hand-lettered keep-your-chin-up card that read: “The ONLY Bertelli we fear is THIS one.” This card was displayed in his Scandicci executive office, which he visited regularly.

  Through the fall, the Gucci stock price slipped and slid to the $35 range due to fallout from the Asian financial crisis. A disgruntled Bertelli watched his investment dwindle, but didn’t buy more. In January, as prospects for Asia improved and analysts forecast heady earnings for Gucci, its stock charged back up to more than $55 a share. De Sole reasoned the price was then high enough to send bargain hunters elsewhere and breathed a sigh of relief. The threat, it seemed, had passed.

  Minutes after the De Sole couple had settled down for their nap, the phone rang. Constance Klein, De Sole’s London assistant, was on the other end, her voice tense. “Mr. De Sole, I am sorry to disturb you, it’s urgent,” she clipped.

  “Excuse me, honey,” De Sole said to Eleanore, moving into another room as his wife rolled her eyes. “I’ll just take this call and I’ll be right back,” he said as she shook her head in disbelief and turned over to get some sleep herself, knowing her husband’s work habits only too well.

  Eleanore didn’t see her husband again until nearly midnight that evening, when an exhausted and overwhelmed De Sole dragged himself back home after one of the most sobering days in his fourteen-year career at Gucci.

  Klein had called to say that De Sole had an urgent call from Yves Carcelle, the president of Louis Vuitton and a trusted aide of Bernard Arnault, the clever, fifty-year-old chairman of the LVMH luxury goods group. De Sole and Carcelle had a cordial relationship and often consulted each other about trends in the industry. But something about the urgency of the call tripped an alarm in De Sole’s head. He knew instantly Carcelle wasn’t calling to chat.

  From the next room, De Sole called Carcelle back. He had been right. The French executive told De Sole that LVMH had acquired more than 5 percent of Gucci’s common stock and would make an official announcement later that afternoon. In a reassuring voice, Carcelle told De Sole that Arnault, impressed with all that Gucci had accomplished in the past few years, had decided to make a “passive” acquisition in Gucci with purely “friendly” intent.

  De Sole hung up the phone, stunned. The moment he had dreaded for months had arrived. Not only was LVMH the largest luxury goods conglomerate in the world, its profitable Louis Vuitton division was one of Gucci’s most direct competitors. In the past few years, Louis Vuitton had also adopted many of the same strategies as Gucci. It had hired a young, hip designer—American Marc Jacobs—to create a new ready-to-wear line, and it had opened a gleaming new flagship store on the Champs-Elysées to give those clothes a grand showcase.

  That afternoon, from his third-floor office in the cream-colored town house on Grafton Street Gucci rented until the building it had bought could be renovated, De Sole spoke to Arnault’s second in command, Pierre Godé, a towering French lawyer with elegant manners, piercing blue eyes, and salt-and-pepper hair. From LVMH’s headquarters—a honeycomb of hushed, gray-carpeted offices on Avenue Hoche just a stone’s throw from the Arc de Triomphe—Godé reiterated Carcelle’s message: “This is a passive investment.”

  “Excuse me, Pierre,” De Sole finally said into the telephone, “but exactly how many shares do you have?”

  When Godé claimed not to know the exact amount, De Sole knew he was in trouble. “Okay,” he said to himself, “here we go.”

  De Sole called Morgan Stanley, only to find that his trusted banker, James McArthur, to whom he had turned over the Prada problem the summer before, was leaving the following week for a yearlong sabbatical in Australia. De Sole, whose problem-solving method hinged on working with loyal people he knew and trusted, felt a pang of despair. McArthur called his boss, a forty-two-year-old Frenchman named Michael Zaoui. In minutes, Zaoui rang the bell at Gucci’s Grafton Street office.

  De Sole greeted Zaoui, trying to hide his nervousness. The handsome, polished investment banker, whose bread and butter was hostile takeover battles, slid into one of the Charles Eames chairs that Tom Ford had picked out for De Sole’s office. Zaoui began to tell De Sole what he knew about Arnault.

