University of MalayaFaculty of Business and Accountancy

Integrated Case StudyCAEA 3231

Group Assignment

Gucci Group NV

Prepared by:Kok Kean Teong CEA070o59Moh Jia Wei CEA070084Neo Ching Hup CEA070109Ong Kah Hoey CEA070157Teo Silk Keong CEA070107

Tutorial Slot:Thursday 9.00am-11.00 am

Introduction of takeover

Takeover or also known as acquisition is the purchase of one company by another. It

usually refer to the aspect of corporate finance, strategy, and procedure in dealing

with buying, selling, or combining of different organizations that can contribute to the

growth of the company without creating another new business entity. A company

exercise acquisition is named acquirer who is a legal entity that intend to acquire

substantial quantity of shares or voting right of a target company. A target company is

a company whose shares are listed on the stock exchange and its shares or voting right

being acquired or control is taken over by an acquirer.

Company may be takeover other company with three different ways. First method is

buying the shares of the target company. The acquiring company buys the shares from

the shareholders of the target company in exchange with cash or other form of

payment like bond and shares. By this method, acquisition is considers complete

when the acquirer obtain significant number of target company’s share, normally

more than 50% of the company’s shares. Second method is buying the assets of the

target company. The acquirer has to purchase all of target company’s assets or its

essential part. This can be the entire business or their predominant part. In this

method, the seller in this deal is not the shareholders, but the company itself. The last

method is buying both shares and assets of the target company. This method involves

the purchase of the selected assets, rights and obligation of the target company. The

new company will be found and it will be wholly owned by the acquirer.

A takeover can be friendly or hostile which will be can be determine by looking at

how the acquirer communicated to and received by the target company’s board of

directors, employees, and shareholders.

1. Friendly Takeovers

This type of takeover method was defined where the takeover action usually

first informs the target company’s board of directors before a bidder makes an

offer. The offer normally will be accepted if the board feels the result will serve

shareholders interest or on the basis of a “reciprocity rule”. It recommends the

offer to be accepted by the shareholders to provide benefit for both parties. The

private acquisitions are usually friendly because the private company’s

shareholders and the board are normally the same people or closely connected

with each other. If the shareholders agree to sell the company, then the board is

usually have the same decision or under the orders of the equity shareholders to

cooperate with the bidder.

2. Hostile Takeovers

A takeover is considered “hostile” if the target company’s board rejects the

offer, but the bidder resumes to pursue the takeover activities or the bidder

makes the offer without informing the target company’s board. A hostile

takeover directs the target company’s management unwilling to agree to a

merger or takeover.

Hostile takeover can be conducted in several ways which include the tender

offer that can be created by the acquiring company through a public offer at a

fixed price above the current market price. This pressure the bidder to spend an

extra cost to acquire the entity compare to the nominal value that suppose to be

made. Another method involves is by quietly purchasing enough number of

share (normally more than 50% of the total share issued) on the open market in

order to effect a change in management, known as creeping tender offer.

A hostile takeover generally is considered an unsolicited offer made by a

potential acquirer that is resisted by the target’s management. If the friendly

approach is considered inappropriate or is unsuccessful, the acquiring company

may attempt to limit the options of the target’s senior management by making a

formal acquisition proposal, usually involving a public announcement, to the

target’s board of directors. This tactic, called a bear hug, is an attempt to

pressure the target’s board into making a rapid decision. Alternatively, the

bidder may undertake a proxy contest. By replacing board members, proxy

contest can be an effective means of gaining control without owning significant

number of share, or they can be used to eliminate takeover defenses as a

precursor to a tender offer. In a tender offer, the bidding company goes directly

to the target shareholders with an offer to buy their stock.

Next will study on how acquirer finances their takeover strategy. First, takeover can

be finance by sufficient cash in the acquirer’s account. This usually used in the

acquisition rather than merger because the shareholders of the target company are

removed from the picture. Next financing method is pay by acquirer’s share. Share of

the acquirer’s company is issued to the shareholder of the acquired company at a

given ratio proportional to the valuation of the acquired company’s share instead of

paying cash directly. Besides that, borrowing is also one of the financing methods

used by acquirer. Acquirer will borrow money from a bank or issue new bond to

finance the takeover action. This type of financing method is known as leveraged

buyouts. With this method, the debt formed often moved down onto the balance sheet

of the acquired company which means the acquired company has to pay back the

debt. Those financing methods are commonly used by acquirer.

Trademarks of a takeover target

In order to gain benefit from takeover action, acquirer has to determine which target

companies are the prime candidates for takeover. The characteristic that well-financed

suitors look for in their target companies are as follow:

Product or service niche

- Acquirer normally looking for company with unique niche in a particular

industry which can buy with reasonable price. It is often cheaper for

acquirer to acquire a given product or service than to build it out from

scratch. Besides the risk of joining that particular industry is much lower

because the target company has done the risky footwork and advertising

before being acquired.

Clean capital structure

- Risk of significant dilution is serious consideration for acquirer. Some

target company has a large amount of overhang that discourage potential

suitor especially those have a lot of convertible bonds or varying classes of

common or convertible preferred shares.

Clean operating history

- Clean operating history consider on the consistent revenue streams and

stable business of the target company. Acquirer prefers a smooth

transition. They will be wary if the target company has, in the past, filed

for bankruptcy, history of reporting unreliable earning results, or recently

lost major income source.

Expandable Margins

- All companies looking for economic of scale. Acquirer wants to purchase

target Company that has the potential to develop these economic of scale

and enlarge margin of earning.

Minimal litigation threats

- Many companies will be engaged in some sort of litigation. However,

acquirer should seek for target company that usually steers clear of firms

that are saddled down with lawsuit.

Pros and cons behind takeover

The central rationale used to explain takeover activities is that acquirer look for

enhanced financial performance. Following main motives are considered to enhance

financial performance.

Economy of scale

- Acquisition often reduce the fixed cost of the acquirer’s operation by

reduce the duplication of function or department. This effect is known as

synergy. Synergy lowering cost and directly increases of profit margins.

