A friendly takeover means that the target is willing to receive an offer from the acquiring company or that the acquisition offer is approved by the target company's board of directors a
PART 3: INDUSTRY AND CORPORATE OVERVIEW3.1 Overview of the luxury market Luxury goods industry is often stratified into three layers: accessible, aspirational and absolute Some factors that determine the degree of luxury can be price, uniqueness, availability and brand name Moreover, the luxury industry usually covers products like perfumes and cosmetics, hard luxury, handbags and cases, furniture, vehicles, etc These products can be sold through wholesale, retail or online channels Global economic growth and globalization in the world at the time of the deal stimulated demand for luxury goods among the middle and upper classes, leading to growth in sales and coverage of the luxury goods industry This growth is associated with many macroeconomic indicators such as disposable income, GDP, average number of tourists of a country, etc
Looking back at history, in the years shortly before the acquisition, the luxury goods industry was shrouded in uncertainty about its future Based on information published by the EIU, the early 2000s was a disappointing time for the luxury goods industry in particular and the world mm general when terrorist attacks took place and the SARS pandemic spread worldwide, From 2004 to 2007, high-end customers regained their consumer demand However, this did not last long due to the outbreak of the 2008 global financial crisis Statistics show that the luxury industry only really regained growth momentum at the end of 2009 and continued until 2010
Furthermore, according to a Morgan Stanley research report, the luxury goods and fashion industry is one of the highest cyclical industries since it is influenced by consumer discretionary spending patterns By this argument, designer brands are working to minimize seasonality by releasing cross-seasonal collections, thereby connecting classic Spring/Summer and Fall/Winter collections mn an effort to reduce sales fluctuations
Based on Bain & Company's report and observing figure 1, we see that the luxury goods industry grew about 9.8% from 2009 to 2010 with growth in most goods except furniture-related dinner table goods Bain & Company's report also forecasts that 2011 and 2012 will promise many growth prospects in the European region when the revenue growth rate is expected to increase by about 3 to 5% Although 2010 witnessed a recovery and favorable development momentum for the luxury goods market, the future still has many uncertainties and unforeseen situations However, industry experts agree that emerging markets are the epicenter for the continued growth of luxury lifestyles
Figure 1: Worldwide luxury market by categories 2009-2010
3.2.1 History LVMH or Moét Hennessy Louis Vuitton is a French international group specializing in luxury products LVMH Group includes over 60 brands and is the only group present in all five major sectors of the luxury market: Wines & Spirits, Fashion &
Leather Goods, Perfumes & Cosmetics, Watches & Jewelry and Selective Retailing
LVMH is a leading multinational goods corporation and family-run group headquartered in Paris, France LVMH's parent company is Christian Dior, which owns 40.9% of LVMH's shares
LVMH was founded in 1987 as a result of the merger of the Louis Vuitton fashion house with the Moet Hennessy company, a company formed after 1971 from the merger between the champagne makers Moét & Chandon and the cognac maker Hennessy
Immediately after the founding of LVMH Group, Bernard Arnault, as the person in the middle of the conflict between the CEO of Moét Hennessy - Alain Chevalier and Racamier - president of Louis Vuitton, quickly spent $1.5 billion to hold 24% of LVMH shares in July 1988 Not long after that, Bernard Arnault spent another $600 million to
17 buy 13.5% of LVMH's shares, making him the largest shareholder of the group In January 1989, Bernard Arnault continued to spend another $500 million to control a total of 43.5% of LVMH and 35% of voting nghts and was elected Chairman of the Board of Directors
Since then, Arnault has led the LVMH group through an ambitious growth plan, transforming it into one of the largest luxury goods groups in the world, alongside Swiss giants Richemont and French Kering Famous acquisitions and mergers of LVMH group under the leadership of Bernard Amault can be mentioned over time such as: in 1993 buying Berluti and Kenzo, in 1994 buying perfume companies Guerlain, Marc Jacobs and Sephora in 1997, Thomas Pink and TAG Heuer in 1999, Emilio Pucci and Fendi in 2000, DKNY and La Samaritaine in 2001, Zenith in 2002, Hublot in 2008, And finally, in 2010, Bernard Arnault did not hide his ambition when trying to bring Hermes under one roof
1345 LE CLOS DES LAMBRAYS 1846 LOEWE 1828 GUERLAIN
1593 CHATEAU D'YQUEM 1854 LOUIS VUITTON 1916 ACQUA DI PARMA
