The House of Gucci

by Sara G Forden

  “I like building things,” said the smiling, blue-eyed Pinault, with a nod to his lumber mill past. “This is a chance to create a global group.”

  Pinault, a high school dropout, had acquired all the traditional French symbols of success, wineries, media, and political ties. He was a close friend of French president Jacques Chirac. Now he wanted to move strongly into Arnault’s territory and Gucci gave him that opportunity.

  “There is room for two in this business,” said Pinault. “Gucci had a rope around its neck, the noose was tied, and the countdown had begun: it was only a question of time before they would become a division of LVMH.”

  Pinault invited De Sole and Ford to lunch at his sixth arrondissement Paris town house on March 12 along with his senior executives, PPR CEO Serge Weinberg and top aide Patricia Barbizet. The small group dined on baked fish in Pinault’s lavishly furnished apartment amid a stunning modern art collection that included paintings by Mark Rothko, Jackson Pollock, and Andy Warhol and sculptures by Henry Moore and Pablo Picasso. De Sole and Ford warmed to Pinault’s direct, no-nonsense, open-minded style—a far cry, they felt, from Arnault’s feints and parries.

  “I liked his eyes, there was instant rapport,” recalled Ford, who watched in admiration the way Pinault listened to and respected the opinions of his senior aides without losing his authority. “One even corrected him.”

  “There was instant personal chemistry,” agreed Weinberg, a tall, clear-eyed executive who had traded a promising public sector career to help meld Pinault’s diverse acquisitions into a smoothly running group nearly ten years earlier.

  “I felt we all spoke the same language,” said Weinberg. “It wasn’t about diplomas, but about personalities.”

  That feeling carried one of the fastest and toughest negotiations bankers on both sides had ever seen. Time was short: Pinault set a deadline, March 19, the date on which court-ordered negotiations between Gucci and LVMH were to resume. If Gucci and Pinault couldn’t reach an agreement in a week, there would be no deal.

  By that evening, a squadron of lawyers and investment bankers for both sides got to work hammering out the nuts and bolts of the Gucci-Pinault alliance. As usual in such top secret deals, the players were dealt code names: “Gold” for Gucci, “Platinum” for Pinault, “Black” for Arnault.

  A SMALL, discreet businessman’s hotel on Rue de Miromesnil with no room service and no coffee bar became one of their unlikely meeting places, the executives coming and going secretively through back exits. De Sole drove a hard bargain on issues of price and control, fearing as he did that Pinault would back away. But on the contrary, Pinault had yet another card to play. He called De Sole and Ford to a private meeting at London’s Dorchester Hotel. If De Sole and Ford agreed, he wanted to buy Sanofi Beauté, which owned the famed Yves Saint Laurent (YSL) design house and a stable of designer fragrances, and turn it over to Gucci to run. Arnault himself had rejected buying Sanofi before Christmas, saying it was too expensive.

  “Do we want it!” exclaimed Ford as De Sole shot him a long “what are we getting ourselves into?” look. “Yes!” Ford said. “YSL is the number one brand in the world!”

  Ford himself had looked to Yves Saint Laurent’s work—especially from the seventies—as inspiration for his sexy mannish suits, tuxedo looks, and Bohemian touches. The thought of the magic Ford and De Sole could work for YSL excited everyone in the room.

  In one week, Gucci had gone from narrowly escaping the devouring jaws of LVMH to commanding a deal that valued the company at $7.5 billion and gave it $3 billion in the bank along with the first pearl in the campaign to build Gucci into a multibrand luxury goods group.