Increased revenue or market share

- Acquisition allows acquirer’s company to absorb a major competitor and

thus raise the market power to set price in the market. Besides that,

acquisition can create vertical integration which also will enlarge the

market share of the acquirer’s company. So, both effects will directly

increase the revenue of the acquirer’s company.

However, takeover also bring negative effects for the acquirer such as negative

goodwill which mean overpaid of the acquisition, liquidities risk increased since some

company finance acquisition by borrowing, and deteriorate the operational cost when

overcapacity or duplicate of operation occur due to bad reorganize of management

system.

Takeover activities can bring pros and cons for the acquirer at the same time. Caution

benefit-cost consideration and detail analysis of target company are important to

determine the successfulness of the acquisition activities. Acquirer should be careful

in such activities.

Procedures involved in takeover

After identify the target company and determine the takeover strategy, an acquirer has

to go through the following procedure for acquire a company.

1. Engage or appoint a merchant banker

- An acquirer should appoint a category 1 merchant banker who provide

advices and manage the transactions of acquisition. The merchant banker

should not associate of or member group of the acquirer of the target

company before making public announcement.

2. Determine public offer

- If acquirer decides to launch a public offer to acquire the target company’s

share, the public offer should acquire the shares of the target company for

a minimum of 20% of the voting capital.

3. Making public announcement

- Objective of a public announcement is primarily disclosing the acquirer

intention to acquire the shares of the target company from existing

shareholders by an open offer. It shall be made in newspaper when the

acquirer able to implement the offer. This announcement will ensure the

awareness of the shareholders about the takeover activities. Normally, the

announcement made by the acquirer through a merchant banker disclosure

a minimum 20% of share or voting right being acquired. The

announcement must contain the details of the public offer price, period of

offer, number of shares intent to be acquired from public, purpose, future

plans, and detail of acquirer.

- In Dutch’s public takeover rules, the Decree require the acquirer to prepare

a bid document which contains the bid price, forecast used to determine

the price, intentions with respect to the continuation of business operations

and the place target company’s registered office.

4. Filling letter of offer

- Letter of offer is a document addressed to the shareholders of the target

company which include disclosures of the acquirer and target company,

financial information, justification of the offer price, number of shares to

be acquired from public, purpose of acquisition, future plan about the

change in control over the target company, the procedure to be followed

by acquirer in accepting the shares tendered by the shareholders and the

period of offer.

5. Determination of offer price

- Offer price is stated in the letter of offer. Although there is no fixed or

approved offer price stated by the government, it cannot follow whatever

the acquirer prefers. The acquirer or merchant banker is required to make

sure that all the relevant parameters are taken into consideration for

determining the offer price. Those parameters can be as follow:

Average of the weekly price of the target company’s share in

the open market if the shares are frequently traded.

Negotiated price between the acquirer and target company’s

shareholders.

Highest price paid by the acquirer for acquire share in a public

issue prior to the announcement period.

If the share is not actively traded in the open market, other

financial information like EPS, book value, return on net worth

etc. should be taken into consideration.

6. Aware of competitive bid

- Competitive bid is an acquisition offer made by other company who also

interest in takeover the target company. Normally, the competitive bid

provide higher offer compare to the first public offer. So acquirer should

pay attention on this matter to avoid any uncertainty or unexpected loss or

over pay within the acquisition process.

7. Aware of obligation of the board of target company

- Management should not sell, transfer or dispose off any assets of the target

company or its subsidiaries after the public announcement is make by the

acquirer unless approved by the shareholders in the general meeting.

Besides that, management of the target company also disallows to issue or

allot any un-issued securities or enter into any material contract with third

parties. Those actions will influence the company net worth and unfair to

the acquirer who had set the offer price prior the public announcement.

8. Negotiation

- Under friendly takeover, negotiation is an important process for

acquisition. Acquirer can pursuit and convince the shareholders of target

company to sell their shares through negotiate with shareholders about the

offer price, future plan for target company, others compensation etc.

Takeover action is consider success if the acquirer can hold a significant number of

common shares or voting right of the target company. Normally, the significant

number of common share means obtain more than 50% of the total common shares.

However, in Dutch, the public takeover rules stated that the controlling interest is

defined as the ability to exercise at least 30% of the voting right at a general meeting.

Commonly, if the acquirer able to obtain 90% of the target company’s shares,

acquirer has the right to compulsorily acquire the remaining shares from the minority

shareholders or on another hand minority shareholder can require the acquirer to

purchase their remaining shares. In Dutch, the public takeover rules restrict the

squeeze-out right will only be available for acquirer if and only if the acquirer hold at

least 95% of the issued capital or voting right of the target company. So, by going

through the above procedure, acquirer is able to takeover the target company with

reasonable payout.

The following flow chart is the procedure required by the Dutch’s judiciary from

announcement of bid to the complete of takeover process.

Takeover defences

Takeover defences are designed to raise the overall cost of the takeover attempt and

provide the target firm with more time to install additional takeover defences. Pre-bid

defenses and Post-bid defenses are used to prevent a sudden or unexpected hostile bid

from gaining control of the company before management has time to assess their

alternatives properly. If pre-bid defenses are sufficient to delay a change in control,

the target firm has the time to use additional defenses to avoid the hostile takeover

after an unsolicited bid is received.

Pre-bid defences usually require shareholder approval and fall into three categories:

(i) Poison pills

Investopedia explained poison pill as by purchasing more shares cheaply (flip-in),

investors get instant profits and they dilute the shares held by the acquirer. For

instance, the “flip-in” took place when shareholders gain the right to purchase the

stock of the acquirer on a two-for-one basis in any subsequent merger. This makes the

takeover attempt more difficult and more expensive.

A suicide pill is a term for any high-risk poison pill strategy that may discourage a

potential acquirer but also place the takeover target under extreme financial pressure.

