The Luxury Wars

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.

“Excuse me, Mr. Arnault, but that is not my style. Can you imagine if we did a deal and my shareholders found out that my salary was increased?” De Sole said, according to people involved. “They would be outraged!”

Arnault says he is stunned by De Sole’s account. “That is completely untrue,” he says. “That is just something written by De Sole for a lawsuit. It has nothing to do with truth. We discussed nothing more than what our boards wanted and how our companies could work together.”

In any case, De Sole left the meeting determined to block Arnault by any means necessary. “It is against Arnault’s principles to make fair offers for companies,” he says.

Arnault responded by suing De Sole for mismanagement in Dutch court, in Amsterdam, where Gucci is incorporated. But while the court deliberated, De Sole rallied a team of Wall Street lawyers and bankers to search for a white knight. They found François Pinault, a rival French financier who bought a 42 percent stake in Gucci in a scheme to merge it with a handful of new brands, including Yves Saint Laurent and Oscar de la Renta perfumes. His plan is to turn Gucci, under De Sole and Ford’s direction, into a new luxury behemoth that could become Arnault’s biggest competitor.

Sitting at a baby-blue table in a room full of child-size designer clothes at the New York headquarters of Christian Dior, at the corner of Fifth Avenue and 56th Street, Arnault, six feet two, dressed in a dark double-breasted Dior suit and preppy tie, hardly seems predatory. Above his pale-blue eyes and thick, arched eyebrows, his gray hair stands up straight in an odd cowlick, earning him the nickname Tintin. Another of Arnault’s nicknames is “the wolf in cashmere.” Arnault throws up his hands at the image. “What do you expect,” he says, “from people who are trying to hurt you?”

In fact, for all his ruthless reputation, Arnault seems shy and gentlemanly, with interests to match: He’s an accomplished amateur at the piano, with a passion for Chopin (his wife is a concert pianist).

Arnault sees himself not as a wolf but as a visionary. “It is a trend for the last ten years for brands to get together, for one simple reason. It is the world market, to be reached globally, that requires a much greater investment. One brand alone will have great difficulty,” he says. “When you buy Dom Pérignon or Dior perfume, or a Vuitton bag, you don’t know it belongs to the same group. It is only backstage that you find the economies of scale that is the basis of our success.”

If economies of scale can be wrung out of the luxury business, Arnault is certainly in a position to do so, having parlayed his small family fortune into control of a $23 billion fashion, leather, perfume, and champagne empire. He controls, in addition to Louis Vuitton, the fashion and perfume labels Christian Dior, Givenchy, Christian Lacroix, Loewe, Kenzo, Guerlain, Berluti, and Céline as well as the jeweler Fred. His company’s prodigious liquor cabinet of top-shelf brands includes Hennessy cognac and the champagnes Moët et Chandon, Dom Pérignon, Pommery, Krug, and Veuve Clicquot. And even as he fends off Gucci’s counterattacks, Arnault is fast expanding elsewhere. In Italy, he has agreed to begin cooperating with Prada and has been in talks with Giorgio Armani about a possible acquisition. In New York, he bought the cosmetics brand and spa Bliss World and a stake in the hot design house Michael Kors, whose designer he hired at Céline. LVMH’s retail division is opening a new flagship for its Sephora high-end cosmetics-and-fragrance chain across the street from Saks Fifth Avenue.

To mark the company’s expanded presence in New York, Arnault has commissioned a new North American headquarters at 57th Street and Madison Avenue, a singular green-glass skyscraper designed by the French architect Christian de Portzamparc. The façade of the new building – LVMH will move in September – is cut inward at jagged angles to evoke the shape of a seashell or the opening-up of a flower. A gigantic, multicolored lighting system will add to the visual spectacle. Louis Vuitton’s American flagship store is slated to occupy the ground floor, and the U.S. headquarters for the rest of his design houses will be consolidated above. “We want to centralize the LVMH brain trust in the U.S.,” he says. Still, there will be walls. LVMH’s many perfume brands’ fragrance teams have demanded strict assurances that their internal competitors won’t be able to peek at their research.