16468 DOM PERIGNON 1895 BERLUTI 1947 PARFUMS CHRISTIAN DIOR
1743 MOET & CHANDON 1924 LORO PIANA 1972 PERFUMES LOEWE
1772 VEUVE CLICQUOT 1945 CELINE 1984 MAKE UP FOR EVER
1832 CHATEAU CHEVAL BLANC 1947 EMILIO PUCCI 1991 FRESH
1843 GLENMORANGIE 1970 KENZO 2009 MAISON FRANCIS KURKDJIAN
1858 MERCIER 1984 THOMAS PINK 2017 FENTY BEAUTY
1985 CLOUDY BAY 1992 COLGIN CELLARS 1993 BELVEDERE 1998 BODEGA NUMANTHIA 1999 CHEVAL DES ANDES 1999 TERRAZAS DE LOS ANDES 2010 WOODINVILLE
2013 AO YUN 2017 CLOS 19 2017 VOLCAN DE MI TIERRA
1780 CHAUMET 1852 LE BON MARCHE 1817 COVA
1860 TAG HEUER 1870 LA SAMARITAINE 1849 ROYAL VAN LENT
1865 ZENITH 1958 STARBOARD CRUISE SERVICES 1860 JARDIN D'ACCLIMATATION
1884 BULGARI 1960 DFS 1908 GROUPE LES ECHOS
1936 FRED 1969 SEPHORA 2006 HOTELS CHEVAL BLANC
3.2.2 Management system Bernard Arnault is Chairman and CEO of LVMH He was born to an industrial family in Roubaix, the town in Northern France on March 5, 1949 Mr Arnault attend the Roubaix lycée and the Faidherbe lycée in Lille He then went on to study at the Ecole Polytechnique, graduating in 1971 Bernard Amault began his professional career as an engineer with his father’s company: Ferret-Savinel construction and successively was promoted to various executive management positions before becoming Chairman in 1978
In 1984, he bought the ailing company Agache-Willot-Boussac, which owned brands such as French department store Bon Marché and fashion house Christian Dior
He changed the company's name to Financiere Agache and initiated a reform, cutting costs and selling off some of the company's businesses
Soon after, he bought the fashion house Celine and sponsored French designer Christian Lacroix In the late 1980s, Arnault said his goal was to run the world's largest luxury company within the next decade He then set his sights on LVMH Moét Hennessy - Louis Vuitton, spending $2.6 billion to buy shares to become the company's largest shareholder, and eventually Chairman and CEO in 1989
Bemard Arnault has a total of 5 children and in tur appointed them to important positions in the LVMH group
Bernard Arnault Antonio Nicolas Bazire Pietro Beccari Michael Burke Chantal
Chairman and Development Christian Dior Louis Vuitton
Chief Executive Group & acquisitions Couture PGD Resources
Jean-Jacques Chris de Lapuente Pierre-Yves Roussel _— Philippe Schaus Sidney Toledano Jean-Baptiste Voisin Guiony Sephora and Special Advisor to the Wines and Spirits Fashion Group Strategy
Figure 4: LVMH Board of Directors
Bernard Arnault Chairman & Chief Executive Officer
Antonio Belloni Group Managing Director
Antoine Arnault Delphine Arnault Nicolas Bazire Bernadette Chirac*
Advisory Board Members Paolo Bulgari Patrick Houél Felix G Rohatyn
Performance Audit Committee Yves-Thibault de Silguy*
Lord Powell Of Bayswater Ethical and Sustainable Development Committee
Marie-Laure Sauty de Chalon Yves-Thibault de Silguy*
Marie-Laure Sauty de Chalon* * Independent Director
The Wine & Spirits sector can be divided into two branches: the Champagne and Wines branch and the Cognac and Spirits branch Consumption revenue from champagne sales is estimated to account for about 83% of this branch's 2009 revenue LVMH is also quite famous for developing high-quality champagne and is recognized by many experts and high-class customers According to 2009 data, the group's champagne is produced on 1,675 hectares of self-owned vineyards located in the Champagne region of France
Besides producing champagne, the company also develops and distributes quality still and sparkling wines from famous wine regions such as France, Spain, California, Argentina, Brazil, Australia and New Zealand Zealand The Cognac and Spirits segment contributed to the Wine and Spirits operation approximately 50% of revenue in 2009 In addition, LVMH also offers a wide range of products from vodka to cognac and rum to bazjiu (traditional Chinese white wine)
The Luxury Fashion & Leather Goods sector includes a group of French brands and other companies from Spain and Italy, all judged on the quality, sophistication and originality of design to succeed In 2008, LVMH was estimated to own about 1,090 stores worldwide and increased this number to 1,164 in 2009 In addition, this field is also one of the most profitable fields for LVMH in recent years, mainly coming from revenue from emerging markets in Asia Louis Vuitton is one of the most famous brands
21 in this field, specializing in trunks, leather goods, ready-to-wear, shoes and accessories
Other famous brands owned by LVMH Group in this field include Fendi, Givenchy, Marc Jacobs, Céline, Loewe,
