A06-02-0000

FASHION FAUX PAS: GUCCI & LVMH

The brewing battle for Gucci is emblematic of the New Europe that is taking shape with the launch of the common currency and the globalization of industry: two Frenchmen squaring off for control of a Dutch-based Italian company run by a U.S.-educated lawyer and an American designer and advised by London-based American investment bankers. Gucci Watch, Wall Street Journal, March 22, 1999.

The Gucci Group N.V. 2000 Annual Report really said it all. Tom Ford, Creative Director, and Domenico De Sole, President and CEO, stood side-by-side facing the camera with eyes of steel. Ford, unshaven and shirt provocatively opened, was the American designer who had single-handedly revitalized the Gucci name. Domenico De Sole, dressed in a dark suit, white shirt, with finely trimmed beard, was the Italian lawyer turned businessman who had returned Gucci to profitability and promise. The photograph, of course, by the famous fashion photographer Annie Leibovitz. These two men represented the defiant spirit of Gucci, a molten mix of high-powered fashion and high-powered finance. These two men had, in the first six months of 1999, been the centerpiece of one of the most highly contested hostile takeover battles ever seen on the European continent. Under attack by LVMH Met Hennessey Louis Vuitton, the French luxury goods conglomerate, Gucci had implemented the age-old strategy of the enemy of an enemy is a friend. Gucci had successfully enticed Pinault-Printemps-Redoute of France, a French retailer, to act as a white knight, grabbing Gucci from LVMHs clutches. Now in September of 2001 it appeared this particular chapter of the fashion wars was finally over. But in the end, when all was said and done, had Guccis shareholders been winners or losers? Gucci Group N.V. Guccio Gucci founded Gucci in 1923 after being inspired by extravagant and elegant baggage while working in a London hotel. Guccis expensive leather goods (shoes, handbags, and ready-to-wear) and the Gucci red and green logo became internationally recognized for the next half-century. The Gucci family, however, sold its remaining interest in the company in 1993 after a decade of turmoil and scandal. Although always considered chic by international standards, the Gucci business lines had grown old in the 1970s and 1980s. Guccis rebirth in the 1990s was credited, strangely enough, to two Americans, Domenico De Sole and Tom Ford. De Sole was Italian by birth, but had attended Harvard Law School, married an American (gaining U.S. citizenship), and began his climb up the corporate ladder in a Washington D.C. law firm. De Sole first worked for the Gucci family, then eventually headed Gucci America. When control of Gucci passed from Maurizio Gucci and the Gucci family in 1993 to a Bahrain investment bank, Investcorp, De Sole moved to the corporate headquarters in Florence, Italy to head Gucci International. Guccis owner, Investcorp, spun-out 49% ownership in October 1995 in an initial public offering in Amsterdam. The original issuance price averaged $22 per share. Investcorp sold its remaining stake six months later for $48 per share. Gucci was now owned by everyone and no one in particular. The company was De Soles to run.
_____________________________________________________________________________________________ Copyright 2002 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professors Michael H. Moffett and Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