The Asian crisis, Arnault says, has vindicated his company’s strategy. In the past twenty years, U.S. and European luxury-products companies have come to rely on Japanese and other Asian consumers for the lion’s share of their sales. When the Asian economic crisis hit, it decimated the region’s demand for excesses like a Gucci handbag or Vuitton luggage. As a result, both companies saw their stocks fall by as much as 50 percent. “Companies on their own, like Gucci, were hit very strongly,” Arnault says, “but a group that is diversified as we are has more areas of business to weather a bad situation like 1998 – champagne was booming; it had its most fantastic year.” And even though LVMH stock was also hit hard by the crisis in Asia, Arnault says, he had enough in his war chest to capitalize on Gucci’s weakness.

One of Arnault’s favorite examples of his companies’ synergies is really a recruitment pitch, directed in part at Tom Ford. “Perhaps our most important advantage is our ability to attract talent,” Arnault says. “To be a designer or manager at one of our brands is not at all different from being in a medium-size company but with the investment muscle to grow. When a young, talented designer or executive comes to work with us, he has more potential to grow, to move up. And guess what happens? The best talent comes here.”

So far, though, that hasn’t impressed Ford, who has said he will leave Gucci if Arnault takes control. “We don’t believe his synergies,” De Sole says. “I find it preposterous that he thinks he can come and help us. He should fix his own brands. Except for Vuitton, his fashion brands are doing terribly. The only synergy that would exist would be for myself and Mr. Ford to come over and fix Christian Dior!”

Actually, the scope and complexity of Arnault’s sprawling combine of luggage, clothes, couture, perfumes, accessories, and drinks makes his companies’ performance hard to track. De Sole is not the first to argue that Arnault is better at buying prestigious brands cheaply than at running them. Arnault’s hardball tactics have left plenty of bruises.

Arnault’s career began with a hard bargain. At the age of 27, without his father’s knowledge, he arranged to sell the family’s construction business to the Rothschild family’s Societé Nationale de Construction, then convinced his father the deal was a good idea.

He entered the fashion business almost by accident. After a brief career as a real-estate developer and a short stint in the U.S., he began shopping for a company to buy with the money he’d earned by selling his family’s company. In 1984, his sights landed on the bankrupt French textile conglomerate Boussac, which happened to own the Christian Dior couture house. The French government had taken it over and was seeking to unload it. There were several bidders interested, including Louis Vuitton. But Arnault had an early edge because his first wife, Anne Dewavrin, was a cousin of the bankrupt owners, and he began by buying a stake from them. Then, with professions of his intent to maintain the company’s payroll, Arnault persuaded the French government to sell him the rest.

Within five years, however, he had laid off 8,000 workers and sold off almost all of its manufacturing assets for about $500 million. The sell-off made Arnault one of the wealthiest men in France, but it won him few friends in French labor groups. (The government eventually forced him to repay about $60 million of the money it had invested in the company.)

Arnault focused his attention on Dior, began dining at the glamorous Paris restaurant Maxim’s, and quickly grew enamored of the fashion world. “What would be very interesting and rewarding for all of us,” he told his aides, “would be to create the No. 1 luxury-product group in the world. Let’s try to do it.”

In 1988, he began to buy LVMH stock. “It’s like an art collector. You buy a painting thinking in three or four years it will increase in value, and in the meantime you’ll have something that pleases you,” he told Women’s Wear Daily. “I preferred buying up shares in LVMH rather than, say, IBM.”

LVMH, one of its founders once said, was like a marriage that raced too fast to the altar. The Moët and Hennessy families had just formed the company by joining their cognac and champagne business with the Vuittons’ fashion holdings. American-style takeovers were proliferating in Europe, and the families sought shelter in the clout of their combined companies.