  Arnault, born in the provinces to a building tycoon, had abandoned a career as a concert pianist as a young man and attended the elite French military and engineering institute École Polytechnique before moving to the United States in 1981
to help expand his family’s real estate business. His U.S. move, prompted by the election of Socialist president François Mitterrand, gave him a new perspective and taught him a different, more efficient way of doing business. When he returned to France in 1984, he took $15 million of his family’s money and bought a failing, state-owned textiles company called Boussac, which contained a jewel—Christian Dior. From there, in the short span of a decade, he became an icon in the world of luxury goods, amassing an impressive stable of designer names including Givenchy, Louis Vuitton, and Christian Lacroix, not to mention the vintners Veuve Clicquot, Moët et Chandon, Dom Perignon, Hennessy, and Château d’Yquem, the perfume house Guerlain, and the cosmetics emporium Sephora.

  “LVMH is his creation, and he runs it,” said Zaoui. “There is no question that he is the boss.”

  But the devastated families, smear campaigns, and forced retirements he left in his wake earned him unflattering nicknames in the French press. His critics dubbed him “The Terminator” and “The Wolf in Cashmere” for bringing American hardball tactics to the genteel world of French business. A trim, long-limbed man with graying hair, an aquiline nose, and a thin line of a mouth, Arnault also had been dubbed “Tin Tin” after the Belgian cartoon character for his dark, circumflex-shaped eyebrows. Although he could appear boyish and whimsical at times, his image had remained ruthless rather than kind. Although he shunned politics, Arnault’s growing power brought him acceptance from the Parisian social and business set, who fawned over him and his second wife, a pretty Canadian concert pianist named Hélène Mercier, whom Arnault married in 1991. She had read the reports about her allegedly ruthless husband with perplexity; to her he was charming, affectionate, and an attentive father who often made time to put at least one of their three children to bed at night.

  Zaoui didn’t describe a conscientious father figure to De Sole. “He is smart, quick and has a strategic mind, like a chess player who thinks twenty moves ahead,” Zaoui said, explaining that Arnault’s style was to keep building his stake in a “creeping takeover” until he could control the company. Zaoui felt sure that was Arnault’s design with Gucci. Though he might make reassuring overtures to existing managers in companies he had set his sights on, after he moved in, he usually moved them out. At Louis Vuitton, he allied with, then expelled the former chairman and family member Henri Racamier in a battle so vitriolic then–French president François Mitterrand chided both sides in a nationally televised speech and called on the French stock market agency to investigate. At Christian Dior, Arnault fired six senior executives in four years, further shaking up the French fashion business establishment.

  Zaoui had closely observed Arnault’s tactics during another highly publicized European corporate battle. In 1997 the Guinness brewery, in which LVMH had a significant stake, fought Arnault over a merger with U.K. beverage and food conglomerate Grand Met. At the time, the French press speculated that if Arnault couldn’t block the merger, he could sell his stake in Guinness for some $7 billion and use it to buy another brand.

  “That would be enough to buy Italian luxury house Gucci, the grand rival of Vuitton,” Le Monde wrote, generating a flurry of then-unfounded rumors. Arnault ultimately reached a deal over Grand Met and the two companies merged to become a mega drinks group called Diageo, in which LVMH started out as the largest single shareholder with 11 percent, although it later reduced its holding.

  A tenacious fight for control of the Duty Free Shops (DFS) chain had preceded Arnault’s wrestling match with Guinness, further fueling the image of Arnault as a heartless conqueror. In all his campaigns, Godé played Talleyrand to Arnault’s Napoléon. “Arnault came up with the ideas and Godé brought him the ammunition,” said Marie-France Pochna, who is working on a book about Bernard Arnault and who previously authored a biography of Christian Dior.

  Arnault had been kicking himself ever since he walked away from Gucci back in 1994, saying it was worth nothing. At the time, he had been immersed in digesting his 1990 acquisition of LVMH, which had involved significant financial implications.

  “We had other priorities,” admitted Godé during an interview in one of LVMH’s tiny, mirrored, top-floor conference rooms. “Now everybody says Gucci is wonderful, but at the time it was a mess!” he added. “The turnaround could have failed, nobody knew.”