Upon his arrival in Florence, De Sole found a design team with one real remaining talent, Tom Ford, a transplanted Texan. De Sole allowed Ford a free-hand in the revitalization of Guccis product line and operations, naming him Creative Director in 1994 at the age of 36. In the next five years Ford successfully transformed what many considered a tired and sad Gucci image into a sexy of-the-moment revolution. The new Gucci was, by 1999, considered a potential takeover target. Analysts believed the firm was undervalued, well-managed, and possessed significant growth potential. Gucci was also extremely widely held. The Italian fashion house Prada had acquired a 9.5% interest in Gucci in June of 1998, making it the single largest shareholder. Pradas move led to much speculation that it might attempt a takeover. Although silent as to its intentions, Pradas move was later seen as the first move to put Gucci into play. Creeping Acquisition On January 6, 1999, LVMH Met Hennessey Louis Vuitton, the French luxury-goods conglomerate, announced that it had passed the 5% shareholding level in Gucci Group NV. Because both Gucci and LVMH were traded in the United States in addition to their home markets (Guccis shares are traded in Amsterdam, LVMH in Paris), U.S. Securities and Exchange Commission regulations applied, requiring public notification of a firm taking a 5% or more stake in another publicly traded company. Guccis share price in New York moved from $50 to $70 per share (see Appendix 1). LVMH was inseparable from its President and CEO, Bernard Arnault. Arnault was widely known for his aggressive and persistent drive to continually build the French luxury-goods conglomerate through acquisition. Arnault had pursued a steady strategy of buying-up hundreds of small fashion brands and business lines with established brands but lagging results. The acquisitions were then folded into the LVMH conglomerate, building mass and exerting its size in marketing and positioning negotiations globally. Arnault had considered buying Gucci back in 1994, but the asking price $350 million, had been too much. LVMHs surprising move on Gucci led quickly to widespread speculation that this was only the first step in a hostile takeover of Gucci. LVMH was 10 times the size (by sales) of Gucci. Six days later LVMH announced that it had acquired an additional 9.5% the shares previously held by Prada for $398 million.1 Two days later, on January 14th, LVMH stated in the present circumstances it has no intention of making a tender offer for Gucci.
Exhibit 1. LVMHs Creeping Acquisition of Gucci Group Gucci, total shares outstanding (January 31, 1999) LVMHs accumulation of shares: Purchased on the open market before Jan 19th Purchased from Prada of Italy on Jan 14th Purchased on the NYSE, Jan 19th - 22nd Purchased on the Amsterdam stock exchange, Jan 19th - 22nd Purchased from private transactions with Capital Research Total holdings in Gucci LVMHs proportional ownership of Gucci 58,510,700 10,068,185 5,560,000 919,800 47,000 3,550,000 20,144,985 34.4%

Pradas investment return was impressive. Pradas original investment of $258 million netted a profit of $140 million. A 54% return in approximately six months.

But Bernard Arnault and LVMH were not through yet. On January 26th LVMH confirmed that it had now increased its stake in Gucci to 34.4%. As illustrated in Exhibit 1, Arnault was buying Gucci shares rapidly and globally. Arnaults 34.4% now totaled 20.15 million shares, and represented an investment estimated at $1.44 billion. This last step was significant, in that under French law, LVMHs home, a company was required to launch a general tender an offer for all of the shares held publicly of any company once a 33% share ownership position was attained. U.S. law had no such requirement. Bernard Arnault described his intentions towards Gucci as not unfriendly.2 On Wednesday February 11th, LVMH informed Gucci by letter that it was requesting a shareholder meeting to vote on its proposal to add its own nominee to Guccis board, expanding it from 8 to 9 members. Bernard Arnault again assured both Guccis management and shareholders that his interests were only those of a passive investor Guccis largest investor.
I reiterate my complete faith in the creative talent of Tom Ford and in the development strategy implemented by Guccis management team. Our proposal today is provided for within the statutes of Gucci, allowing LVMH to exercise its rights as a shareholder without altering in any way the independence of the company.

Guccis corporate bylaws, as incorporated under Netherlands law, stipulated that a shareholder with a stake of 10% or more was entitled to call a special shareholder meeting to implement board changes. The meeting must then be held within six weeks of the request. Guccis CEO Domenico De Sole publicly admonished Bernard Arnaults moves and characterized the strategy as a creeping takeover in which LVMH gradually acquired more and more shares of Gucci until it gained effective control without ever paying existing shareholders any premium for the change in ownership. The Poison Pill Gucci reacted quickly and radically. Less than one week later on February 18th, Gucci announced the creation of a new employee stock ownership plan (ESOP) and structure, the Employee Trust. Gucci granted the Trust the right to purchase up to 37 million newly issued shares. The Trust instantly purchased 20,154,985 shares. The Trusts ownership in Gucci was now 25.6% (if it exercised its right to purchase all 37 million its stake in Gucci would rise to 38.7%). This matched LVMHs newly-diluted ownership; LVMHs position had been diluted from 34.4% to 26% by the issuance. Gucci had extended an interest free loan to the Employee Trust to purchase the shares (a Note), with the stipulation that the shares could not be transferred to a thirdparty.3 Exhibit 2 details the new share structure. A subtle yet significant feature of the ESOP plan was that it did not dilute earnings. Because the ESOP shares were issued to a Trust, the shares carried no dividend rights. The new shares would not be included in Guccis earnings per share (EPS) calculations.