Still fearing hostile bids, the Moët-Hennessy families suggested inviting their distribution ally Guinness to acquire a 20 percent stake in the company. The prospect spooked the Vuittons, who feared it would tip the internal balance of power. So Henry Racamier, a 75-year-old self-made steel magnate who had married into the Vuitton clan and taken charge of its business, responded by seeking backers of his own. His new investor was Bernard Arnault, who Racamier saw as a protégé.

The night after the two men met to set the timing of Arnault’s investment, Arnault drove to the home of a Lazard Frères banker he knew from the Boussac deal. There he met with the leader of the Moët-Hennessy faction. Without telling Racamier, Arnault changed sides. He formed a new organization with Guinness’s support to buy shares in LVMH. The venture eventually took a 37 percent stake.

On September 26, 1988, the LVMH board met with a plan to elect Henry-Louis Vuitton, Racamier’s son-in-law and the great-grandson of the founder, as its head. But Arnault had already accumulated enough shares to take control. And at the meeting, he installed not Vuitton but his own father, Jean Arnault (who was an experienced businessman, says Arnault, and well qualified).

“When I signed the alliance agreement with him in June 1988, I held out my hand. It was like holding a limp rag,” Racamier later told Arnault’s French biographers, Nadège Forestier and Nazanine Ravai. He shared similar sentiments with De Sole, a friend he had met doing business for Vuitton in New York.

Racamier battled Arnault indefatigably for years afterward, accusing him of multiple counts of financial shenanigans and bad faith. French president François Mitterand even took up the issue of “the LVMH affair” in a televised address. After years of wrangling, French courts found that Lazard had improperly sold some stock to Arnault, but he was exonerated.

Arnault, for his part, accused Racamier and the Vuittons of embezzling from the LVMH’s Asian sales (he was cleared) and hired Kroll Associates, the business world’s favorite private investigators, to dig into Racamier. False allegations surfaced in the press that Racamier and the Vuitton family had excluded Jews from their store during the war, that Racamier’s grandchildren goose-stepped around his backyard, and that he supported the rightist Jean-Marie Le Pen. Racamier blamed Arnault, and a press account accused him of hiring a public-relations firm to fake a letter to from Le Pen to Racamier. The letter turned out to be forged, but no evidence was found to link Arnault to the letter.

Arnault dismisses allegations that his takeover of LVMH disserved its shareholders. “We bought LVMH on the stock market,” Arnault says, “and in the meantime, if you take Vuitton, we have tripled the profit and we have tripled the product, so every investor is very happy.” The company’s stock has doubled in the ten years since his arrival.

Arnault wasted no time shaking up the Paris fashion world. He ran through four top managers at Dior in his first six years there. He set up the young designer Christian Lacroix with his own fashion house, and Lacroix’s pouf dresses quickly became nouvelle society’s garment of choice in the late eighties. Arnault has bankrolled Lacroix’s company to this day, though it’s never made a profit.

More typically, Arnault has bought well-known labels – sometimes riding roughshod over the people who gave them their names. He bought two thirds of the design house Céline, for instance, from its founders, Richard and Céline Vipiana, then forced them out three months later.

When the 68-year-old Count Hubert de Givenchy, famed for dressing Audrey Hepburn, retired from his eponymous label, Arnault passed over his handpicked successor to appoint the young British designer John Galliano, a plumber’s son famous for outrageous designs like butt-revealing skirts. A few years later, he moved Galliano to Dior and replaced him with another taboo-breaking young Brit, Alexander McQueen, who told the press, “Hepburn is dead.”

Galliano, an Arnault favorite, has lately drawn pans at Dior. The International Herald Tribune’s Suzy Menkes described Galliano’s recent spring show as “a cartoon African theme” and lamented that Galliano’s “magic is fading.”

But Arnault defends the choice. “It is my requirement, when I choose a designer, that I feel he is a great talent, and, second, that it is something for which he has a great feeling, aesthetically. Galliano’s designs were very feminine, very romantic – exactly the spirit of what Mr. Dior did in life,” he says. He maintains his designers have complete autonomy: “I am involved in the selection of designers, obviously, but then they are free to create.”