  Concentrating on reviving his brands, Arnault had successfully generated attention for Christian Dior, Givenchy, and Louis Vuitton, among others, with a new generation of younger, high-profile designers and powerful advertising campaigns—further shaking up the French fashion and business establishment. Of all the brands, Louis Vuitton became the most commercially successful. With LVMH’s dominant position in France, it made sense for Arnault to start extending his reach to other countries. Up to then, the French luxury industry had always looked down its nose at Italy as merely a supplier country. But with the return of Gucci, the meteoric rise of Prada, and the continuing success of others such as Giorgio Armani, Arnault began to view Italy as a ripe field for potential acquisitions and alliances.

  “Italy is a place we should have ties with,” insisted Concetta Lanciaux, Arnault’s influential director of human resources—the same person Maurizio Gucci had tried to hire—who fingered most of the new design talent Arnault has hired for LVMH in the past few years. “It’s written on the wall. This is not just about Gucci, but about the leadership of the European luxury goods industry,” said the blond-haired, brown-eyed LVMH executive, who is Italian-born, though she has spent most of her professional life in the United States and France.

  Arnault didn’t move on Gucci in the fall of 1997, when everyone expected him to, because he was preoccupied with the Guinness–Grand Met battle and struggling with newly acquired DFS, hard hit by the Asian financial crisis.

  As the Asian market slowly regained stable footing in 1998, Arnault finally set his sights on Gucci. A corporation with LVMH’s Paris address quietly began buying up Gucci shares in 1998, accumulating nearly 3 million shares.

  “If he wants the company he can have it!” De Sole exploded, pacing agitatedly in front of Zaoui. “I’ll just go sailing. My wife is sick of all this. I want to spend more time with my daughters.”

  De Sole, the Gucci survivor, realized all too well he was at the brink of a new battle. He wasn’t sure he wanted it.

  Zaoui looked De Sole in the eye. “Domenico,” he breathed. “This is war. I have been through these fights. It takes incredible determination and there are no guarantees. You really have to want to win.”

  De Sole slumped in another Charles Eames chair across from Zaoui. He knew he had no choice. He couldn’t just walk away.

  “OK, Michael, what do we do?” said De Sole, palms out, fingers spread. “I have never done a corporate takeover battle before, but I certainly know how to fight.”

  Zaoui asked for a pad of paper and a pen. “Tell me, Domenico, what are the company’s defenses?”

  As De Sole talked, Zaoui realized there wasn’t much. The most Gucci had were golden parachute provisions for Tom Ford and Domenico De Sole—Gucci’s two most precious employees—in the event of a change in control. The Morgan Stanley team had nicknamed the provisions the “Dom-Tom Bomb,” or the “human poison pill.” The clauses allowed Ford to flee Gucci, cashing in his considerable stock options, if a shareholder accumulated 35 percent of the company’s stock. Ford also had the right to follow De Sole out the door; he could leave a year later if De Sole walked out. De Sole’s clause was more open to interpretation; the Gucci CEO could bail out if any single shareholder assumed “effective control” of the company.

  Two days later, the third-floor conference room of Gucci’s Grafton Street town house was inaugurated as the latest Gucci war room. De Sole had rallied a small group of Gucci’s senior executives. Over the weeks and months ahead, they would become his war team. One of them was De Sole’s old friend and Gucci’s general counsel Allan Tuttle, the same man Rodolfo had given his overcoat to in Venice sixteen year
s earlier. De Sole had brought Tuttle over from Patton & Boggs in Washington, D.C., hiring him to work for Gucci full time. Another was the company’s chief financial officer Bob Singer; De Sole had stumped alongside him on the Gucci IPO road show four years earlier. Rick Swanson, the man who had supported De Sole within Investcorp, was also there. Tuttle, Singer, and Swanson, as well as the others, were not only talented professionals but also loyal soldiers; De Sole knew he could count on them. Zaoui outlined Gucci’s meager options in front of the worried Gucci executives: either negotiate with Arnault or find a white knight with whom they could merge to fend him off.