Details of Tom Fords contract with Gucci as filed with the U.S. Securities and Exchange Commission included a provision that in the event of any one shareholder gaining a 35% stake in Gucci, Ford could sever his relationship with Gucci and a variety of specified salary, bonus, and stock options could be exercised. There is some disagreement on the roots of the ESOP plan. The creation of an ESOP was provided for in Guccis prospectus in its 1995 initial public offering. But Gucci CEO Domenico De Sole reportedly had an American law firm design the specific employee share issuance structure used the previous fall (1998) after Prada of Italy had purchased its 9.5% interest in Gucci. The plan could be triggered on the first sign of a hostile takeover.

4 Exhibit 2. Guccis Share Ownership After the ESOP Prior to ESOP Shares Percent 20,144,985 34.4% ------65.6% 38,365,715 58,510,700 100.0% Post ESOP Shares Percent 20,144,985 25.6% 20,154,985 25.6% 38,365,715 48.8% 78,665,685 100.0%

LVMHs Employee trust* Free float shares Total shares in Gucci

* The employee stock ownership plan was authorized to issue up to 37 million shares; 20 million were actually exercised upon initiation of the program.

Gucci CEO De Sole defended the action as necessary. It was not a poison pill in Guccis opinion. It was instituted in order to prevent a creeping acquisition in which the controlling ownership of Gucci did not change hands without all shareholders receiving a payment a premium for that control. Gucci continued to oppose LVMHs advances on the basis that having a competitor as a part-owner and director was not consistent with Guccis best interests. De Sole went on to invite LVMH to make a public tender:
We are telling them they can make a takeover bid for 100% of the companys shares any time they want. ... Weve had a lot of contacts with LVMH in the past month. We made it very clear that a minority position held by a major competitor is an impossible situation. Its like Coke having a seat on Pepsis board.

LVMHs response was equally as quick and defiant.

Far from raising new cash, this amounts to creating virtual shares, without putting a cent into the company. Theyre not issuing shares; theyre issuing voting rights to control ... to management.

One week later on February 25th, LVMH filed suit in the Enterprise Chamber of the Amsterdam Court of Appeals seeking an injunction that would strip the newly issued Employee Trust share voting rights and bar Guccis management from issuing new shares. LVMHs argument was that Guccis management was not acting in the interests of shareholders (of which LVMH was arguably the largest), but rather acting in the best interests of management. LVMH went on to point out that the new share issuance had not raised any capital, and that the shares issues were restricted (could not be sold to a third-party, for example, LVMH, preventing employees from redeeming their newly acquired shares for capital).
Exhibit 3. Excerpt from CIBC Oppenheimers Equity Research on Gucci
Finally, on a fundamental basis, would the acquisition of Gucci by LVMH really make sense anyway? We dont think it would, and heres why. Louis Vuitton (which in imitation of Gucci now has an American designer, Marc Jacobs, and has added a clothing line) really is the jewel in LVMHs crown, and it has seen a renaissance of sorts in the last year or so, but its still not Gucci in a fashion or design sense. LVMHs other fashion brands, Kenzo, LaCroix, Givenchy (Alexander McQueen), Celine (Narcisco Rodriguez) and Loewes, are even lesser stars. Gucci and Louis Vuitton would still need to compete against one another in design, for real estate (whether for owned stores or for space in department stores) and for advertising space (where Gucci excels). So where are the synergies? Frankly, we dont see any. Source: Specialty Retailing: Gucci Group NV, CIBC Oppenheimer Equity Research, March 4, 1999, p. 4.

