Moral of the Story:  Don’t be a “Creep”

Background on the Players

Gucci
1999.  This Italian based company produces high-quality luxury goods such as handbags, luggage, shoes, watches, cosmetics and much more.  Their corporate level strategy can be defined as “unparalleled product design and quality, global distribution, and outstanding communication.”  Tom Ford is the Texas-born creative director for Gucci and the strategic leader behind the product design and quality.  De Sole is the President and CEO, and a figurehead for the company’s business strength over the last ten years.  Some of Gucci’s resources include intangibles like Ford’s design talent, De Sole’s leadership and the Gucci brand name, and tangibles like the worldwide sales network.  These resources allow Gucci to become capable at successfully creating, marketing and delivery luxury goods all over the world.

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Capabilities are valuable in that they raise barriers to entry for any potential competitors.   Competitors would find imitating Gucci extremely costly as Gucci has a historical brand.  Also, it is always a challenge for a company to try and create a “cool” brand, which is needed to compete in the luxury goods market.  Often a sort of luck is needed due to the casual ambiguity surrounding how to create “cool” like Gucci has done.
Gucci’s distribution/marketing system includes a wide reach of customers through advertising and valuable floor space in retail establishments.  Gucci has a focused differentiation business level strategy as it targets metropolitan consumers who are wealthy and/or fashion savvy.

Gucci’s strengths include a high quality image, and the ability to adapt to future customer desires through the innovation of new styles at the right time.  Their weakness remains their small size, which opens them up to hostile takeover bids.

LVMH
A French rooted company with ten times the revenues of Gucci.  Bernard Arnault is the company’s CEO, president and strategic leader of LVMH’s acquisition strategy.  The company’s business level strategy is to build a luxury goods conglomerate through acquisition.   LVMH acquires through takeovers and has little interest in diversification.

PPR
PPR is another French firm.  Their figurehead is the wealthiest individual in France, Francois Pinault.  Pinault champions the corporate level strategy of diversification through acquisition.  The company holds a high strategic flexibility allowing it to raise capital quickly and acquire firms as the chance arises.  PPR diversifies into a moderate to high number of new industries/markets with related links.  Some of the businesses are related and some are not.

A competitive rivalry exists between Gucci and LMVH as they share market commonality, and both focus on luxury goods in these markets.  Since both of these companies only sell to the luxury market, their market dependence is absolute.  This forces the companies to practice multipoint competition across the globe.  They battle to create the best brand and reputation of quality.

In addition to competing with Gucci through its strongest brand, Louis Vuitton, LVMH sales representatives compete with those from Gucci to secure the largest possible share of the finite floor space in retail stores.  PPR does not compete directly with Gucci or LMVH as they lack a foothold in the luxury fashion business. 

 

Looking back on the acquisition from the present (2004), Gucci did not want to be taken over by LVMH.  The company felt capital market shareholders would not receive the proper premium for a takeover bid.  Furthermore, organizational shareholders such as the Italian managers and employees did not want to work for the French LVHM, due to perceptions of a loss of control and Italian pride.

Yet, LVHM and Arnault felt Gucci fit into their acquisition strategy.  They felt that the tactic of purchasing Gucci would further their market power and allow them to exert their size “in marketing and positioning negotiations globally.”  Instead of being upfront and sharing his company’s intentions with the Gucci’s De Sole, Arnualt attempted to buy Gucci shares with a “creeping takeover” to avoid paying shareholders a premium for the change in ownership.  This resulted in Gucci enacting a poison pill, by way of an employee stock option plan, in order to block LVHM from gaining a controlling share of the company.  Next, Gucci began to look around for a white knight.

Enter Pinault with his company PPR.  PPR was willing to pay a premium for Gucci, thus becoming the preferred potential owner in the eyes of De Sole and the capital market shareholders.  The acquisition of Gucci would allow PPR to gain a foothold in the luxury business where entry barriers were high.  Ironically, the acquisition would allow PPR to now compete with LVHM head-to-head.

Gucci issued and sold 39 million new shares to PPR at $75 per share, giving PPR 40% control and 4 seats on the board of directors.  Litigation by LVHM to oppose the deal between PPR and Gucci failed.  Over the next four years, PPR eventually bought out LVHM and the common shareholders, who finally received their premium.

 

 

A competitor analysis of LVHM by Gucci may have better prepared Gucci to fend off takeover advances.  This analysis may have helped Gucci gain an earlier awareness of the competitive actions of LVHM.  Gucci may have foreseen the incentives their company unintentionally offered that created the motivation for LVHM.  Lastly, this competitor analysis could have also discovered whether LVHM had the financial ability to launch a takeover.

LVHM could have also done more research on Gucci and realized, as CIBC Oppenheimer’s research points out, no synergies would be created by an acquisition of Gucci by LVHM.  Cannibalism would have been a more likely consequence.  Furthermore the “creeping takeover” consumed management’s time, company lawyers, and company money, and may have degraded LVHM and Arnault’s reputations.  Even if LVHM had been successful in forcing a takeover, such a move may have caused such talent as De Sole, Ford and others to leave Gucci.  This would cause a drop in value of Gucci.  The talent that remained may have had integration difficulties due to the loss of management, lingering resentment of LVHM as a past competitor and the French/Italian cultural differences.