Contentious Acquisition…at What Cost?

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Ever since I heard the news that LVMH wanted out of its deal to acquire Tiffany and Company and the two companies\’ resulting suit and countersuits, George Harrison\’s \”Sue Me, Sue You Blues\” has been an earworm playing in my head:

You serve me
And I\’ll serve you
Swing your partners, all get screwed.
Bring your lawyer
And I\’ll bring mine
Get together, and we could have a bad time.

Buyer\’s Remorse

Speculation has swirled for months that LVMH has buyer\’s remorse after agreeing last November to pay $16.2 billion or $135 per share for Tiffany. It would have been the largest acquisition that LVMH ever made, a luxury conglomerate built through acquisitions.

Even as late as February 4, 2020 when LVMH\’s shareholders agreed to the deal, chairman and CEO Bernard Arnault was effusive about Tiffany\’s possibilities:
\”This approval is a significant milestone as we move closer to completing our acquisition of Tiffany, an iconic company with a rich heritage and unique positioning in the global luxury jewelry market. A globally recognized symbol of love,\” he said in a statement. \”Tiffany will be an outstanding addition to our unique portfolio of luxury brands. We look forward to welcoming Tiffany into the LVMH family and helping the brand reach new heights as an LVMH Maison.\”
Then the world changed and Arnault started to drag his feet.

Raising the Stakes

On Wednesday September 9, LVMH officially called off the deal, citing a request by the French Government to delay the closing. Many speculate that LVMH was simply playing hardball to renegotiate the agreed-upon price but inserting the French government into the dispute adds a level of complexity rarely seen in mergers and acquisitions.

[callout]Tiffany went from being a culture creator some time ago to being culturally irrelevant, not measured in years but in decades.[/callout]

\”Involving the French government and its trade dispute with the United States takes this to a whole other level,\” shares M&A attorney Wilhelm E. Liebmann, a member of Dykema\’s business services department and the corporate finance practice group. Of note, Liebmann has no official involvement in the case, but has carefully studied the original filed agreement.

Tiffany responded by filing suit in the Delaware court, which presides over the agreement LVMH followed with a suit of its own, claiming the pandemic and Tiffany\’s poor handling of it resulted in Material Adverse Effect (MAE) that gives LMVH an out, not to mention that, \”Tiffany\’s mismanagement of its business constitutes a blatant breach of its obligations to operate in the ordinary course.\”

Tiffany bounced right back with a press release claiming LVMH was making \”baseless accusations \”and called the company \”shameless\” in seeking to quash the original agreement. It further alleged that despite claims to the contrary, LVMH solicited a French government official to write the letter.

\”LVMH\’s seeking this letter was a clear violation of its obligations under the Merger Agreement, and Tiffany anticipates that more of LVMH\’s duplicity will come to light during the trial,\” Tiffany stated.

With desperation mounting on both sides, the Delaware Chancery Court has granted Tiffany\’s motion to expedite its lawsuit against LVMH and will begin a four-day trial on January 5, 2021.

No Leg to Stand On

Based upon his experience and understanding of Delaware\’s case law, Liebmann says, \”The agreement doesn\’t give LVMH many outs, or really any outs under the circumstances. They are going to have a difficult time getting the Delaware court to agree that there has been a material adverse effect on Tiffany, given the terms as defined in the merger agreement.\”

And he further notes, \”Delaware has historically been very reluctant to find material adverse effect that would allow a party to walk away from a deal.\”
Regarding LVMH\’s Material Adverse Effect argument, which didn\’t specifically state the MAE of a pandemic, or provide a \”carve out\” in legalize, Liebmann believes Delaware courts are likely to side with Tiffany.

Liebmann adds that Tiffany met the agreement\’s terms to \”conduct business in the ordinary course, which Tiffany argues includes paying shareholder dividends, an act that really got under LVMH\’s skin. Tiffany claims paying dividends was actually \”required\” by the merger agreement, since it has been part of its longstanding \”ordinary course of business.\”

\”Dating back to shortly after its 1987 IPO, Tiffany has never missed or reduced a dividend payment, even during recessions, financial crises and the September 11 attacks, spanning 131 consecutive quarters. Tiffany has more than $1 billion in cash and has no liquidity constraints,\” Tiffany states and argues, \”The real reason LVMH complains about the dividend payments is that it wanted the cash left in the company for its benefit rather than paid to Tiffany shareholders.\” Liebmann believes the court will again side with Tiffany.