Michael Kors, the New York designer who took over Céline two years ago and sold a third of his company to Arnault this spring, says input from LVMH has always been welcome. “I have never had anyone at LVMH say, ‘Pink is the color for Céline this season,’ but I will say, ‘Do you think this will work for Southeast Asia?’ “

Marcia Kilgore, the 30-year-old founder of Bliss World, who just sold a majority stake in her company to LVMH, says she had heard of Arnault’s tough reputation but isn’t afraid for her job. “I told him our company was like this chair in the Dior boutique in Paris, covered in Mongolian lamb-hair that looks like wet dog hair – a wry sense of humor with great backbone. He got it immediately,” she says. “I have complete creative control. You don’t buy a plane that is flying very well to crash it.”

Still, more than a few of Arnault’s investments have provoked litigation. After LVMH took a large stake in Chateau d’Yquem, makers of the world’s most sought-after – and expensive – dessert wine, Count Alexandre de Lur Saluces, who runs the winery and with his son owns 10 percent, sued Arnault for sidestepping their talks by buying a dominant stake in the winery from his brother. The count contended that his 75-year-old brother was mentally incompetent and, furthermore, prohibited from selling by the terms of his inheritance. A French court recently ruled in favor of Arnault.

And last year, after Arnault bought a majority stake in the international retailer Duty Free Shoppers, Hong Kong billionaire Robert Miller, father of the New York socialites the Miller sisters and owner of 39 percent of the company, charged Arnault with trying to use Duty Free Shoppers for the benefit of his luxury brands. “Despite his promises,” Miller charged in New York State court, “Bernard Arnault has a pattern of exploiting the assets of partially acquired companies for the benefit of LVMH with no concern for the best interests of minority shareholders.” The charges were settled with a guarantee of the chain’s independence. The two have since patched things up. Miller wrote a letter on Arnault’s behalf to the court that’s ruling on his Gucci suit, and Arnault recently hired Miller’s daughter Pia Getty as a spokeswoman for LVMH’s Sephora stores.

The building of Arnault’s flowerlike trophy tower on East 57th Street was thorny, too. New York broker Robert Siegel, who had been assembling the site for more than a decade, found himself in a tight squeeze, since LVMH was his minority partner in the building, its tenant, and its construction lender, and also had control of the design. When the building’s elaborate design went over budget by about 60 percent, LVMH as tenant refused to pay more, LVMH as builder claimed Siegel had approved the new budget, and LVMH as lender was in a position to foreclose and take control. Siegel sued. The case was later settled, and LVMH acquired the building for an undisclosed sum.

Dark, bearded, and stocky, De Sole is the visual opposite of Arnault. He was overshadowed by Tom Ford until he began his tireless, sometimes near-hysterical defense of Gucci’s independence. “Gucci is one of the most profitable luxury brands in the world,” he says. “Arnault is trying to steal this company.”

Despite the name and accent, De Sole is an improbable chief executive for an ultra-trendy fashion house. Born in Rome, the son of a brigadier general in the Italian army, he briefly taught law in Italy before coming to the U.S. for a second degree at Harvard. Afterward, he joined the well-connected Washington firm Patton, Boggs & Blow, eventually becoming a U.S. citizen.

Because of his Italian roots, he often handled Italian clients with tax issues in the U.S. He was representing Maurizio Gucci’s branch of the family when, in 1982, a family brawl erupted during a company board meeting. Maurizio’s cousin Paolo was bleeding as he staggered out of the meeting, vowing revenge. He got it by releasing documents that incriminated his father, Aldo, in tax-evasion schemes. Aldo, 77 years old, served a year in prison.