A people pill involves the threatened resignation of the whole management team in

the event of a successful takeover. Series of possible strategies designed to prevent

hostile takeover. These include offering discounted shares to current shareholders (but

not the potential acquirer) in order to dilute whatever stake the acquirer may hold and

raise the cost of an acquisition. The sources of cash to purchase another entity (such

as special bonds, warrants etc) are becoming harder to access as bank will become

less willing to lend out money for purchasing shares which affected by the diluted

stock price and engaging unpredictable decline towards unexpected lows.

(ii) Shark repellents

The Shark repellent strategy used by corporations to protect against unwanted

takeovers. Examples of these anti-takeover strategies include issuing new shares of

stock or securities convertible into stock, and staggering the election of directors.

Most companies want to decide their own fates in the marketplace. So, when the

sharks (the bidder) “attack”, shark repellent method can avoid from being taken over

and let the acquirer switch their decision for a less aggressive target. This strategy is

not in the best interests of shareholders as the actions may damage the company’s

financial position and interfere with management’s ability to focus on critical business

objectives.

(iii) Golden parachutes

Stephen Shmanske & Nabeela Khan (March 1995), stated that Golden Parachute (GP)

is a statement in the employment contract of high-level managers which is requiring a

payment to the manager in the condition of corporate restructuring.

In other word, Golden Parachutes is an agreement that provides key executives with

generous pay and other benefits in the events that their employment is terminated

from the result of a change of ownership at their employer corporation (formally

known as change-of control agreement). These agreements compensate executives

when they lose their job or quit affected by a reduction of power or status following a

change of their employment company.

Golden parachutes have been justified on three grounds. First, they may enable

corporations that are prime takeover targets to hire and retain high quality executives

who would be unwilling to work for them. Second, since the golden parachutes add

the cost of acquiring a corporation, bidder may discourage to make the takeover bids.

Finally, if the takeover bid does occur, executives with Golden Parachutes are more

likely to respond in a manner that they will benefit the shareholders. Without Golden

Parachutes, executives might refuse to go along with the shareholders’ interest in

order to save their own job

Post-bid defenses involve the management board undertaken actions in response to a

takeover bid.

(iv) White Knight

The White Knight is a common tactic in which the target company will find another

company to come in and try to persuade the “Knight” to purchase them in order to

prevent the hostile takeover by another unwelcoming acquirer. The reasons of this

method is, because of the desired “Knight” has been chosen (which is probably their

comrade), might make a better purchase deal and might have better relationship or

better prospects for long term success.

Usually, the target company will request the investment bank to locate a “white

knight”. The White Knight company will comes in and rescues the target company

from hostile takeover attempts. In order to stop the unfriendly takeover, the White

Knight will pay a price more favourable than he price issued by the hostile bidder.

(v) Stand Still Agreements

This takeover defence was defined as the bidder and the target company can reach an

agreement whereby the acquirer will ceases to buy the target company's shares for a

specifies period of time. This stand still period gives the target company a certain

amount of times to explore another options or tactics to avoid from the hostile bidder.

(vi) ESOPs

ESOPs have been used as an employee benefits tool and takeover defense measure by

many publicly held corporations, as well as a means of taking a publicly held by private

company. Fundamentally, it is a way in which employees of a company can own the

shares of the company they work for. There are different ways in which employees can

receive stocks of their company such as the bonus or buy directly from the company.

In essence, the ESOPs is a vehicle for accumulation of shares by corporate insiders

who presumably have a bias for the status quo (stock hold by the company's

employees). The ESOPs effect on the takeover defense arise when the company

themselves have only a small stake in the company and their private benefits of

control are high. They use the employment policy as a takeover deterrent as a possible

step to prevent the unfriendly takeovers. Workers can take industrial (labor's

authorities to voice up their view) or political (they might protest) action to oppose

takeovers.

Introduction of parties involved in Gucci Case

The story of takeover involves three companies that are Gucci Group NV, LVMH

Moet Hennessy Louis Vuitton SA and Pinault Printemps Redoute SA.

Gucci Group NV

Gucci is an Italian company which is incorporated in Netherland and sells French

Fashions. The shares traded in NYSE and Amsterdam Stock Exchange. Prior to 2004,

the CEO and the chairman of Gucci is Mr. Domenico De Sole and after the PPR take

full control over Gucci, the CEO changed to Mr. Robert Polet.

LVMH

LVMH is the world largest luxury group company created in 1854 and based in Paris,

France. The CEO of the company is Mr. Bernard Anault and the main competitor is

PPR.

PPR

PPR is the third largest luxury group which is behind LVMH and Richemont. The

chairman and the CEO is Mr. Francois Pinault.

History of Gucci Group NV

Gucci was founded in 1923 by Guccio Gucci and in the year 1938, Gucci was

expanded rapidly and opened a boutique in Rome. In 1953, Guccio passed away and

gave equal control over Gucci to his three Sons: Vasco, Aldo and Rodolfo. Vasco

then became a supervisor of operations at manufacturing plant, Aldo, the director of

foreign operation, and Rodolfo, the general manager.

Aldo had successfully led the company to international stage and made Gucci a

branded store. In the late 1970s, Gucci faced almost bankruptcy due to the disastrous

business decision and family quarrels. Family quarrels occurred since Vasco died, and

the two: Aldo and Rodolfo had equal control over Gucci. Aldo wished to reduce

Rodolfo’s control in the company and then he appointed his grandson, Uberto Gucci

as a vice president in the Gucci Perfumes Branch. Later, Aldo developed Gucci

Accessories Collection which he intended to boost sales for the perfume sector which

his son, Roberto controlled.

In 1983, Rodolfo passed away and gave the 50% stake to his son Maurizio. In the

same year, Aldo’s another son, Paolo, proposed a cheaper version of brand- the Gucci

Plus which damaged the image of Gucci. Hence, Aldo laid him off. Paolo was furious

and made a report to the tax regulators about the tax evasion done by Aldo. Hence,

Aldo was imprisoning for two years.