LVMH is one of the strongest growing corporations in the perfume and cosmetics market Driven and driven by the beauty and health needs of modern consumers, as well as rising income levels in emerging countries and a more diverse customer base with different needs together This field has a lot of development potential and opportunities in the future Major brands in LVMH's Perfume & Cosmetics sector include Christian Dior, Guerlain, Givenchy, Kenzo, Make Up Forever and a few others Many of them incorporate the development and research of perfumes, cosmetics, skin care and beauty products in their products while others mainly focus more on one single product line The group holds a significant number of brands, which allows for appropriate synergies in this area and constitutes a relational advantage
PART 4: CASE ANALYSIS4.1 Motivations for LVMH to takeover Hermes Based on the research article by Inés Alexandra Mira (2014) titled "M&A: Luxury sector - Case of a merger between LVMH and Hermés"”, the author has made assumptions about revenue in product lines, operating costs, NWC, cost of capital, capital expenditure, at the two groups LVMH and Hermés along with other macroeconomic assumptions such as inflation along with the application of three different valuation models such as WACC , APV and Relative Valuation method to find reliable strategic motives for LVMH wanting to acquire Hermés
Economies of scale are simply understood as allowing combined companies in the same field to become more efficient in terms of costs and profits In a merger like this, with two companies operating in the same sector, the possibility of creating synergy is higher In 2009, LVMH had 2,423 stores, of which 1,164 were dedicated to Fashion and Leather Goods, while Hermés owned 1,601 stores, of which about 300 focused on this sector A very important thing about the luxury retail industry is the ability to own stores in prime and convenient locations, something that both Hermés and LVMH were able to do in the past If both companies are in good sync, they will be able to gain bargaining power in leasing or acquiring new stores for the group based on their reputation and doubled brand recognition The combined group could even lease or acquire larger assets to combine both brands For this reason, the study expects operating profit margins to quickly increase by 0.5% after one year
Pricing power is driven from reduced competition and higher market share, greater pricing power should result in higher margins and operating income The combination of Hermés and LVMH will create the largest empire ever involved in the luxury goods industry in general and the fashion and handbag industry in particular Monopoly power is expected to increase brand awareness while giving the group stronger pricing power by holding most of the most popular brands, creating more influence in the market Greater consistency and market power lead to a 0.2% increase in margins from recurring operations if the merger is successful
Emerging markets have been very important for the development of the luxury market Although LVMH already has a strong presence in emerging markets, such as China, Hermés 1s still trying to develop a strategy that will allow a good position in the market With both entities combined, the efforts to establish a strong presence in emerging markets will be more successful
Of the most anticipated synergies that derive from the merger of LVMH and Hermés, general costs with marketing and administrative expenses are on top Mr
Arnault suggested that “LVMH could develop synergies with Hermés in areas including store development and advertising.” However, of course, this idea was rejected by Hermés’ executive at the time Given the unique characteristics of the luxury goods industry, jomt marketing efforts are expected to help reduce costs to maximize net profits
30 across the group In fact, the positive impact of this synergy on profits from recurring operations is related to an estimate of 0.3%, and started to increase from 0.15% in 2012
In addition to the strategic motives demonstrated through impressive forecasts from the model if LVMH's acquisition of Hermés is successful, there are still many other non-strategic motives discussed by Parisian elites at that time The most typical example is the views and ambitions of LVMH chairman, Mr Bernard Amault As mentioned earlier, through deals in which LVMH acquired other companies, Mr Bernard Arnault seems to have a preference for approaching and acquiring companies he admires That's why people in the industry gave him the nickname "wolf in cashmere” because of his ruthless takeover moves In addition, he has never hidden his ambition when he once told the press that he wanted to build a luxury goods empire despite receiving many criticisms
4,2 Timeline and developments of events In 2001, LVMH acquired an initial 4.9% stake in Hermés through subsidiaries
In 2007, LVMH continued to accumulate shares by purchasing shares through financial intermediaries and subsidiaries, with each subsidiary holding shares of less than 5%