One week later the Amsterdam court postponed any decision on the legitimacy of Guccis defense until May, but did invoke a voting rights injunction on both the newly issued employee shares and LVMHs shares. The court stated that the suspension of LVMHs voting rights was based on the company not acting as a responsible shareholder in that it had failed to fully disclose its intentions. Both sides claimed victory, and the battle moved into a two-week period in which calm was quickly replaced with a new harsher and more personal battle. The White Knight Gucci had retained Morgan Stanley Dean Witters London office in February to aid in its defense strategy. Joseph Perella of Morgan Stanley had immediately contacted Mr. Francois Pinault, the President and CEO of Pinault-Printemps-Redoute (PPR), a French retail conglomerate. Pinault controlled 42.6% of PPR via his personal investment vehicle, Artemis. Pinault had been on an acquisition binge recently, including the famed London auction house Christies in 1998. Pinault told Morgan Stanley he would think about it. Pinault flew to New York where he visited Guccis Fifth Avenue showplace. After returning from New York he met in London with De Sole of Gucci. In the meeting De Sole explained Guccis emerging strategy of becoming a multi-brand luxury-goods company. This goal fit neatly with Pinaults own goal of expanding PPRs business breadth to include luxury goods. Negotiations began immediately with the two parties discussing the size of PPRs potential investment, managerial implications, and of course price. Francois Pinault, known for his rapid moves, simultaneously undertook the acquisition of Sanofi Beaut, the beauty-products division of the French firm Sanofi. Beaut owned the Yves Saint Laurent brand. Pinault intended to buy the division and resell the business to Gucci.4 Pinault followed the words of his favorite French poet Rene Char, Think strategically, act primitively. On March 19th Gucci announced the entry of Francois Pinaults PPR in the role of white knight.5 Gucci would issue 39 million new shares to PPR for $75 per share ($2.9 billion), giving it a 40% stake in Gucci. PPR would hold 4 of the 9 seats on the Gucci board, and 3 of the 5 seats on the newly created strategic and financial committee. LVMHs share in Gucci was once again diluted (as were the shares of all shareholders), falling to 21%, as illustrated in Exhibit 4. Guccis share price jumped on Friday March 19th from $70 to $81 per share, a 15.7% increase in one day.6 See Appendix 2 for share price movements around this date. Francois Pinault was considered the richest man in France; Bernard Arnault was considered to be the second richest. The entry of Pinault made the issue as much personal as it was business. Pinault made no secret that he saw LVMH as his new competitor:

Ironically, both Gucci and LVMH had previously considered buying Sanofis beauty-products line. LVMH had come very close, deciding against the purchase only minutes before signing papers making the acquisition. Both Gucci and LVMH had backed away from Sanofi on the basis of price.

The move was particularly galling to LVMH as the two parties were scheduled to meet that very day in Amsterdam to search out an amicable solution to LVMHs request for managerial influence at Gucci. The strategic investment agreement contained a five-year standstill clause which restricted PPRs holdings to 42% in Gucci. The standstill agreement could only be terminated by either a vote of Guccis board or by a full public tender offer by a third-party. In the event of a third-party bid, PPR could purchase additional shares only if it were to make a full and open tender offer for all shares outstanding.

We want to make Gucci our beachhead for development in the luxury sector and create a rival to LVMH. LVMH was practically a monopoly. Theres room for two in this business. Arnault and Pinault were very rich, very French, but ultimately very different. The 50-year old Arnault was born into a family real estate business, and a graduate of the elite Ecole Polytechnique. The 62-year old Pinault was a high school drop-out, starting from the ground up in a small family partnership running a sawmill. Both had obviously built personal financial empires over many years of hard work. And in a truly French touch, both owned wineries; Pinault owned Chateau Latour and Arnault, in a partnership, Chateau Cheval Blanc.
Exhibit 4. Guccis Share Ownership After the Strategic Investment of PPR Without ESOP Shares Shares Percent 20,144,985 20.7% ------39,007,133 40.0% 39.3% 38,365,715 97,517,833 100.0% With ESOP Shares Shares Percent 20,144,985 17.1% 20,154,985 17.1% 39,007,133 33.1% 38,365,715 32.6% 117,672,818 100.0%

LVMHs Employee trust* PPRs strategic investment Free float shares Total shares in Gucci

* The ESOP shares were typically not included in most discussions of Guccis new share ownership (without ESOP shares) structure after the investment by PPR.

Morgan Stanleys London offices provided most of the financing behind PPRs entry. Morgan Stanley extended a $3 billion bridge loan to PPR in order for it to purchase the agreed upon stake in Gucci. $2 billion of the loan were based on a refinancing of existing credit lines held by PPR, and the additional $1 billion was funded through the issuance of a convertible bond (issuance led by Morgan Stanley). The bonds were convertible into PPRs ordinary shares. Within hours LVMH was once again in the Amsterdam courts asking for injunctions to stop the capital infusion by PPR into Gucci and block Guccis acquisition of Sanofis beauty-products division. LVMH now stated that if the PPR transaction was nullified it could envision an offer at $85 per share for those shares needed for control. It did not define control. Four days later the Dutch courts ordered Gucci to consider LVMHs offer(s). Over the following weeks LVMH sold investments it held in other companies in order to put sufficient funds in place to make additional offers. Over the first two weeks of April 1999 LVMH continued to come forward with alternative offers of a variety of kinds, at one point having four different offers on the table.7 The fight was increasingly public as both sides continued to make accusations regarding the practices of the other. On April 20th Guccis board, hoping to quell the feud, told LVMH that it would be willing to recommend to stockholders an unconditional offer for the company at $88 per share. LVMH responded that the position