During the family turmoil that followed, Maurizio badly needed a trustworthy ally. De Sole helped him take control of the company by selling 50 percent of Gucci Group to the Arab company Investcorp. Afterward, Maurizio asked De Sole to become president of Gucci’s U.S. unit part-time to help settle its accounts with the Internal Revenue Service.

De Sole soon became embroiled in the family’s infighting. In 1987, a lawyer for Aldo Gucci, out of jail and plotting his return, called De Sole “the guest who came for dinner and never left” and accused him of running the company to generate fees for his former firm. Patton, Boggs had billed Gucci more than $1 million in 1986.

But the family’s problems went far beyond legal fees. Throughout the seventies and eighties, the company’s double-G logo was plastered like graffiti on every imaginable product: There were bottles of Gucci Scotch authorized by cousin Roberto, a rival line of Gucci leatherwear designed by the black-sheep cousin Paolo, and countless key chains, watches, T-shirts, and tchotchkes authorized by the company itself under Maurizio. Meanwhile, the company was spending more than $4 million a year in a vain effort to dam a flood of fake Gucci merchandise from the East.

In 1990, Gucci hired Tom Ford, a handsome 29-year-old actor-model with a degree in interior architecture and just a few years’ experience in design. Maurizio considered him “too fashion-forward,” not “classic” enough, and ordered him fired.

De Sole interceded, though he didn’t know Ford. “I told Maurizio it didn’t make any sense,” he says. “Tom seemed like a good person, and besides, there was no one else on the design team left.

“Maurizio was a wonderful person but a terrible manager,” De Sole continues, “By 1993, the company was basically broke. We lost about $30 million that year.” Around that time, Arnault came close to buying the company but backed off at the last minute.

Investcorp was forced to buy out Maurizio Gucci’s remaining 50 percent stake in a desperate effort to recoup its investment. De Sole took over as head of the company. Two years later, Maurizio Gucci was shot on a Milan street by a hired gunman working for his ex-wife.

At first, it was an awkward partnership for De Sole and Ford – a man twenty years younger, who came out at Studio 54 and likes to tell reporters that he doesn’t wear underwear. “At that point, everybody had left the company, and the only people around were myself and Mr. Ford,” De Sole says. “A lot of people had told me that his style was out of control and not ‘real Gucci.’ I’m sure they told him horrible things about me too.”

De Sole contemplated leaving himself, and even interviewed for a job working for Arnault at Dior. But driving together around Tuscany, wooing back local manufacturers whose bills the cash-starved company had stiffed, De Sole and Ford began to understand each other.

De Sole worked hard to cancel Gucci’s myriad licensing agreements and position the double G’s again as a symbol of big bucks. In the studio, Ford began studying Gucci’s archive, drawing on its history to create a provocative new look. There were some false starts, like G-strings with Gucci’s double-G logo. But in March 1995, the velvet hip-huggers Ford designed were the season’s surprise upset: “Dangerous, sexy, modern, and slightly roughed up,” wrote Katherine Betts in Vogue.

A few days after the show, De Sole met Ford for dinner at the Bristol hotel in Paris. “Domenico, I want you to marry me,” Ford said.

“Tom, I am not sure what my wife, Eleanore, is going to say to this,” De Sole answered. But he got the drift. He increased Ford’s compensation. And to reinforce the bond, a significant chunk of Ford’s paycheck came in Gucci stock options. Ford made his influence felt throughout the company, from the layout of Gucci stores to the look of its ad campaigns. Gucci’s annual sales soared from $264 million in 1994 to more than $1 billion last year. Ford amassed a personal fortune worth more than $80 million, most of it tied up in Gucci stock, which had more than than doubled in price.

But last spring, the Asian economic crisis sent Gucci’s shares tumbling from its high of about $80 a share to less than $35 a share, and the low price made the company vulnerable to a takeover. In June, its rival Prada disclosed that it had acquired a 9 percent stake on the open market, apparently contemplating a takeover.