Paolo worked together with Maurizio to gain control over the Board of Director and

later, Maurizio kicked out other family members except Uberto Gucci. Eventually, in

1989, Maurizio sold 50% of the shares to a Bahrain-based company- Investcorp

International. In 1993, Investcorp forced Maurizio to sell all his shares so Gucci is

100% owned by the Investcorp. The family business was then handed over to

outsider. In 1995, Investcorp brought Gucci go public by issuing IPO and in 1998;

Prada owned 9.5% of Gucci’s shares.

The hostile takeover began in 1999 when LVMH slowly amassed 5% of Gucci’s

shares at January 7, 1999.

The scenario in the takeover bid of Gucci by LVMH

In 1999, January 7, LVMH gathered 5% of stake in Gucci and when LVMH

announced this news, both shares price of LVMH and Gucci increase. Gucci shares

price increased from $ 52.8125 to $68.625 in New York Stock Exchange (NYSE) and

increased 19% closed at $64.41 in Amsterdam Stock Exchange while LVMH shares

increased 7% in Paris and 4.8% in Nasdaq Stock Market Trading.

At a later date at 13 January, LVMH paid $398 million to buy a further 9.5% of Gucci

shares and at that moment it was holding total of 14.5% stake in Gucci. LVMH did

not announced its intention to purchase Gucci’s shares but it will have to comply with

U.S. Disclosure Rules which require it to notify the Securities and Exchange

Commission (SEC) of its motives to enter Gucci’s capital within the 10 calendar days

after the first announcement that it had crossed the 5% line. Gucci shares price

dropped due to the profit taking and uncertainty.

Many analysts tried to figure out the reasons behind the creeping takeover by LVMH.

In their opinions, the reasons was because LVMH wished to acquire companies to

strengthen its core business due to the damaged by the Asia’s turmoil and incurred

losses at its retail divisions. Besides, at that moment, Gucci was seen as undervalued,

have a strong management team (perfect partners between Mr. Domenico De Sole, the

CEO and Mr. Tom Ford, the designer) and was having strong potential growth. The

analysts also presumed that Gucci is geographically attractive as the Dutch law is

looser and Gucci has higher sales in United States. By acquiring Gucci, LVMH would

have the greatest benefits to strengthen its business.

On January 14, LVMH stated that it has no hostile intention towards Gucci and will

not buy Gucci’s shares now but may increase the stake holding in the future. After the

announcement, share price of both companies dropped again. Four days later, LVMH

became the largest shareholder in Gucci where it spent $ 1.1 billion to hold 26.7%

stake in Gucci. Gucci is vulnerable to a takeover as its share capital is highly

distributed among the individual shareholders and the shares are undervalued. Mr. De

Sole has no details about the intention of Gucci and seen LVMH move as a creeping

takeover.

Finally on 26 January 1999, LVMH amassed 34.4% shares where these include the

9.5% shares purchased from Prada. According to the disclosure in SEC filing, LVMH

stated that it bought 919,800 shares in NYSE during 19 to 22 January and 47,000

shares in Amsterdam Stock Exchange on 22 January. In addition, it also bought 3.55

million shares at $76 from U.S. Investment Fund Capital Research and Management

Co. to amass the 34.4% stake in Gucci (equivalent to 20.15 million shares).

In France stock market, the rules require a shareholder who amasses more than 33%

of a company shares to launch a takeover bid but in U.S market regulations, there is

no such rule. Hence, LVMH is not require to make tender offer to all Gucci’s shares

outstanding and at the same time, LVMH stated that it has no intention to launch

takeover bid for Gucci now.

Eventually, LVMH’s intention of creeping takeover revealed whereby it disclosed in

SEC filing that it wants to name a LVMH candidate to Gucci’s Board. Gucci affirmed

that they wish to run the company independently. Gucci had a lot of contacts with

LVMH to discuss a fair and full takeover bid to all shareholders and agreement to

prevent conflict of interest, but LVMH turned the offers down. So, LVMH’s moves

were perceived as a creeping takeover where Gucci cannot accept this.

Poison pills in the mid 1980s was used to penalized the acquirer that purchase a large

stake without launching a formal offer and pay a premium bid (tender offer). Gucci

was aware of the creeping takeover by LVMH as LVMH holding a large stake

without paying the usual premium required for control. Hence, on the February 19,

Gucci launched an Employee Stock Option Plan (ESOP) by granting its employee to

purchase 37 million new shares with interest free loan provided. Immediately, 20

million shares were purchased and successfully diluted LVMH’s stake to 26% from

34.4%. The Employee Trust was holding 26% shares which were then cancel out the

voting rights of LVMH and reduce its influence in Gucci. After the issuance of new

shares for ESOP, Gucci and LVMH‘s shares price dropped about 3-5%.

LVMH was furious about the poison pill which diluted its stake to 26% as it spent

$1.44 billion to build up 34.4% stake in Gucci. This made its creeping takeover more

difficult and more expensive. One week later, LVMH files a suit with the enterprise

chamber of the Amsterdam court of appeal in order to cease the issuance of new

shares for the ESOP by Gucci and bar Gucci from doing any defensive tactics to fend

off LVMH. In the view of LVMH, the issuance of new shares has no benefit to the

employees and the shareholders as the company receive no payment for the shares

and the shares cannot be transferred to a third party. The move will only create benefit

for the management at the expense of the shareholders as the voting rights are

deprived. On the other hand, Gucci claimed that the shares would not entrench the

management or the management does not have control over the shares and it is ready

to accept a fair and full bid for the company by LVMH.

The court did not take side and claimed that the capital increase through ESOP might

be illegal and the mechanism chosen may be not in accordance to Dutch Law. Hence,

the court suspended both LVMH and ESOP’s voting rights but did not remove

Gucci’s right to issue new shares to unrelated party. On the other hand, the court

urged both side to continue negotiate the standstill agreement and independence

agreement.