  The morning of March 19, as cameras flashed, Pinault and Gucci announced their unexpected new alliance: François Pinault had agreed to invest $3 billion for a 40 percent (later raised to 42 percent) share in Gucci in addition to turning over the Sanofi business Pinault had just bought for $1 billion. The agreement valued Gucci stock at $75 a share—a 13 percent premium over the average price during the past ten days of trading—and called for Gucci to issue 39 million new shares to Pinault. The megadeal effectively reduced Arnault’s 34.4 stake to 21 percent and shouldered him out of any decision making. Gucci agreed to increase its board of directors from eight to nine members and give Pinault’s group four representatives, in addition to three out of five seats on a new strategic committee to evaluate future acquisitions. De Sole and Ford happily described their newfound partnership as a “dream come true.” They explained to reporters that they had been willing to give Pinault what they refused Arnault because PPR was not a direct competitor and Gucci would become the cornerstone of a new strategy in luxury goods instead of being folded into a larger group, such as LVMH, as just a division. Pinault had also agreed to all of their conditions and signed a standstill agreement, promising that he wouldn’t increase his shareholding beyond the 42 percent.

  When news of the Gucci-PPR deal hit the newswires, Arnault was outside Paris delivering a speech to a group of LVMH managers at Euro Disneyland. He cut short his engagement and sped back to Paris, less than an hour away. His senior aides, the blue-eyed Godé and hard-jawed Lieber, learned about the massive deal in Amsterdam’s Amstel Hotel shortly before their 1:00 P.M. meeting with Gucci’s general counsel Alan Tuttle at the Hotel Krasnapolsky.

  “What do we do now?” Lieber asked Godé helplessly.

  “We keep our appointments,” said Godé through his teeth.

  When Tuttle met Godé and Lieber in an upstairs conference room, the Gucci executive politely declined to give the men additional details of the Pinault deal, further infuriating the LVMH duo.

  “To have a successful meeting, three things are required: courtesy, transparency, and goodwill,” said Godé sternly. “I regret that this morning you have shown none of these,” he fired as the LVMH executives turned on their heels and left. By early afternoon, they reunited with Arnault in LVMH’s top-floor Avenue Hoche conference room. Just the day before, at an LVMH analysts’ conference in Paris, Arnault had insisted he had no intention of launching a full bid for Gucci. In the light of the Pinault alliance, Arnault realized he had two options: stay as a powerless minority shareholder in a company controlled by hostile management or try to buy Gucci outright. That afternoon, Arnault made a $81 per share bid for Gucci, valuing the company at more than $8 billion—a remarkable figure considering that just six years earlier, Gucci had teetered on the edge of bankruptcy.

  De Sole was on the telephone in a conference room at his Paris hotel, explaining the Pinault agreement to a reporter, when he heard the news. He cut the interview short and began to shout: “I rest my case! I rest my case! I rest my case!” Finally, it seemed, Arnault had done what De Sole had asked for all along: made an offer for all of Gucci.

  Arnault’s bid never went anywhere. The offer was contingent on the abolition of Gucci’s agreement with Pinault. But the Gucci team had played its cards well and made sure that the agreement with Pinault was an unshakable, cash-in-the-bank transaction. Subsequent offers from Arnault, in which he raised the price to $85 per share, and, according to some reports, as high as $91 per share—valuing Gucci at nearly $9 million—also went nowhere. Gucci’s board of directors examined and then rejected each one for not being full and unconditional. Arnault filed a new round of lawsuits to block the Pinault deal. On May 27, in a green-walled room of the Enterprise Chamber of Amsterdam, five black-robed judges, presiding under a photograph of Queen Beatrix, upheld Gucci’s agreement with PPR. Although the court struck down the ESOP, the unprecedented poison pill had served its purpose by buying Gucci time to find its white knight. De Sole immediately called Tom Ford, who was in Los Angeles to pick up an award, with the good news. Then he instructed his staff to make plans for a party. That night the tired, overjoyed, and relieved Gucci team members celebrated on a barge floating down the canals of Amsterdam, toasting each other merrily with non-LVMH champagne.

  Licking their wounds, Arnault a
nd Godé retreated to their glass and marble Avenue Hoche tower, sheepishly admitting that perhaps they had gone wrong. But they refused to go away. Although common wisdom might have dictated Arnault quietly sell his Gucci shares, he stubbornly maintained his position in the belief that in the long run he would have his way.

