The House of Gucci

by Sara G Forden

  The ensuing fight for control of Gucci riveted the attention of the international fashion and business community as De Sole and a small team of executives, lawyers, and bankers marshaled the most determined, surprising, and successful defense Arnault had ever come up against in his fifteen years in the business.

  Though the faceoff between Gucci and Arnault was just one corporate takeover battle in a wave of corporate consolidation sweeping Europe—and a relatively small one at that—for Gucci, it marked a new frontier. Gucci had fully evolved from a Florentine mom-and-pop handbag shop to a global fashion corporation that had whetted the appetite of the sector’s most feared and respected takeover lord. In 1998, Gucci’s sales pierced the $1 billion mark—just five years after it had reported losses in the tens of millions.

  That Wednesday in January, as far as De Sole was concerned, Arnault had thrown down the gauntlet at his feet, challenging his leadership of one of the world’s most successful luxury goods groups. De Sole really had started thinking about retirement, wanting to spend more time with his family and sailing his sleek new 63-foot sailboat, Slingshot. But in just a few hours, Arnault’s advance had snapped him back to attention.

  “I was ready to retire,” De Sole admitted, “but I wasn’t going to let anybody push me out,” he said. “I don’t go around starting fights, but if you pick a fight with me, I am going to fight back just as hard as you do.” And he did.

  De Sole had survived all the Gucci wars—first as the foot soldier for the family factions, later as the linchpin that allowed Investcorp to strike down Maurizio. In the process, he had made his own enemies and detractors. His critics painted him as ruthless, mercenary, and self-serving, with an uncanny ability to marry his own interests with those of the company so as to appear selfless. At the same time, De Sole was the one figure in Gucci’s history who had changed the most. Over the years he had transformed himself from a subservient, awkward, and badly dressed lieutenant into a commanding, articulate CEO. Forbes magazine put a steely-eyed portrait of De Sole—his beard now impeccably trimmed—on the cover of its February 1999 Global edition for a cover story entitled “Brand Builder.”

  De Sole had led Rodolfo’s fight against Aldo, Aldo’s fight against Paolo, and Maurizio’s fight against Aldo and his cousins. He had acted decisively in Investcorp’s fight against Maurizio. After years of hard work and scant recognition, Investcorp had finally handed him his prize. Now the campaign to fend off Arnault’s challenge would engage LVMH on De Sole’s turf, where his best weapon would be his sophisticated legal knowledge. He dug in his heels with relish for the fight. “The guy [Arnault] just asked himself over for dinner without calling first!” De Sole said indignantly.

  As Zaoui and a team of lawyers pored over Gucci’s bylaws, they discovered that the company’s statute had actually been written to facilitate a takeover; when Investcorp was looking for an exit back in 1995, a takeover would have been an easy way out. But those same provisions had left Gucci’s front door wide open to intruders.

  In 1996, De Sole had instituted Project Massimo (Italian for maximum) to examine every possible defense that could lock out potential invaders. Gucci’s bankers and lawyers turned over every stone—defensive stock restructuring, partial and total mergers with companies including Revlon—but came up with little. After shareholders defeated the proposed 20 percent voting limitation in 1997, there wasn’t much else to do. There weren’t any more tricks in the bag.

  “We were just sitting there, waiting for someone to take us over,” Tom Ford recalled. “It was so frustrating.”

  In the summer of 1998, after Prada took its stake, De Sole and Ford even met with leveraged-buyout king Henry Kravis, and looked at buying the company themselves. But they soon realized that a leveraged buyout would be too expensive and risky, possibly igniting a bidding war with a strategic buyer from the industry who could afford to pay more than a financial one.

  At Gucci’s men’s show in January, Tom Ford had sent white-faced models with bloodred lips striding aggressively down the runway to the theme song from Psycho, baring their teeth like Dracula as though to say “Back off!” to Arnault. The next day, Zaoui called an LVMH banker in London. “This is an official message,” he said. “Stop now!”

  To everyone’s surprise, on January 12, Arnault turned up in Milan as the surprise guest at Giorgio Armani’s men’s fashion show, where he was thronged by journalists and paparazzi in an appearance that symbolized the dramatic changes going on in the fashion and luxury goods business, where the businessmen had become stars and the stars—at least for an instant—had become passé. At the time, both Arnault and Armani stunned the fashion world once again by acknowledging their two groups were in talks, further consolidating Arnault’s image as a great white shark, strong enough to tackle even the largest prey. Nothing would ultimately come of their discussions. Nothing had come either of earlier, little-known conversations between Ford, De Sole, and Giorgio Armani. An idea to merge the two companies into one giant fashion powerhouse equally strong in apparel and accessories was stillborn.