While the voting rights were suspended, Mr. De Sole seeks help from Mr. Pinault,

which is the Chairman of the Europe’s largest non-food retail group, Pinault

Printemps Redoute SA (PPR). PPR came in the battle as a white knight and holds

40% of the stake of Gucci by acquiring the 39 million newly issued shares of Gucci

for $2.9 billion. The price per share is $75 per share and it is significantly higher than

any price paid by LVMH. This move further diluting LVMH’s stake to 20.6%

There is a standstill agreement between Gucci and PPR where the agreement stated

that PPR is permitted to purchase more shares on fully-diluted basis to reach 42%

stake of Gucci and it is disallowed to purchase any shares more than that in five year

times. But PPR is allowed to acquire more shares to a maximum 10.1% shares if

LVMH increase its stake. Besides, the agreement also stated that if LVMH launch a

full bid on all of the Gucci’s shares, PPR has the option to sell all shares to LVMH or

make its own bid for all shares at a higher price. PPR has the right to nominate 4 of

the 9 board members in Gucci.

By accepting help from the white knight, Gucci can purchase Yves Saint Laurent

business and other perfume business of Sanofi SA from PPR for $ 1 billion. After this

public release, LVMH immediately change its mind to offer Gucci a full bid at $81

per share for all shares or $85 per share if the PPR shares are invalid. Under the Dutch

law, the acquirer has to give seven days notice for a formal bid. Gucci turned down

this offer and LVMH soon turned to the court for help.

On April 7, LVMH formally submitted a final bid of $85 per shares for all shares

except those in employee trust fund or $ 91 per shares if the white knight is abandon.

But Gucci’s board turned down the offer again as it will void the agreement with PPR.

At a later date, Gucci offer LVMH $88 per shares to end the battle but LVMH refused

to raise it bids from $85. Then LVMH turned to NYSE for finding possibility that

Gucci will be delisted as violated the NYSE’s rules. NYSE required companies to get

shareholders’ approval for issuing more than 20% shares but Gucci did not get

shareholders’ approval as this is not required by the Dutch law. PPR informed LVMH

that NYSE allows foreign issuers to use their own countries’ rules in lieu of the

shareholders’ approval requirement. LVMH had no choice but to turn back to court.

On 27 May 1999, enterprise chamber of the Amsterdam court of appeal knocked the

hammer and ruled that Gucci’s shares issued to the employee are invalid and

invitation of PPR to purchase the 42% stake of Gucci has violated article 2:8 of the

civil code which require companies to act in accordance with the requirement of

reasonableness and fairness. Hence, Gucci was guilty for mismanagement related to

the timing of the transaction. It seems like good news for LVMH but the court also

ruled that PPR 42% stake of Gucci is valid. Even though Gucci was not acted fairly

when the court asked both of Gucci and LVMH to negotiate the full takeover, but the

court said that LVMH had many times refused to offer full takeover bid, hence, Gucci

has the right to issue more shares to defend itself.

LVMH was unsatisfied with the court’s decision and appealed to the Dutch Supreme

Court. In the October of 2000, the Dutch Supreme Court held that the enterprise

chamber was wrong in finalized any decision without an official inquiry. LVMH went

back to the enterprise chamber and in March 2001, the chamber appointed two Dutch

Lawyer and former CEO of a large financial institution as the official investigators.

In September 2001, before the issuance of investigation report, the three parties met at

the offices at Darrois Villey in Paris to have a peace negotiation. The settlement

agreement and the revised standstill agreement were made during this peace

negotiation. PPR spent $812 million to buy 8.6 million shares from LVMH at a price

of $94 per share (a $2 premium) and making PPR own 53.2% of Gucci. LVMH now

holds only 12% of Gucci. Then in December, PPR will issue a special dividend of $7

per share for non-PPR shareholders. Finally, PPR will offer shares buy back (buy

back the shares which does not belongs to PPR) for $101.50 per share in 2004. PPR

has the right to a majority of the board and designate the chairman after the

completion of the offers in 2004. In return, LVMH will forgo all of the legal claims

against PPR and Gucci.

After the two and a half year fight among the three parties, the battle ends with a

happy ending where LVMH claim a capital gain of 760 million euro, Gucci is no

longer under attack and PPR will gain full control over Gucci by 2004.

Structure of Gucci prior to the takeover bid and after the takeover process

In this report, we are going to discuss six elements of changes in Gucci before and

after the takeover bid. It is clearly stated as follow:-

1. Stock price

2. Capital structure

3. Top Management structure

4. Business structure

5. Corporate financial performance

6. Ownership of Gucci

The further explanations are as follow:-

1. Stock Price

Source: SEC report on 31/7/2003

Share Price: Annual 2002-1998

Year   NYS   US   Euronext   €

EHigh

$Low

AmsterdamHigh Low

2002   99.4   82.5  110.9   83.9

2001   94.7   66.7  109.1   66.5

2000   116.2   72.9  122.0   81.4

1999   121.5   61.0  121.9   56.6

1998   75.3   31.5  65.0   26.1

Source: SEC report on 31/7/2003

From the graph and table above, it clearly showed that share price of Gucci Group NV

increase significantly from year 1998 to year 1999. It was mainly because of LVMH

had purchased a significant portion of Gucci’s shares and LVMH was planning to

takeover Gucci and place its own people in the board of Gucci. According to the news

published in Wall Street Journal on 18 January 1999, LVMH had held 26.7% stake in

Gucci. LVMH believed that Gucci’s share was undervalued and had potential to

grow.

2. Capital Structure

IAS Financial Data of Gucci 1998-2000 (in Euro Million)

2000 1999 1998

Current Liabilities 878.1 1061.5 245.4

Long-term loan 981.3 146.2 15.2

Shareholders’ Equity

4425.9 3943.8 507

Outstanding share 101.591 94.869 59.499

Source: SEC report on 31/7/2003

Based on the table above, liabilities especially current liabilities had increased

significantly from 1998 to 1999. In order to defense against hostile takeover by

LVMH, Gucci had launched an Employee Stock Ownership Plan (ESOP) to dilute the

shares holding by LVMH. Gucci provided an interest free loan to its employees to

exercise the ESOP. That is the reason behind why liabilities increased significantly in

a year.