Most of the offers had a clause specifically stating that the offers were only applicable if the PPR transaction was nullified and Gucci Creative Director Tom Ford agreed to stay on at Gucci for at least two years following the closure of LVMHs new controlling position.

was untenable because of PPRs continuing stake in the firm.8 On April 22nd the Amsterdam court heard arguments over the legality of Guccis defensive maneuvers. The court postponed any ruling until June, putting the debate on ice for a month.9 During the interim, all parties were busy. LVMH and Gucci continued to wage a public fight in which both urged Gucci shareholders to support their disparate initiatives.
More than anyone else, De Sole is looked to as the man who can save the heart of Gucci, keep it from becoming just another profitable listing in a voluminous corporate annual report. He is the man who can salvage the swagger of Gucci as a fashion house founded on Italian craftsmanship and signifying classic Italian chic. And he is the American who can defend Gucci against the French, making sure that the company remains Italian. This is a matter of national pride, supported by folks such as Santo Versace, president of Italys fashion industry association and the financial brains behind the Versace empire. Guccis Strong Suit; CEO Domenico Is Defending the Firm Against Takeover Designs, The Washington Post, May 6, 1999, by Robin Givhan.

The Amsterdam court released its findings on May 27th, upholding PPRs investment in Gucci, but rejecting the poison-pill defense used by Gucci in the issuance of employee shares to the Employee Trust. By most principles the courts decision signaled a clear defeat for LVMH. Arnault then threatened further legal actions, and also pointed out that LVMH owned 20% of the Gucci Group and expected to see superior results from Guccis management. Gucci and PPR moved quickly. Gucci used the capital injections from PPR to purchase from Francois Pinault the Sanofi Beaut division and the Yves Saint Laurents couture and fragrance business. At PPRs annual shareholder meeting it was announced that Tom Ford had agreed to stay on at Gucci for at least another four years. The PPR investment was formally approved by 80% of Guccis shareholders at the regularly scheduled stockholder meeting in July 1999. The Denouement The problem Gucci now had was an awkward one. PPR now controlled Gucci in cooperation with Guccis management. But LVMH still held a 20.7% interest. The question was how to get LVMH out, while simultaneously making-good on the long-term promise that stockholders were entitled to a premium when ownership had changed? LVMH, given the intensifying consolidation of luxury goods brands in the European marketplace, wanted to free its $1.4 billion invested in Gucci. Negotiations continued.
C

In September 1999 Gucci/PPR and LVMH (with Prada of Italy) once more entered into a bidding war, this time for a third party, the Fendi Italian fashion house. Both parties had offered the same $850 million in the end, but Fendi chose LVMH/Prada over Gucci because Fendi designer Karl Lagerfeld preferred LVMH/Pradas management teams. Prada eventually sold its interest in Fendi to LVMH.

If PPRs investment was canceled, a full bid for Gucci would require LVMH to purchase all shares outstanding which it did not already own, 38,365,715 shares. This assumed the ESOP shares were also canceled. If, however, the PPR investment was not canceled, the share total would rise to 77,372,848 shares, which would double the price. The two principals filled the interval with legal suits and countersuits. Pinault first filed suit in Paris accusing Arnault of libel in a published interview in Paris Match. In the interview Arnault described Pinaults actions as defrauding minority shareholders. Arnault responded in-kind with a countersuit against Pinault.