  “We are going to stay right here,” said Godé at the time. “It isn’t every day we get to sit back and watch other people working for us. But if things don’t turn out to be as easy as announced, we will be there in the first row.” He smiled, implying that LVMH would be ready to swoop in to protect its interests. By mid-2000, however, LVMH appeared ready to unwind its Gucci shareholding.

  For Domenico De Sole, the true end of the battle with LVMH didn’t come until July 1999, when a series of routine Gucci board appointments were approved despite LVMH opposition at Gucci’s annual general shareholders meeting in Amsterdam.

  “All of the independent shareholders voted in our favor,” De Sole said. “For me that was the real end of the battle. Arnault thought he was the master of the universe! Well, he got beaten!”

  In the meantime, as Godé promised, LVMH continued to breathe down De Sole’s neck, attacking first the Pinault agreement, then the planned acquisition of Yves Saint Laurent through Sanofi Beauté. Arnault mounted technical challenges to the way the Gucci-PPR alliance had been concluded, charging that the Gucci-PPR alliance had failed to pay the $30 million corporate tax on the transaction. Gucci defended its actions, saying its lawyers had determined they weren’t obliged to pay the tax and that they had saved their shareholders money in the process. Gucci otherwise shrugged off the allegation, saying that even if they were required to pay, it was a minor issue with respect to the $3 billion deal they had secured. Still, Arnault had made his point: he was watching De Sole’s every move. Arnault also announced that he believed the 6-billion-franc (about $1 billion) price tag for Sanofi Beauté—the fragrance group that controlled YSL—was too steep. As Gucci’s second-largest single shareholder, he could threaten the transaction if he could prove it wasn’t in the interests of Gucci shareholders. Arnault had walked away from buying Sanofi himself in December, saying it was too expensive.

  In addition to Arnault, De Sole had two other Frenchmen to contend with. The first was Pierre Bergé, YSL’s feisty, sixty-eight-year-old chairman and cofounder. Bergé, who had an airtight contract through 2006 that gave him veto power over creative decisions taken at the house, wasn’t about to be elbowed aside. Nor was he willing to allow newcomers into the hallowed inner sanctum of Yves Saint Laurent, a rarefied, Proustian mansion on Paris’s Avenue Marceau with spacious salons hung with green curtains and chandeliers, design studios, and offices.

  “This building and these offices are untouchable!” Bergé had intoned. “This is the reign of haute couture.”

  On the other side of the negotiating table, Domenico De Sole was equally uncompromising. He and Tom Ford had to have complete control or there would be no deal.

  The other Frenchman De Sole had to deal with was his own savior and newfound partner—François Pinault, who had acquired YSL through his private holding company Artemis SA, but was anxious to complete the transfer to Gucci.

  “I was negotiating very hard against my largest shareholder!” De Sole said. “We had to find a formula that would give Gucci total control. The deal had to win the compliance of the independent members of the board.”

  “The strong point of the Tom Ford–Domenico De Sole team was their ability to exert control over the art and value of a brand through product design, communications image, and store concepts,” observed a Milan-based luxury goods consultant, Armando Branchini, senior vice president of Intercorporate. “It would have been a shame if they couldn’t have gotten the freedom to do that.”

  Just when it seemed there was no solution to the problem, Pinault himself came forward with a graceful compromise: he would buy the haute couture operation through his own investment company, Artemis, and Gucci would get the rest. In addition to the YSL business, Sanofi contained the Roger & Gallet brand and a stable of fragrance licenses including Van Cleef & Arpels, Oscar de la Renta, Krizia, and Fendi. At YSL, there was already a division between the haute couture—which was still designed by Yves Saint-Laurent himself—and the Rive Gauche women’s and men’s ready-to-wear collections, which were designed by young designers Alber Elbaz and Hedi Slimane, respectively. The formal separation of the business into two distinct companies seemed both natural and feasible. Pinault’s eleventh-hour solution gave everybody what they wanted. Yves Saint-Laurent and Pierre Bergé signed over full control of the Yves Saint Laurent brand to De Sole and Ford for a princely payoff of $70 million, while they retained artistic and executive control of the haute couture operation, which employs some 130 people, registers sales of some 40 million French francs—and operates chronically in the red. Pinault agreed to swallow that pill in the interests of moving on with the larger transaction.