3. Top Management Structure

Members of the Supervisory Board (July   1, 2003 ):

Name

 

Position

 

Age

 

Year of Initial

Election

Adrian D.P. Bellamy (1)(2)   Chairman   61   1995

Patricia Barbizet   Member   48   1999

Aureliano Benedetti (1)   Member   67   1995

Reto F. Domeniconi   Member   67   1997

Patrice Marteau   Member   55   1999

François Henri Pinault   Member   40   2001

Karel Vuursteen (1)(2)   Member   61   1996

Serge Weinberg (2)   Member   52   1999

(1) Member of Audit Committee  

(2) Member of Remuneration Committee

After Gucci Group NV was being taken by PPR, there were some changes to its

supervisory board. Patricia Barbizet, Patrice Marteau, Francois Henri Pinault and

Serge Weinberg were being appointed subsequently.

Members of the Management Board (July   1, 2003 ):

Name

 

Position

 

Ag

e

 

Year of

Initial

Electio

n

Domenico De Sole  Chairman  59  1995

Tom Ford  Vice Chairma

n

 41  2002

Aart Cooiman  Member  61  1995

After the takeover process, there was no change to its top management. Domenico De

Sole and Tom Ford could still be the top management of Gucci even it was being

taken over by PPR.

Domenico De Sole is President, Chief Executive Officer and Chairman of the

Management Board of Gucci Group, and a member of the Board of Directors of

certain of the Company's operating subsidiaries. From October 1994 until his

appointment as Chief Executive Officer in 1995, Mr. De Sole was the Chief

Operating Officer of the Gucci Group. From 1984 to 1994, Mr. De Sole was President

and Chief Executive Officer of Gucci America, Inc., Gucci's largest retail subsidiary.

Mr. De Sole is also a member of the Board of Directors of Procter and Gamble and

Bausch & Lomb.

Tom Ford is Creative Director and Vice-Chairman of the Management Board of

Gucci Group and the Chief Designer for the Gucci and Yves Saint Laurent brands.

Mr. Ford began his career with the Company in 1990 as Gucci's chief women's ready-

to-wear designer, before becoming Design Director. Mr. Ford was the Design

Director of Perry Ellis Women's America Division from 1988 to 1990 and Senior

Designer of Cathy Hardwick from 1986 to 1988.

The table below stated Gucci’s members of the management committee:-

Members of the Management Committee (July   1, 2003 ):

Name

 

Position

 

Age

Domenico De Sole   President and Chief Executive Officer,

Gucci Group

  59

Tom Ford   Creative Director, Gucci Group   41

Brian Blake   Executive Vice President, Gucci

Group; President of Gucci Group

Watches; President and Chief

Executive Officer of Boucheron

  47

Patrizio Di Marco   President and Chief Executive Officer,   40

Bottega Veneta

Mark Lee   President and Chief Executive Officer,

Yves Saint Laurent

  40

James McArthur   Executive Vice President and Director

of Strategy and Acquisitions, Gucci

Group; President, Emerging Brands

  43

Renato Ricci   Worldwide Director of Human

Resources, Gucci Group

  58

Chantal Roos   President and Chief Executive Officer,

YSL Beauté

  59

Giacomo Santucci   President and Chief Executive Officer,

Gucci Division

  47

Robert Singer   Executive Vice President and Chief

Financial Officer, Gucci Group

  51

4. Business structure

With the investment from PPR, Gucci was able to expand its business to other

industries and products. The main strategy used by Gucci Group NV to expand its

business was horizontal acquisition of other companies. Compare to prior takeover

bid, Gucci Group NV has become a larger size organization. The timeline below will

show the companies that were being acquired by Gucci from 1999 to 2001.

1999 November   Acquisition of 70% of Sergio Rossi.

   

1999 December   Acquisition of 100% of Yves Saint Laurent and YSL Beauté (ex Sanofi-Beauté).

2000 June   Acquisition of 100% of Boucheron.

2000 December   Announced Partnership with Alexander McQueen (51% interest in joint venture).

2000 December   Acquisition of 85% of Bédat & Co.

2001 February   Acquisition of 66.7% of Bottega Veneta.

2001 April   Announced Partnership with Stella McCartney (50% interest in joint venture).

2001 July   Acquisition of 91% of Balenciaga.

2001 July   Acquisition of additional 11.8% of Bottega Veneta (interest subsequently increased to 78.5%)

The chart below shows that the subsidiary companies that under Gucci Group NV

Source: SEC report on 31/7/2003

5. Corporate Financial Performance

Revenue

Year Revenue (Euro Million)

2001 2565.1

2000 2461.3

1999 1173.8

1998 898.1

Operating Profit (Euro Million)

The table and graph above show the revenue and operating profit of Gucci

respectively. As we can see from the revenue table, Gucci’s revenue increases

tremendously after 1999 which was after the takeover process between PPR, LVMH

and Gucci. Besides, the operating profit of Gucci was kept increase from 1998 to

2000. Increasing in operating profit was more obvious in 2000. With the investment

from PPR, Gucci was able to expand its business through acquisition and most

probably, this would be the reason that tells about the increasing figures in revenue

and operating profit of Gucci.

6. Ownership of Gucci

Share Ownership (as a % of shares outstanding on July   1, 2003 )

Name

 

No. of SharesBeneficially Owned

 

Percent of OutstandingShare Capital(3)

 

Pinault-Printemps-Redoute S.A.   64,233,996 64.6 %

Crédit Lyonnais S.A.   11,484,609 11.5 %

Source: SEC report on 31/7/2003

The table above shows the share ownership of Gucci on July 1, 2003. Prior to the

takeover bid, LVMH purchased Gucci’s shares quietly from the market and it

reported that it had hold 34.4% of Gucci’s shares on January 26, 1999. In order to

remain independent and avoid conflict of interest between Gucci and LVMH, Gucci’s

top management decided to come out with an ESOP to dilute LVMH’s shares to 26%.