  In the following weeks of January, the fashion and business community watched in awe as Arnault moved forward in lightning strikes, snapping up large blocks of Gucci shares from private institutional investors and on the open market. In mid-January, Bertelli sold Arnault his 9.5 percent stake, cheerfully grossing $140 million on the deal, calling the proceeds a simpatica plusvalenza, a “delightful profit.” Overnight, “Pizza”’s chief executive became a genius in the eyes of his peers.

  During the next nine months, Bertelli went on to lay the cornerstones of his dream—emerging at the helm of the first Italian industrial-based luxury goods group. He bought controlling stakes in German designer Jil Sander, known for her high-quality, minimalist styles, and Austrian designer Helmut Lang. In the fall of 1999, he would join forces with LVMH to snap up a majority in Rome-based accessories house Fendi out from under Gucci’s nose in what had become a furious bidding war. The luxury goods business was no longer just about quality, style, communication, and stores, but also about ruthless corporate fights that underscored just how high the stakes had become.

  By the end of January 1999, Arnault had accumulated a startling 34.4 percent in Gucci, for an estimated $1.44 billion. In the three weeks since LVMH had announced its initial stake, Gucci shares had shot up nearly 30 percent, while the international press hung on every move. Even the New York Times, which has seen many a corporate fight, called the affair “the most riveting cliffhanger to transfix the fashion industry in some time.”

  Arnault hoped to soften his aggressive moves through back channels—not only through Yves Carcelle, who had broken the news to De Sole, but also through De Sole’s old friend from Harvard, Bill McGurn, who worked in Paris for the New York law firm Cleary, Gottlieb, Steen & Hamilton, one of the firms that represented LVMH. From frequent conversations with McGurn, Godé felt confident that a friendly deal was possible.

  In the meantime, De Sole desperately looked for a white knight, another company that could come in as a partner and stave off LVMH’s advance. He spoke to at least nine possible rescuers, but none came through. No potential buyer in his right mind wanted to step into a company that seemed poised to come under LVMH control. Furthermore, it seemed every time a hopeful De Sole contacted a potential new partner, Arnault snapped up another block of shares.

  “This is David against Goliath,” De Sole said wearily at one point during the struggle, wishing he hadn’t turned a cold shoulder to Bertelli. Arnault smiled. From his austere, glassed-in headquarters on Paris’s Avenue Hoche, he knew De Sole’s every move. “The people who refused him called us.” He grinned.

  At night, De Sole talked over the problem with his wife, Eleanore, who well remembered the ways of the business world from her days as an IBM executive but had retained her highly developed moral sensibility. She urged him to do not what was “best” for De Sole, but what was “right” by Gucci.

  Resigned and angr
y, De Sole agreed to meet with Arnault, but he didn’t feel friendly about it. The two sides bandied about times and locations for nearly a week. Arnault had proposed a meal to keep the meeting personal; De Sole opted for a business setting.

  “I asked him to lunch,” Arnault quipped later, “and he asked me to Morgan Stanley!”

  The meeting, on January 22 in Morgan Stanley’s Paris office, was a stiff, scripted encounter, for which both men had rehearsed their parts. The two CEOs used the time to study each other. Arnault, the brilliant, French-educated takeover baron; De Sole, the determined, Rome-born, and Harvard-educated quick study.

  “They were total opposites,” said Zaoui, who attended the meeting. “Arnault was formal and ill at ease; De Sole was natural, straightforward, and talkative.”

  Arnault lavished praise on De Sole and Ford, saying his interest in Gucci was not hostile. He urged De Sole to consider that Gucci could benefit from LVMH control and pressed for representation on the board. De Sole demurred, citing a conflict of interest. He cringed to think that LVMH could maneuver its own executive onto Gucci’s board and have full access to confidential information ranging from sales, marketing, and distribution data to potential acquisitions and new strategies. He asked Arnault either to stop buying Gucci stock or to make a bid for the entire company.