  “I am very low key, but some very stubborn people have misread that as being soft,” De Sole said. “I’m not soft. It was very simple. I knew what I needed.”

  De Sole had showed his negotiating fiber during the past few months when a lively bidding war exploded over the Rome-based accessories label Fendi, the darling of the accessories market for its so-called baguette handbag, a versatile model created in 1997 that had flown out of stores faster than it could be restocked. Fendi was controlled by five spirited sisters, the daughters of the company’s founder, Adele Fendi, and their families. As a gaggle of suitors circled, offer prices began to spiral far beyond average values for luxury brands being quoted in the industry at the time. As the price rose, early bidders, including Rome-based jeweler Bulgari and U.S. buyout fund Texas Pacific Group, dropped out. De Sole, who had made an offer for a controlling stake that valued the entire company at about 1.3 trillion lire, or an estimated $680 million, watched the others walk away, thinking he had the deal in the bag. Then Prada’s Patrizio Bertelli—who had been a long-ago supplier of leather goods to Fendi—bounded on the scene with an offer of 1.6 trillion lire, or the equivalent of about $840 million. De Sole really wanted to buy Fendi. He felt he and Ford could do wonders with the Italian fur, leather, and accessories firm, whose roots were not unlike Gucci’s. De Sole topped Bertelli’s offer at 1.65 trillion lire, or about $870 million. Then Bertelli delivered his bombshell: he teamed up with LVMH in an unprecedented alliance, beating out Gucci with an offer that valued the entire company at more than $900 million, more than 33 times Fendi’s bottom line. At that time in the industry, a multiple of 25 for a sale price was already considered high. The Fendi deal hit established values right out of the ballpark and made De Sole feel as though his two worst enemies had ganged up on him. Nonetheless, De Sole marched back to his board of directors.

  “We can beat the Prada-LVMH bid,” he told them, “but in my view it’s too much.” He had also balked at some of the Fendi family’s conditions, including ensuring jobs for the younger family members and their spouses. “I can treat people well, but I cannot promise anybody a job,” De Sole said. “It isn’t about family anymore. You have to perform.”

  The Fendi transaction, even though Gucci lost it, helped De Sole in two ways: it established him as a tough negotiator who could walk away from the table if he didn’t get what he wanted and it deflated Arnault’s argument that Gucci was paying too much for Sanofi, relieving some of the pressure surrounding that transaction.

  On November 15, 1999, Gucci finally announced it had acquired Sanofi Beauté, and with it the historic Yves Saint Laurent name, which veteran fashion journalist Suzy Menkes at the International Herald Tribune dubbed “fashion’s shiniest trophy.” In the process, Gucci had even managed to elicit remarkably conciliatory remarks from Bergé, well known in the business for his barbed tongue: “The only thing that I wanted to protect was M. Yves Saint-Laurent. If others want to come and apply their marketing and communication techniques, let them come. We don’t know how to do t
hose things. We created the greatest maison of haute couture, but we don’t know about marketing.”

  With the YSL acquisition, Gucci had not only taken its first step toward becoming a multibrand group, it had also done so with one of the golden names of the industry. On November 19, Gucci further announced it had bought control of a small, luxury shoemaker in Bologna called Sergio Rossi, paying 179 billion lire (about $100 million) for 70 percent of the company, leaving the Rossi family with 30 percent. More acquisitions would follow, including the purchase of fine French jeweler Boucheron in May 2000.