Subsequently, it diluted to 20.6% after Gucci issued new shares. After that, Gucci

called for white knight, PPR and sell its shares to them. Ownership of the Gucci

Group changed significantly in the second half of 2001 when LVMH, Gucci Group

and PPR settled outstanding issues and reached an agreement, pursuant to which PPR

purchased from LVMH 8,579,337 common shares for a price of US$ 94.00 per

common share. After that, during the course of Fiscal 2002 and in the first half of

2003, PPR was involved in the purchase of Gucci Group shares in the open market,

which raised its position to 64,233,996 common shares. Each share is carrying one

voting right.

Analysis of similar major takeover cases that wasn’t successful

1. Arcelor comes out fighting against Mittal's hostile takeover bid

Source:

Bloomberg Business Week, November 6, 2006

Msnbc Digital Network, January 27, 2006

Overview:

Industry: Steel Industry

Type of takeover: Hostile Takeover

Lawsuit: No lawsuit involve, no violation of rules, no court case bring out

Finance of Takeover: Cash and stock bid

Other significant information:

1. Takeover took place in year of 2006 and 2007.

2. Arcelor formed the Strategic Steel Stichting in the Netherlands to keep it

out of Mittal Steel Co.'s reach

3. At the end, stichting strategy doesn't block a takeover, but it may prove a

thorn in Mittal's side.

4. When the merger is finalized, a company with a market capitalization of

$50 billion and revenues in the range of $80 billion created.

5. The takeover is said as the back from the dead of previous few years in its

industry.

2. Facebook's Failed Twitter Takeover

Source: Bloomberg Business Week, March 1, 2009

Overview:

Industry: Social Network Media

Type of takeover: Friendly Takeover

Lawsuit: No lawsuit involve, no violation of rules, no court case bring out

Finance of takeover: Issuance of new share to Twitter ($ 500 million)

Other significant information:

1. Takeover took place during downturn in year 2008 and 2009.

2. Private company takeover which stock are not publicly trade.

3. Takeover happened within the United State (U.S.) which does not involve

foreign countries.

4. Facebook and Twitter remain good relationship and talks after the

takeover does not successful.

3. Huawei Said to Have Failed in U.S. Takeover Bids

Source: Bloomberg Business Week, August 03, 2010

Overview:

Industry: Telco and Technology Industry

Type of takeover: Friendly and hostile takeover

Lawsuit: There are a number of lawsuits toward Huawei (acquirer) over the

alleged theft of trade secrets and stole of intellectual property by Motorola Inc.

and Cisco Systems Inc.

Other significant information:

1. Takeover took place during downturn in year 2008 till present

2. All stock are publicly traded and Huawei lost the bids

3. Seller of the company loss it’s confident on Huawei, Chinese company due

to skepticism.

4. U.S. government review and approval involve in the purchase process.

5. U.S. government concern and investigate Huawei’s purchase due to its

founder who is the former Chinese army official Ren Zhengfei.

6. Huawei hired Morgan Stanley in its attempts to purchase a U.S. asset

7. Huawei assisted by law firms such as Sullivan & Cromwell LLP and

Skadden, Arps, Slate, Meagher & Flom LLP,

8. In a nutshell, Huawei keep aquire US based assets despite seller

skepticism to win the bids.

Impact of takeover failure to the industry & economy

No matter which type of takeover bring held out by any companies, this action would

impact the industries and change the corporate culture. As indicated in the previous

session of the motive in takeover, it is subjective to judge the pros and cons of the

action. Every takeover should conclude its wellness through looking at its impact.

Nevertheless, failures in takeover, either hostile type or friendly type, is not necessary

bring bad impact to the industries and economy which will be presented in the next

session.

Impact of takeover failure to industry

One of the impacts of failure in takeover to the industries is the remaining of

competitiveness. Monopoly or oligopoly may be avoided. Target company and

Acquirer Company remains its influences and market share in the industries.

Consumer for that industry may benefit from this as the consumer choice and jobs

opportunities remain unchanged. For instance, Gucci, which substance from the

hostile takeover, has provided global market a choice of luxury goods and it doesn’t

dominated by LVMH. In Arcelor Mittal’s case, fighting against hostile takeover have

avoided jobs cut and cultural change in the target company after merged.

Moreover, unsuccessful takeover action will not stop the acquirer from pursuing its

takeover efforts. From the Huawei’s case, Huawei is still keeping its effort of

acquiring of other companies for business growth and expansion. Companies in the

same industry also affected and learned from the takeover failure on how to prevent

hostile takeover against them. This scene is obvious when more and more EU

members use stitching to protect their company. New EU takeover law also allowed

stitching and other defensive measures to continue.

Furthermore, takeover failure would trigger the improvement of both acquirer and

target. This can be show by the growth of Facebook and Twitter, the growth of PPR,

LVMH and Gucci and the growth of Huawei in China. From every case that we

observe, we could notice that acquirers will improve their strength and ability from

the failure experiences. Target company, on another hand, will strive to improve their

weaknesses to avoid future hostile takeover and strengthen their arsenal.

There is no doubt that both companies and industries could benefit growth after the

acquisition failed. It is not necessary a loss from takeover failure. This is because

acquisition that fails does not necessary cause the acquirer loss money. LVMH as an

example earns $760 million from the takeover failure in acquire Gucci. Arcelor

Mittal, on another hand, has proof that companies that successfully merge can

improve the steel industry back from the worst situation in previous year in 2007.

However, corporate takeover that failed will trigger corporate war. When corporate

war takes place, time and money would be the concern. It is hard to seek settlement

between the parties involve just like the battle between LVMH with Gucci. Gucci had

taken more than 2 years to settle down the takeover by LVMH. This is mostly due to

the benefits of treaty seek by every parties is hard to achieve. Huawei’s bids lost in

U.S. are a very good example to indicate money and time wastage in corporate

takeover that failed.

