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The Luxury Wars

French luxury tycoon Bernard Arnault owns more fashion houses than some men do suits. But when he tried to add Gucci to his collection, the fireworks could be seen all the way to Seventh Avenue. The inside story of the season's most sensational fashion show.

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In Milan this spring, designer Tom Ford delivered yet another virtuoso reinvention of Gucci's seedy chic -- tough and trashy, a fantasy in fur and leather, driven by a thumping Donna Summer beat. This time, however, the best show was taking place backstage. Throughout the winter and spring, Bernard Arnault, the acquisitive chief executive of the Paris luxury-goods giant LVMH Moët Hennessy Louis Vuitton, had quietly been buying Gucci Group's stock, eventually amassing some 34 percent. In the past few seasons, Arnault has accumulated an impressive lineup of big-name designers: John Galliano at Dior, Alexander McQueen at Givenchy, Michael Kors at Céline, and Marc Jacobs at Vuitton, among others. With Tom Ford, arguably the decade's most successful new designer both commercially and critically, Arnault's fashion influence would achieve an almost Napoleonic dominance. The fashion world has never known quite what to make of Arnault. He has given his young designers free rein; Dior, Givenchy, and Vuitton, which were sleepy if not dowdy fashion provinces prior to Arnault's ownership, have been providing high drama the past few seasons. But he is at heart a financier, and fashion people have never been entirely certain that he actually cares about fashion. Besides, whatever his intentions, Tom Ford and Gucci didn't seem to need the kind of shaking-up Arnault had administered in Paris.

So in Milan, when seats to Gucci's show proved especially hard to get, a rumor swept the assembled fashionistas that was a paranoid fantasty of corporate control. Arnault, the story went, had used his growing leverage to procure a large block of seats for the use of LVMH executives -- Ford would have to show his clothes to an audience of suits.

The show backstage had begun two months before. On January 27, Arnault arranged a meeting with Gucci CEO Domenico De Sole, at Morgan Stanley Dean Witter's office on the Rue Balzac in Paris. Arnault says it was intended to be a get-acquainted meeting, the beginning of what could develop into a long relationship. He warmly praised De Sole and Ford for restoring the venerable brand's once-flagging sex appeal and extended an olive branch. "We are offering friendly cooperation," he told De Sole.

De Sole agrees that things began with an extravagant exchange of praise. "He said I was the greatest thing since sliced bread," De Sole recalls, delivering the American idiom in his thick Italian accent. But from the first, he was wary. He knew Arnault by reputation as a bare-knuckled, take-no-prisoners businessman, one who, for all his courtly compliments, now had considerable influence over De Sole's future. And after the pleasantries, the conversation turned distinctly less friendly. Arnault proposed that, since he was now one of Gucci's largest shareholders, he should be entitled to name directors to its board.

To De Sole, this didn't look like friendly cooperation. He thought these new directors might become Arnault's "eyes and ears" on the board, where competition with Louis Vuitton for store space, publicity, and designers was regularly discussed.

As cordially as he could, De Sole suggested that Arnault was plotting a "creeping takeover" by gradually buying enough shares to dominate Gucci's board without actually paying shareholders for control of the company. The tactic, once common in takeover battles, has become illegal in the U.S. in order to protect small investors.

De Sole pressed Arnault instead to make a bid for all of Gucci. "We will be reasonable about the price," he said. "And myself and Tom Ford would be delighted to stay if you desire." When De Sole eventually named his price, it was $85 a share, more than $30 a share above Gucci's price before Arnault began buying.

It was then, according to court documents filed by De Sole, that Arnault changed tacks, warning that LVMH was "a big powerful company in France with a lot of resources for litigation," and adding that De Sole could receive a big raise for allying himself with LVMH.


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