De Sole and Ford were dismayed to realize that when Gucci had been incorporated in Amsterdam (to minimize its taxes), the company had neglected to include in its bylaws the Dutch version of a “poison pill.” Earlier, De Sole had sought shareholder approval to install a new poison pill. But shareholders worried it might deter bids for their depressed stock, and it was voted down.

De Sole hastily assembled a team of investment bankers from Morgan Stanley Dean Witter and lawyers from the New York firm Skadden, Arps, Slate, Meagher & Flom who together contrived a make-shift takeover deterrent involving the issuance of special “ghost shares” to an employee trust that could block unwelcome suitors. De Sole warned Prada that Gucci could use the ghost shares to stop an unwanted advance, but they were never issued because Prada never moved ahead.

The ghost-share plan soon came in handy. On February 18, as Arnault attempted to call a special shareholders’ meeting to force De Sole to let him name a director to Gucci’s board, De Sole’s board implemented its poison pill. Arnault immediately challenged it in Dutch court.

To hear Arnault tell it, the whole dispute with De Sole was just a big misunderstanding. “We never understood why De Sole was so hostile. We don’t want to buy or invest in a brand if we can’t bring something to increase its profitability,” Arnault says. “Just look at Gucci versus Louis Vuitton. Vuitton’s profit margins are double Gucci’s – 48 percent against 24 percent. The reason is clear, and it is size. We could help move Gucci in that direction.”

His company’s sheer market power, Arnault argues, enables it to push around malls, department stores, landlords, suppliers, and even the media where his brands advertise. “When we look to locate in a shopping mall, there is a phenomenon where we define which mall is a luxury mall, because they need all our brands,” Arnault says. “We are the largest luxury-goods advertiser in the world. I cannot tell you the exact savings – I cannot give away my secrets – but it is obvious that the more you buy, the better you get.”

As a result, says Arnault, LVMH can economize on everything that creates a brand’s aura of style, luxury, and prestige besides the look itself. Many LVMH brands have for a long time sold their wares primarily out of their own shops. Controlling distribution gives the company complete control of how the goods are presented and the ability to ensure that they are never, ever marked down. And LVMH’s size gives it considerable leverage in negotiating over presentation for brands sold in department stores. “We know how important it is to be in control of the retail distribution around the globe,” Arnault says. “When you go wholesale, as Gucci still does, you risk parallel sales and markdowns that hurt the brand. At Louis Vuitton, we never have a sale.”

But how much do all these synergies really help? “That is debatable,” says Cedric Magnelia, an analyst at Credit Suisse First Boston in London. He says the real savings on advertising, real estate, and dealing with retailers remain to be proven.

“Comparing Gucci with Vuitton is a clownish argument!” says De Sole. “Our leather goods are more profitable than theirs. But we sell ready-to-wear, which is less profitable, and we use it to enhance the look and make it very exciting. That is how we have grown the company so fast. In 1995, Vuitton was four times Gucci’s size. Now we are the same.”

Both brands spend a roughly equal portion of their revenue on advertising – about 5 percent. And De Sole points out that Gucci has no trouble getting all the press the company needs; the fashion magazines can’t get enough of Tom Ford right now. “We have been on the cover of 24 of the most important fashion magazines in the last few months,” he says.

As far as real estate, “I wouldn’t say LVMH has a huge advantage,” says Robert Futterman, a New York real-estate broker who specializes in luxury boutiques. “A landlord may say, ‘We will give you a prime spot in our Short Hills mall if you go into our Florida mall,’ but Arnault is going to want to cherry-pick locations that suit his brand’s image. It will be a long time before LVMH has as much clout as tenant as the Gap or Barnes & Noble.”

In some ways, exactly what makes fashion and luxury products appealing to sell limits the potential in savings on cost. Economies of scale are mainly important in commodity businesses, like making blue jeans or television sets, where low prices sway shoppers. “With products like Gucci’s, people pay an exceedingly high price for the perceived value in owning something that has a timeless design,” says Sewall Hodges, a Scudder Kemper Investments portfolio manager whose fund owns Gucci stock.