Impact of takeover failure to economy

From the Gucci- LVMH takeover battle, we could see the government intervention in

the industry. Government had freeze the voting right of both LVMH and Gucci when

the battle bring to the court. This court decision had affected the corporate

management power and reputation. Nevertheless, it is in favor for Gucci and less

favor to the LVMH on the court decision. In fact, every hostile takeover that brings to

the court would benefit the corporate war victim whom is not restricted either the

target company or Acquirer Company as it is based on case by case. Government

intervention is to bring out justice and fair. Thus, there is more case law for future

references as we could predict and foresee more and more takeover in this fast

changing business world.

As there is growingly cases brought and to be brought to the court for judgment,

takeover rules in individual countries are perhaps more important than ever. For

instance, when LVMH refer Gucci’s mismanagement that have broke NYSE listing

requirement have been rejected as NYSE listing requirement allow foreign issuer to

use their home country rules and regulation. This means every country is encouraged

having individual takeover rules to protect its corporations. This could also being call

as regulatory hurdles like U.S. effort in preventing Huawei, China largest telco

company, in takeover its assets namely 2Wire Inc. and Motorola Inc. Thus, takeover

practices no matter success or failure would trigger more and more rulings than ever.

Furthermore, increasing of defenses tactics and strategies available in the corporate

takeover when there is a takeover failure becomes the example of other companies.

This could be both good and bad for the economy. It could be say as good to economy

when local and minority shareholders affair being protected. However, it is bad for

the economy when hostile takeover harder than ever. This is because, despite the

reluctant of target management, there are numerous benefits to merge than staying as

individual company. Let’s refer to Arcelor Mittal’s case, despite the reluctant of

Arcelor’s CEO, Guy Dollé, Arcelor Mittal enjoy synergies, economy of scale and

growth than staying as Arcelor SA and Mittal Steel.

Moreover, hostile takeover cases have stressed the important of compliance with code

of conduct like civil code in Netherlands. For instance, Dutch court had claimed that

Gucci has broken “The requirements of reasonableness and fairness” in its practices to

defend LVMH’s takeover. Hence, Gucci is guilty of mismanagement. Besides, it is

also important to investigation before any judgment make. This is particularly true

when Enterprise Chamber make conclusion before investigation has been held wrong

by its Supreme Court in Gucci-LVMH case. After that, Enterprise Chamber opens an

inquiry toward Gucci.

Also, fresh new concept, Duty of good faith, came in articulated and credentials

needed. This new concept is origin at Netherland and should be applied worldwide.

This new concept has impacted economy with more sustainability deals and

transactions. The substance of the deals and transactions has been examined in each

acquisition case to make sure that the acquirer and target conduct the transaction with

good faith. With this brand new concept strong hold and practice by worldwide

regions, takeover would be more meaningful and beneficial to the global economy.

Lastly, the takeover failures have triggered the increase use of white knight structure

to defend hostile takeover. From the Wikipedia about the searching for white knight,

we could find out many white knights since 1953 till 2009. This is particularly good

for the economy of both target’s country and white knight’s country. Many

collaboration and business could be generated from the white knight structure while

stimulating economy of both countries.

Conclusion

Takeover action is the famous strategy for an organization to growth and expands

their business; no matter it is a friendly takeover or hostile takeover. Procedure of

takeover activities is varying from different countries but it is important for acquirer

to avoid any lawsuit and uncertainty in the takeover process. However, both acquirer

and target company should try to avoid any unfair and harmfulness strategy to

takeover or against takeover which will hurt both company and also the industry.

Takeover action will only be beneficial for both acquirer and target company if

shareholders of the target company is satisfy with the compensation of takeover and

both company is subjected to growth in term of market share and profit. As a

conclusion, companies will gain advantages from takeover strategy if there is a fair

trade between both acquirer and target company.

References

1) S. Guhan, (Decemeber 2003). “Bargaining in the Shadow of Takeover

Defenses”.The Yale Law Journal. Vol. 113,P.p.621.

2) Securities and Exchange Board of India, (August 2005). “A Reference Guide

for Investors on Substantial Acquisition of Shares and Takeovers”. Uchitha

Graphic.

3) Allen & Overy, (September 2007). “New Dutch Public Takeover Rules”.

Bulletin.

4) M. Ljiljana, (2004). “Adopted EU Directive on Takeover Bids-The Target

Company Management’s Position, Defensive Measures and Insider Dealing”.

5) Harneys , (2000). “Poison Pills: Ways a BVI company can avoid a hostile

takeover”.

6) N. M. Dave, (September 2001). “Gucci Fights Off LVMH”.

http://www.Information/How%20to%20Avoid%20Poison%20Pills

%20Takeovers%20-%20Poison%20Pill%20Takeovers%20-%20Poison

%20Pills%20-%20Your%20TeenAnalyst.com.htm, (Re: 9 September2010)

7) “Shareholders Right Plan”. http://www.information/Shareholder%20rights

%20plan%20-%20Wikipedia,%20the%20free%20encyclopedia.htm, (Re: 12

September 2010).

8) “Takeover”. http://www.Takeover%20-%20Wikipedia,%20the%20free

%20encyclopedia.htm, (Re: 12 September 2010).

9) Bloomberg Business Week, (6 November 2006). “Arcelor comes out fighting

against Mittal’s hostile takeover bid”.

http://www.businessweek.com/globalbiz/content/nov2006/gb20061106_23834

1.htm, (Re: 18 September 2010).

10) Msnbc Digital Network, (27 January 2006). “Facebook’s Failed Twitter

Takeover”. http://www.msnbc.msn.com/id/11057024/, (Re: 18 September

2010).

11) Bloomberg Business Week, (1 March 2009). “Huawei Said to Have Failed in

U.S. Takeover Bids”.

http://www.businessweek.com/news/2010-08-03/huawei-said-to-have-failed-

in-u-s-takeover-bids.html, (Re: 3 September 2010).

12) http://www.secinfo.com/dVut2.2pzj.htm , (Re: 15 September 2010).

13) http://en.wikipedia.org/wiki/Gucci , (Re: 20 September 2010).