In May and June 2000, representatives of Francois Pinault and Bernard Arnault tried once again to find a resolution to the ownership impasse. Impossibility of common ground was given in late June for breaking off talks. All parties were back in court in November 2000 when LVMH charged that Tom Ford and Domenico De Sole were secretly granted Gucci stock options in the spring of 1999 as part of the PPR strategic investment. Gucci denied the charges. The charge was part of a new filing by LVMH in Amsterdams Enterprise Court claiming that PPRs purchase of the Gucci shares short-changed minority shareholders and constituted mismanagement. This would be grounds for rescinding the PPR investment. (The Dutch court was rehearing many of the previous arguments as part of a Dutch Supreme Court ruling that the Amsterdam lower court had failed to conduct a thorough investigation of the mismanagement charge prior to its ruling in May of 1999.) In March 2001 the Amsterdam Enterprise Court agreed to a new demand for an investigation into Guccis management practices. The probe was expected to take between three and six months. PPR shares fell 3% on the announcement of the ruling as speculation increased that PPR might eventually have to sell its 40% share in Gucci. The court, however, urged the parties to reach a settlement on their own.

More than two and half years after it started, it ended. On September 11, 2001, PPR, Gucci, and LVMH reached a termination agreement. LVMH would be able to cash out of Gucci at a profit, and the minority shareholders of Gucci would indeed finally reap a premium from the change in ownership. LVMHs exit. PPR would pay $812 million to raise its stake in Gucci to 53.2% by acquiring 8.6 million Gucci shares from LVMH for $94 per share. This was a $2 premium over the closing price on the Amsterdam close on the previous Friday. This left LVMH with 12% interest in the Gucci Group. PPR would then offer to buy out all of Guccis remaining minority shareholders, including LVMHs 12%, in March 2004 at a price set at $101.50 per share.10 (The assumption was that LVMH would take PPR up on its offer in March 2004, but many minority shareholders may not.)11 A member of Guccis management team termed the exit agreement for LVMH greenmail. LVMH in return agreed to forgo all legal claims against PPR and Gucci. Shareholder buyout premium. Gucci agreed to distribute a special dividend of $7 per share to all shareholders except those held by PPR. A number of investment analysts were publicly annoyed, noting that the premium should be at least 15%, or a dividend of about $15 per share, not $7. Gucci Group continues to refer to LVMHs large investment as an uninvited acquisition of a 34.4% stock interest in the Company. Gucci considers PPRs current dominant ownership position as a strategic investment.

PPR, in order to fund the completion of its takeover of Gucci, announced an additional issuance of i700 million of new shares and i700 million in convertible bonds. Francois Pinaults private investment company Artemis committed to subscribing to both to maintain Pinaults 45% control of PPR.
11

10

LVMH arranged a bank securitization of its remaining 12% share holdings against the March 2004 sale, allowing it to receive the money up-front and declare a capital gain immediately.

9 In 2000, our strategy of unparalleled product design and quality, global distribution and outstanding communication had its natural progression to other brands. For our development in this direction, we are fortunate to have had the partnership of Pinault-Printemps-Redoute (PPR), which in the Spring of 1999, not only brought us the capital to move in this direction, but the cultural breadth to enable us to acquire on proper terms and conditions the pre-eminent French brand, Yves Saint Laurent, and which more recently assisted us in the acquisition of Boucheron. President and CEOs Letter to Shareholders, Gucci Group N.V. Annual Report 2000, p. 14-15.

Appendix 1. Gucci Groups Share Price, January - June 1999

$85 $80 $75 $70 $65 $60 $55 $50 $45
1/7/99 2/4/99 3/4/99 4/1/99 4/8/99 5/6/99 1/14/99 1/21/99 1/28/99 2/11/99 2/18/99 2/25/99 3/11/99 3/18/99 3/25/99 4/15/99 4/22/99 4/29/99 5/13/99 5/20/99 5/27/99 6/3/99 6/10/99 6/17/99 12/31/98 6/24/99

10 Appendix 2. Gucci Groups Share Price Movements During Key Events of the LVMH Bid Event LVMH Takes Position in Gucci 1st trading day of year Date (1999) Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Day Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Closing Share Price $53.00 55.81 68.63 67.44 74.88 $71.06 70.06 70.00 72.00 72.63 Percent Change in Share Price 9.0% 5.3% 23.0% - 1.7% 11.0% - 5.1% - 1.4% - 0.1% 2.9% 0.9%

(Peak price until March) LVMH purchases Pradas 9.5% LVMH: no intention of tender offer

PPR Enters as White Knight March 15 March 16 March 17 March 18 March 19 March 22 March 23 March 24 March 25 March 26 Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri $63.81 65.25 65.63 70.00 81.00 $83.13 80.13 82.00 83.00 84.56 - 1.8% 2.3% 0.6% 6.7% 15.7% 2.6% - 3.6% 2.3% 1.2% 1.9%

