2013 Pearson Education, Inc. All rights reserved.

2-1
Luxury Wars LVMH versus
Herms

The basic rule is to be there at the right moment, at the
right place, to seize a promising opportunity in an
environment guaranteeing sufficient longer-term growth.
Bernard Arnault, Chairman and CEO, LVMH.
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Patrick Thomas had been riding his bicycle in rural Auvergne, in south-
central France, when his cell phone had buzzed. He had spent most of
his professional life working at Herms International, SA and had
assumed the position of CEO in 2006.
Thomas was the first non-family CEO to run the company the family
controlled company in its 173-year history.
The man on the other end of the phone had been Bernard Arnault,
Chairman and CEO of LVMH (Mot Hennessy Louis Vuitton), the
world's largest luxury brand company, and the richest man in France.
Arnault was calling to inform him that LVMH would be announcing, in
two hours, that they had acquired a 17.1% interest in Herms.
Thomas could not believe LVMH had acquired such a position without
his knowing about it. Arnault assured him it was no joke and that he
looked forward to participating in the company's continued success as
a shareholder before repeating again that the press release would be
made in two hours.
Thomas began assessing the potential threat, if it was indeed a threat.
Luxury Wars LVMH versus
Herms
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"Arnault is a shrewd man. He has reviewed
his portfolio and sees what he is missing - a
company that still produces true luxury -
and he is going after it."
- Anonymous luxury brand CEO speaking on the LVMH announcement
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The Battle in the Public Press
It appears that Hermes
was suffering the risks
associated with going
a little bit public.
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The Battle in the Public Press
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LVMHs Announcement Stalls
the Share Price Run
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1. Herms 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?
2. Bernard Arnault and LVMH acquired a large position
in Herms shares without anyone knowing. How did
they do it and how did they avoid the French
regulations requiring disclosure of such positions?
3. The Herms 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 Herms:
Case Questions
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1. Herms 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?
Although in its sixth generation of family ownership, a number of the family
members wanted to cash out of the business. Ordinarily this would be
affected by having other family members buy those shares or interests. But
other family members did not either have the capital or interest in buying
those interests.
The solution was to list 25% of the companys shares on the public
marketplace, therefore accessing a liquid capital market for the firms
shares.
The primary reward for the public listing was liquidity of share values and a
market-based valuation of those shares.
The risks of a public listing is the increasing reporting and transparency
(information for customers, suppliers, and competitors), and the fact that
any investor can purchase those shares even LVMH.
LVMH versus Herms:
Case Questions
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2. Bernard Arnault and LVMH acquired a large position in Herms
shares without anyone knowing. How did they do it and how
did they avoid the French regulations requiring disclosure of
such positions?
LVMH had acquired the position under the radar of the Herms family,
company management, and industry analysts, by using equity swaps.
Equity Swaps are derivative contracts whereby two parties enter into a
contract to swap future cash flows at a pre-set date. The cash flows are
referred to as legs of the swap.
In most equity swaps, one leg is tied to a floating rate like LIBOR and the
other leg is tied to the performance of a stock or stock index.
Under current French law a company must acknowledge when they attain a
5% or more equity stake in another company, or the rights to purchase a 5%
or more stake via derivatives like equity swaps.
Equity swaps can be structured so that only their value is tied to the equity
instrument; at close-out the contract may be settled in cash, not shares.
Using this structure, the swap holder is not required to file with the AMF,
since they will never actually own the stock.
LVMH versus Herms:
Case Questions
2013 Pearson Education, Inc. All rights reserved. 2-10
3. The Herms 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?
Depending on continuing court and legal issues, the holding company
structure should preserve the familys control of the firm.
The holding company structure essentially prevents other family members
from taking their shares to the public marketplace a risk associated with
any family business where the many generations have grown increasingly
apart, distant, and possibly in financial need.
This holding company structure is essentially a perpetual trust, and is a
common structure used in many countries, particularly smaller market
countries in Europe, to protect publicly traded companies from hostile
takeovers. Typically, although the company is publicly traded, the shares
bearing all votes and control are held within the perpetual trust, and are not
available for public purchase.
LVMH versus Herms:
Case Questions