At 8:30 a.m. on March 19, Arnault was presiding over a meeting of his company’s top executives at EuroDisney, near Paris. He expected to meet again with De Sole at 10:30 a.m., in an effort to jump-start their talks. Instead, he received word that De Sole had launched a new surprise defense, signing an agreement to sell a 40 percent stake in Gucci to François Pinault, a French financier and department-store mogul, for about $3 billion, or about $75 a share – $10 a share below what De Sole wanted from Arnault.

The deal diluted LVMH’s stake in Gucci by nearly half, removing his leverage over its future. Under the terms of the deal, Pinault will eventually name three out of five members of a new committee with veto power over any potential mergers or acquisitions, which Arnault says amounts to control. “It is stupefying,” Arnault says. “This is exactly the opposite of what De Sole said he wanted! Now we have no choice but to protect our investment.”

Immediately, Arnault reversed himself and made a bid for all of Gucci’s outstanding shares, eventually offering as much as $91 a share, under certain conditions. But success is unlikely because of Pinault’s big stake. “Pinault is the one who is making a creeping takeover; that is his maneuver. We are on the side of minority shareholders here!” Arnault says.

And Arnault tacked a new charge onto his claims against De Sole in Dutch court: that Gucci betrayed its shareholders by locking up control for a fire-sale price. A shareholders’ rights group has backed him up. And at least one U.S. investment fund has written Arnault a letter siding with him as well.

De Sole, though, insists that Arnault hasn’t made a legitimate offer, because the board can’t meet Arnault’s conditions, which include making Ford stick around. “That is laughable,” De Sole says. “We cannot speak for Mr. Ford!”

In fact, De Sole claims, the only reason Arnault made his “alleged offers” is that he is afraid of the competition. De Sole doubted the efficiency of Arnault’s luxury conglomerate, but now he is excited about building his own. “We can really become an important player as a luxury conglomerate,” he says. “In fact, it was our plan to buy some new brands all along.”

That was Pinault’s plan, too, says Serge Weinberg, chairman of Pinault’s department-store company Pinault-Printemps-Redoute. “We plan to make Gucci our platform to consolidate luxury brands, with De Sole as CEO.” And, he says, they intend to start shopping for new brands right away. “We didn’t just invest $3 billion in Gucci to put it in the bank,” he says.

To begin with, Gucci will have a chance to buy a portfolio of brands Pinault just acquired from the drug company Sanofi; a host of additional brands, including Yves Saint Laurent; and the Fendi, Oscar de la Renta, Van Cleef & Arpels, Roger & Gallet, and Krizia perfumes.

Ford will be in charge creatively. “Ford has demonstrated a very wide understanding of how to translate a very consistent brand image across a wide range of products,” Weinberg says, “But his talent will also help in asking other talents to join.”

Their ideas sound very much like Arnault’s: Rising marketing and distribution costs make it hard for smaller firms to compete, creating an opportunity to consolidate design “boutiques” into a brand-new conglomerate. Until now, Weinberg says, smaller luxury companies had only one potential buyer when they wanted to sell. “Now they will have two,” he says.

On Thursday, April 22, Arnault faces what may be his last chance to buy Gucci: a ruling by the Dutch court on his charges against De Sole. But a defeat still wouldn’t mean the saga is over. Arnault still has a substantial minority stake, and people who know him say he is unlikely to walk away empty-handed. Two years ago, for example, he was a major shareholder in Guinness when the company announced a plan to merge with the U.S. snacks-and-fast-food giant Grand Met. He held up the talks for months by advancing his own plan for a three-way deal with Moët-Hennessy to form a giant “Drinksco.” Finally, at a meeting with the top executives of both companies in a private plane at London’s Northolt airport, Arnault offered a compromise solution. He accepted a $375 million payment to let the deal go through.

So Arnault may not get what he wants. But Gucci’s escape, too, may have a high price.

The Luxury Wars