In October 2010, Hermes’ CEO Patrick Thomas at that time found out that LVMH had been secretly accumulating Hermés shares over the years and was planning to buy more By 2010, LVMH owned 14.2% of Hermes through its subsidiaries Once the company converted certain derivative instruments of Hermés, it would own a total of 17.1% LVMH bought Hermés shares at an average price of $80.5 per share, while Hermés’ shares had been publicly traded for $100 and above There were many speculations that LVMH could have purchased the shares from family members or other shareholders Because at that time, the Hermés family, as mentioned in the previous section, consisted of 3 branches: Puech, Guerrand, and Dumase For a long time, the Hermés family did not completely agree with each other on the company's development strategy, so it cannot be ruled out The case of Bernard Amault took advantage of disagreements in management opinions to buy back Hermés shares at cheap prices from shareholders in the Hermés family
In November 2010, France's financial services watchdog, the Autorité des Marchés financiers (AMF), officially launched an mmvestigation into LVMH's investment in Hermés There was a lot of information at that time that Hermés had relied on a French government agency to help them avoid the risk of being taken over And AMF has basically tacitly agreed to find appropriate legal ways to help them avoid this risk
Although Hermés has initially reached tacit agreements with AMF, it does not sit still in the face of hostile moves from LVMH Mr Emile Hermés, Chairman of the Board of Directors of Hermés at that time, gathered members of the family that owned shares to join forces to fight LVMH's takeover plot In December 2010, Hermés created a private equity company that owned 50.2% of Hermés shares The holding has a night of first
31 refusal when a family member decides to sell the shares While there are many investors and experts who criticize LVMH's acquisition of Hermés, there are still a few people who believe that this is an inevitable law of the market when victory belongs to the strongest and Hermés had to anticipate it when the family company was listed on the French stock exchange
On 7th January 2011, according to the AMF ruling, LVMH will not be permitted to buy out minority Hermés shareholders, effectively ending any possibility of a takeover
In 30th May the same year, Hermés chairman, Mr Bernard Puech wanted LVMH to halve its 21 percent stake He also said: “After six months, we are the target of incessant attacks of the kind we’ve never seen in 174 years, even though LVMH says its approach to us is friendly With friends like these, who needs enemies?”
However, as analyzed before, with Bernard Arnault's leadership style and ambition, LVMH does not easily give up a charming prey like Hermés On December 31, 2011, LVMH announced it had increased its stake in Hermés to 22.6%
July 10, 2012: Hermés filed a lawsuit against LVMH in a Paris court (separate from the AMF investigation), accusing the LVMH group of engaging in insider trading, collusion and stock price manipulation, an anonymous source told Women's Wear Daily
Responding to Hermés' accusations, LVMH said that Hermés did not comply with the investigation and lawsuit process, and that the file also contained serious and unfounded accusations that affected LVMH
September 5, 2012: LVMH responded to Hermés’ suit by filing a complaint of its own against Hermés for “blackmail, slander and unfair competition” Hermes’ senior management and public relations department declined to respond to LVMH's lawsuit
In October 2012: The AMF announced that it had uncovered evidence of
“wrongdoing” on LVMH’s part and asked the sanctions committee to decide whether to munpose penalties on LVMH
PART 5: DISCUSSION AND CONCLUSIONFrom the above case study, readers and businesses can draw many useful lessons as follows:
Although there are many experts and scientific research articles recognized around the world that have provided reliable and intuitive analyzes and numbers showing many great financial benefits if Hermés agrees to merge with LVMH However, in reality there are spiritual and cultural factors that can trump conventional financial numbers
Whether a company is completely acquired or not depends greatly on the attitude and determination of the management, the board of directors and the cooperation of that company's shareholders In fact, a company, whether it wants to or not, can suddenly become the target of other acquiring companies Therefore, tactical and psychological preparation and a leadership team that acts for the benefit of the company and shareholders are extremely important In the above deal, Hermés was very fortunate that the shareholders holding voting shares were members of the same family In addition to the key members of the founding family, other members of the management board all act in the interests of shareholders and are determined to protect the company's traditions
This plays a key role when Hermés can successfully fight LVMH with the least damaging method
In addition, the support of government agencies also seems to be a factor promoting Hermés' success