  De Sole’s fear was that Arnault could buy up enough Gucci shares to effectively control the company without making a fair offer to all of its shareholders for 100 percent of stock. Although New York Stock Exchange regulations do not set a threshold over which a bidder must make a full offer to all the shareholders in a company it has accumulated a significant stake in—called a public tender offer—most companies quoted in the United States already have antitakeover measures in their corporate charters. The same is true for the Amsterdam stock exchange, where Gucci was also quoted. Stock markets in other European countries, such as the United Kingdom, Germany, France, and Italy had all passed antitakeover laws setting specific levels after which a public tender offer is required. Gucci found itself in a no-man’s-land: its statute had no built-in defenses—its effort to institute one had been voted down by its own shareholders—and it was listed on two stock markets that had chosen not to set specific takeover limitations, putting the onus back on the companies themselves.

  De Sole tried to get Arnault to agree to stop his advance.

  “There was goodwill in the beginning,” recalled Zaoui. “De Sole even showed up at the next meeting with a Gucci handbag for Arnault’s wife.” He offered Arnault two seats on Gucci’s board in exchange for reducing his voting rights to 20 percent, from 34.4 percent. But by their third meeting, Arnault rejected the offer and threatened to sue De Sole and members of the board personally if they didn’t acquiesce. Both sides grew frustrated. On February 10, citing its rights as a shareholder, Arnault sent Gucci a letter requesting an extraordinary shareholders meeting to appoint an LVMH representative to Gucci’s board. That move sent De Sole into a rage.

  “We were convinced the proposal would be well received!” said Godé later, saying that LVMH had proposed an outside candidate with no ties to LVMH and had asked for only one representative instead of three. “We thought it was a sign of good faith,” he said.

  But De Sole’s blood was boiling over a report that had quietly made its way back to him: an LVMH executive had told one of Gucci’s institutional shareholders it wanted to have its own “eyes and ears” on the board to pave the way for acquiring complete control. De Sole wasn’t about to let the wolf into his chicken coop.

  “I became convinced that they never intended to make a full and fair offer for the company,” De Sole said.

  On Sunday, February 14, Gucci executives and bankers mustered their forces in the small Grafton Street conference room. In the months since Prada first bought its Gucci stake, a lawyer named Scott Simpson, who worked in the London office of the high-powered New York law firm Skadden, Arps, Slate, Meagher & Flom—famous for its work on corporate takeover battles—had been studying a far-fetched and risky ploy that he thought just might work. So far untested in Dutch courts, the defensive ploy focused on a loophole in New York Stock Exchange regulations. The idea was an ESOP, an employee stock ownership plan, that would allow Gucci to issue a huge block of stock to company workers—and thereby dilute Arnault’s percentage. The ESOP wouldn’t make Arnault disappear, but it would neutralize his voting power. De Sole held the ESOP card up his sleeve and tried one last time to get Arnault either to agree to a written “standstill” agreement that would legally prohibit him from buying more shares or to make a fair and full offer for the entire company. Arnault’s answer crept through Gucci’s fax machine the afternoon of February 17 in the form of a letter asking Gucci to provide the LVMH board with “a valid reason” to accept a standstill. De Sole, initially reluctant to put up a fight, but now hard and determined, hit the roof.

  “A reason for a standstill? He wants a reason?” De Sole shouted. “Tonight, I’ll give him a reason!”

  The next morning, February 18, Gucci announced it had issued an ESOP, consisting of 37 million new common shares, to Gucci employees. The block of new shares immediately diluted Arnault’s stake to 25.6 percent and neutralized his voting power. De Sole had fired his opening shot.

  “He started to enjoy the game as we moved on,” Zaoui said. “He became determined to win.”

  When news of the ESOP broke, neither Arnault nor Godé knew exactly what an ESOP was. Godé did a double take as the surprising news scrolled across the Reuters screen on his desk; Arnault received the news via fax in a New York hotel room. Arnault ordered an immediate report from Godé, who told both his boss and the flood of reporters calling for comment that the ESOP was a clear violation of NYSE regulations. Before making its move on Gucci, Arnault had been assured by LVMH’s New York lawyers that no company quoted on the New York Stock Exchange could issue new shares amounting to more than 20 percent of its capital. Only later, after urgent phone calls to stock exchange officials, did LVMH learn what Gucci’s lawyers already knew: the veto against issuing the new shares didn’t apply to foreign companies, which were regulated instead by laws in their own countries. Gucci, with corporate headquarters in Amsterdam, had no such restrictions under Dutch law.

  “We were very surprised when we saw that horrible measure,” admitted Godé later. “They were phantom shares that suddenly appeared, were owned by no one, and financed by the company. It was no coincidence that the number of shares matched exactly the number of shares we owned.”

