Luxury Wars – LVMH versus Hermès

Chapter2- Financial Goals and Corporate Governance

Mini-Case

Case Study BulletedCase Study Bulleted• Hermès is a French company that makes and sells

luxury goods (apparel, watches, leather goods, Jewelry and perfumes.

• Founded in 1837.. Went public in 1993. But still controlled 73% by Hermès family.

• 2006 CEO went to nonfamily member..

»Patrick Thomas.Patrick Thomas.

Case Study BulletedCase Study Bulleted»Bernard ArnaultBernard Arnault

• CEO for LVMH took over family-owned businesses WOLF in Cashmere.

• Helped bankrupted companies then he started to build his evil empire.

• He tool over: • Christian Dior, Louis Vuitton,Pucci,

Celine..and others.

Case Study BulletedCase Study Bulleted• Bernard Arnault (CEO-LVMH) informs Patrick Thomas ( CEO-

Hermès) that they acquired a 17.1% interest in Hermès.• AMF (French stock market regulator) announced opening formal

investigation as the ownership percentage should have been filed as Hermès is publicly traded. If violation is found, LVMH would lose voting rights for 2 years.

• Equity Swaps were how the company gained such percentage. this way of gaining percentages is not required to be reported to AMF

• Arnault (CEO-LVMH) was successful in increasing the annual Sales for LVMH through growth of brands and strategic purchases.

• With Banks agreements, Arnault held rights to shares via equity swaps, He publicly announced the ownership by October 2010.

Press release:

Case Study BulletedCase Study Bulleted

• On December 2010, LVMH announced raising its total stake in Hermès to 20% and filed documents with AMF

Hermès International was a family-owned business for many years. Why did it then list its Hermès International was a family-owned business for many years. Why did it then list its shares on a public market? What risks and rewards come from a public listing?shares on a public market? What risks and rewards come from a public listing?

LVMH versus Hermès: Case Question 1

Many family businesses take the decision of going public at some stage in their life to be able to secure financial resources for the business expansion or to give its shareholders a way of selling their shares in case they prefer to cash them in.

By June 1993 and possibly a grave mistake, Hermès had gone public. At the time, the equity sale generated great excitement. The 425,000 shares floated were oversubscribed by 34 times. Dumas said that the equity sale would help lessen family tensions by allowing some members to liquidate their holdings without "squabbling over share valuations among themselves.“

Rewards of being publicly listed:1- Improved Marketability of Shares: This makes it possible for family shareholders to sell their shares at the prevailing stock price in the open market. It also makes it easier for shareholders to use their shares as collateral to obtain loans. As a result, the improved marketability of the company’s shares helps reduce family issues as it solves the liquidity needs for shareholders who prefer to hold their wealth in assets other than their interest in the company.2- Improvement of the Company’s Financial Position: This is a direct result from selling the company’s shares to the public. The stronger financial position makes it easier for the company to seek loans and to negotiate the terms of these loans.

Hermès International was a family-owned business for many years. Why did it then list its Hermès International was a family-owned business for many years. Why did it then list its shares on a public market? What risks and rewards come from a public listing?shares on a public market? What risks and rewards come from a public listing?

LVMH versus Hermès: Case Question 1 - Continue

Risks of being Publicly listed:- Loss of Privacy: This is probably the most unwelcome outcome of going public for family businesses. Once public, the family business will have to reveal more information than before, including: detailed financial statements and other performance measures, and any advantages given to family members.- Loss of Autonomy: This is a consequence of the arrival of new shareholders after the family business goes public. Even in cases where the family remains a controlling shareholder, minority shareholders have rights that will make it difficult for the original family members to operate unfettered, which exactly happened to Hermès- Possibility of a Takeover: If enough shares have been issued to outsiders during the process of going public, it could be possible for competitors or other investors to gain control over the family business.- Additional Costs: The initial cost of going public can be quite substantial. Some of the potential components of this cost are: underwriter’s commission, auditing fees, legal fees, and any registration costs. In addition, once public, the company will incur additional costs such as audit fees, periodic disclosure of financial information costs, and any other compliance requirements’ fees for public companies.

Bernard Arnault and LVMH acquired a large position in Hermès shares without anyone knowing. How did they do it and how did they avoid the French regulations requiring disclosure of such positions?

LVMH versus Hermès: Case Question 2

•LVMH was able to attain such a large ownership position without the knowledge of Hermes family and management through equity swaps. Equity swaps are derivative contracts whereby two parties enter into a contract to swap future cash flows at a preset date.

•LVMH was able to avoid French regulations requiring disclosure of this type of position through tying only their value to the equity instrument and at maturity, the contract would be settled in cash and not shares.

•On December 2010, LVMH announced raising its total stake in Hermès to 20% and filed documents with AMF

The Hermès family defended themselves by forming a holding company of their family shares. How will this work and how long do you think it will last?

LVMH versus Hermès: Case Question 3

• How will this work?1.The structure will give family members the ability to trade between themselves while denying Mr. Arnault the chance to buy their shares.2.Rumors went out that some family members sold their shares, so “The creation of this holding structure confirms the unity of the family in their commitment to defend the independence of Hermes to preserve its values and culture," the family wrote in a press release.3.This will give confidence in the family unity and thus raise the share prices in the market.4.Regulations in France require that “any entity that gains control of more than a third of shares launch an offer.” If in creating a nonlisted holding company, the family members had to group their shares into a bloc, the bloc would surpass more than a third of capital or voting rights. Thereby, entitling the minority shareholders to a public offering for the company.

• How long do you think it will last?The holding company is still waiting for the approval of the AMF. If it was approved, it will be a successful step and it will lead of the company retaking control over the company.