Gucci announces PPR investment

(Peak price until August)

Amsterdam Court Makes Final Rulings May 24 May 25 May 26 Court confirms PPR, rejects LVMH May 27 May 28

Mon Tue Wed Thu Fri

$74.50 73.56 70.50 65.94 66.13

- 0.3% - 1.3% - 4.2% - 6.5% 0.3%

11

Appendix 3. Time Line of Events in the LVMH-Gucci Controversy

Date Jan 6, 1999 Jan 12, 1999 Jan 13, 1999 Jan 25, 1999 Feb 10, 1999 Feb 18, 1999 Feb 25, 1999 March 3, 1999 March 19, 1999 April 15, 1999 Event LVMH increases its holdings in Gucci above 5%. LVMH increases its stake in Gucci by purchasing Pradas (Italy) 9.5% stake in Gucci. Arnault praises Gucci management, CEO De Sole and Creative Director Ford. LVMH increases its stake (over previous weeks) to 34.4%. LVMH does not rule out additional share purchases. Gucci Group receives request from LVMH for special shareholder meeting to approve a request for gaining a seat on Guccis board. Gucci launches a poison pill, an employee stock option plan, which dilutes LVMHs share in Gucci to 26%. LVMH files suit in the Enterprise Chamber of the Amsterdam Court of Appeals seeking a stop to the Gucci ESOP defense. Amsterdam court postpones any decision on the LVMH suit until May, but imposes an injunction on the voting rights held by both the ESOP and LVMH. Gucci announces the strategic investment of PPR, in which Gucci issues 39 million shares in return for $2.9 billion ($75 per share). LVMH publicizes a 5-page Letter to Gucci Shareholders and other correspondence with Gucci management. LVMH charges Guccis board of total lack of good faith and sincerity in negotiations. LVMH again accuses Guccis management of violating the rights of minority shareholders. LVMH repeats its offer to make a full bid if PPRs investment is canceled. Guccis board tells LVMH it will recommend to stockholders an unconditional offer for the company at $88 per share. LVMH responds that this position was untenable with PPRs presence. Amsterdam court releases its findings that the PPR investment is legal, but rejecting the poison-pill ESOP issuance. Gucci officially acquires Sanofi Beaut from PPR for $1 billion. Gucci, LVMH, and PPR reach a termination agreement whereby PPR will buy-out LVMHs investment in Gucci, and PPR will make a tender offer to all remaining minority shareholders.

April 20, 1999 May 27, 1999 October 1999 Sept 11, 2001

12 Appendix 4. LVMHs Alternative Bids in April 1999 1. 2. 3. 4. If PPRs investment was rescinded, $91/share. $85/share for all outstanding shares, but under which Gucci would help LVMH pass the 50% threshold in share ownership through a reserved capital increase if LVMH obtained a majority of shares held by independent shareholders, but not those of PPR. $85/share under which LVMH would have the same rights and board representation as PPR if it ended up with less than 50%. $85/share including PPRs stake, but only if Gucci helped deliver PPRs stake and guaranteed that most of Guccis top management stayed on for at least two years.

Source: Gucci Board Invites Unconditional Bid from LVMH of $88 a Share to End Battle, Wall Street Journal, April 20, 1999.

Appendix 5. A Brief Overview of Takeover Laws in Selected European Countries Great Britain C Decisions are made by a takeover panel and not appealable to courts C A final offer is generally final C Threshold of 30% where an acquirer has to make a full offer
C C C C C C C C C

France Threshold of 33% beyond which an acquirer has to launch a full offer Some defensive measures allowed during a bid Regulatory decisions appealable to courts Germany A voluntary takeover code lets companies opt in or out Netherlands Allows companies to adopt a broad array of defenses during a bid No rules requiring a company to launch a full offer at a certain threshold Italy Limits the defenses a company can employ during a takeover Switzerland Allows a broad array of defensive steps to a hostile takeover An acquirer can force a cash buyout of minority shareholders only after it achieves 98% control

Spain C Panoply of defenses that can be put in place before a takeover is launched C Limited defenses after takeover offer is made C No compulsory buyout of minority shareholders
Source: Pressure Grows to Unify Europes Takeover Laws Mazes of Rules Baffle Investors, Hurt Shareholders, Wall Street Journal, December 13, 1999.