  Another surprise for LVMH came on the heels of the ESOP—in a filing with the SEC, Gucci had revealed the clauses that would allow Tom Ford and Domenico De Sole to bail out in the event of a change in control. By then, the De Sole/Ford team was considered one of Gucci’s most valuable assets. If they left, Gucci would be much less attractive as a takeover prize. Gucci maintained its lawyers had informed LVMH of the measures long before; LVMH claimed it knew nothing of the golden parachutes that allowed Gucci’s “dream team” to bolt, collecting millions of dollars in stock options.

  Arnault fired back, suing Gucci to block the ESOP and accusing the Gucci management of dirty tricks. De Sole’s claim that an LVMH director represented a conflict of interest was simply a pretext to keep the company to himself, LVMH officials charged. A week later, an Amsterdam court froze both LVMH’s shares in Gucci and the ESOP shares. Once again, Gucci’s future lay in the hands of a court, its shares frozen, its management under siege. Although the Dutch judge had ordered both sides to negotiate in good faith, both camps felt bruised and angry. De Sole charged James Lieber, an American lawyer and senior aide to Arnault, with calling him a fascist in the French press and stopped believing anything Arnault said.

  “It became intensely personal,” recalled Zaoui.

  The tension rose. De Sole ordered regular security sweeps of Gucci’s Grafton Street offices to ensure that no hidden microphones had been planted. Tom Ford noticed a man sleeping in a car outside t
he apartment he and Buckley maintained in Paris and believed he was a private detective from the New York investigative firm Kroll Associates, which Arnault had reportedly hired to snoop on him—the stuff of a crime movie.

  Undaunted, Arnault began to lace his offensive with sugar, sending conciliatory messages directed at Tom Ford in an effort to drive a wedge between him and De Sole and lure the Texan over to the LVMH camp. If De Sole bolted under the change of control clause, Arnault could find another manager to replace him, but if Ford left, Gucci’s entire image went with him.

  “Businessmen, there are a lot of them, but designers, there are few,” an LVMH executive commented pointedly in a conference call with journalists.

  Then Arnault sent a French journalist, a friend of Ford’s, to meet the designer for dinner in Milan. Ford found out halfway through the meal that she was really there on behalf of Arnault and had agreed to call him after their meal.

  “He approached me through every channel except the right one—the direct one.” Ford finally agreed to lunch with Arnault several weeks later at Mosimann’s, the exclusive London club where ten years earlier an exiled Maurizio Gucci had furnished the Gucci room with his signature green fabric and stately Empire furniture. On the day of their appointment, news of the supposedly secret meeting blared from the apricot-colored pages of the Financial Times—along with details of Ford’s stock option plan revealing that he had options on some two million shares on which he stood to make some $80 million based on the stock price at that time. Ford promptly blamed LVMH for the leak—and canceled lunch. The effort to separate Ford from De Sole had only driven the two men closer together.

  Meanwhile, although the ESOP had bought Gucci time, it hadn’t changed the company’s fundamental vulnerability to a takeover and the outcome of the move was still in the hands of the Dutch court. Gucci still needed to find its white knight.

  Domenico De Sole had never heard of François Pinault, even though he was one of the richest men in France. In June 1998, Forbes had ranked Pinault as the thirty-fifth richest man in the world with an estimated net worth of $6.6 billion. Born in Normandy, the sixty-two-year-old Pinault had over the years transformed a small family-owned sawmill into Europe’s largest nonfood retail group, Pinault Printemps Redoute SA (PPR), becoming a household name in France. His holdings included the Printemps department stores, the FNAC electronics outlets, and the Redoute mail-order catalog. His better-known assets outside France included Christie’s auction house, Converse shoes, and Samsonite luggage. During a routine chat with one of his Morgan Stanley bankers, Pinault’s ears had perked up at the mention of Gucci. He had been attracted for some time by the luxury goods business. After a quick trip to New York, where he dropped in on Gucci’s Fifth Avenue store—which at the time still sported the dark marble and glass decor from Aldo Gucci’s days—he asked for a meeting with Domenico De Sole. They met in Morgan Stanley’s London Mayfair town house on March 8. De Sole gave his speech—which he had polished to perfection collecting no-thank-yous from other potential partners—about how he and Tom Ford had taken Gucci in five years from a company with sales of $200 million to one with sales of $1 billion. Both he and Ford knew that what took Gucci to the $1 billion mark wasn’t going to get it to the $2 billion mark, De Sole said, telling Pinault their dream of turning Gucci into a multibrand company. It was exactly what Pinault wanted to hear.