Perhaps all these machinations are just a way for LVMH to renegotiate the deal to a lower price, but with each passing day as the rancor escalates, this looks less and less likely. LVMH really wants out of the deal.

Maybe even as shrewd a businessman as Arnault bought the hype of the Tiffany brand leading up to the merger agreement but has since seen the light. What he thought he was buying – a big, bright, flawless diamond called Tiffany in a beautifully-wrapped robin\’s egg blue box – turned out to be beautifully set fake CZ when examined under a jeweler\’s loupe. Tiffany is not the brand or the company that he hoped it was.

Tiffany\’s Lost Its Way

Once Arnault pulled back the curtain and got a real look at what he was buying, he discovered Tiffany simply didn\’t fit.

\”I\’ve never thought of Tiffany\’s as a luxury brand,\” says Benedict Auld, founder of Lapidarius, a New York-based brand strategy consultancy. \”By that, I mean the things that seem to power luxury today, which is crass consumption and deliberate, cynical scarcity with a veneer of style and fashion.\”

Great brands, including but not exclusive to luxury brands, create culture.

\”When was the last time Tiffany created culture for anybody in this country and made a cultural contribution based upon their products, their promises, and the people who made those promises happen?\” he asks. \”For a vast majority of Tiffany\’s history, they did just that. But the brand went from being a culture creator some time ago to being culturally irrelevant, not measured in years but in decades.\”

Auld believes you have to go back to the 60s and Breakfast at Tiffany\’s to understand Tiffany\’s cultural contribution.

\”I consider Tiffany the same way Truman Capote did, which was an equalizer brand. It was a great American cultural institution. Virtually any American could walk into the flagship store and make something very special happen for somebody they loved or respected or admired.

\”Being in Tiffany\’s was never about exclusivity. It was the most inclusive and friendly of places you could go,\” he says, and adds \”Tiffany\’s was a very democratic idea, where the price was more a nuisance, not an obstacle like it is in luxury.\”

In effect, Tiffany\’s has been detaching itself from its American cultural roots as it has tried to model itself after exclusive European luxury brands and expand globally.

In that way, Auld sees parallels with Brooks Brothers, another democratic, equalizer brand with its promise that any man could dress like an American president. Then it was acquired by Italian businessman Claudio Del Vecchio in 2001, who \”ran it into the ground,\” he shares.

Cultural Connection

Auld goes on to explain that brands can create culture, ignore culture or chase culture. \”It is better to create it; nice if you can ignore it, but as soon as you chase it, there is something fundamentally wrong,\” which is what he believes Tiffany has done for too many years.

\”If you can\’t sell an American institutional brand to your own people in the United States, you are going to go out of business in the same way as Brooks Brothers. It\’s not a sustainable strategy,\” he says. Tiffany\’s revenues in the Americas dropped from 45 percent in 2017 to 43 percent in 2019.

\”I love the Tiffany brand,\” Auld concludes. \”But it is a great American brand that has laid fallow and been adrift for the better part of 20 years. Tiffany\’s was based on a promise that allowed everyday people to express love every time they walked into a store. That promise gave rise to an experience. And that experience was delivered by people. All that stopped. I think it has been extremely badly managed,\” he shares.

Tiffany Wins, LVMH Loses

Tiffany badly needs the cash infusion that the LVMH deal would bring, but more importantly it needs new strategic direction that Arnault and LVMH could give. \”LVMH is a superb brand manager. There are few comparable companies in that regard,\” Auld says.

But making Tiffany over following a European Louis Vuitton or Christian Dior luxury-brand model – which will take a lot more effort than LMVH originally bargained for – may ultimately be a huge mistake, as it undermines the uniquely American heritage values Tiffany stands for. Europeans don\’t get us and never will get us.

But if, as Dykema\’s Liebmann contends, LVMH\’s chances are slim to none to get out of the Tiffany acquisition, it will ultimately be Tiffany\’s gain and LMVH\’s loss. It is going to take more than spit and polish to bring back Tiffany to its past glory.

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