LVMH Acquisition of Tiffany & Co.
Company Details: Acquirer - LVMH
Founded: 1987
CEO: Bernard Arnault
The Louis Vuitton brand was established in 1854 after Vuitton had built up his career making trunks that were designed to travel by steam train, boat, and horse-drawn carriages. This included flat-topped, waterproof cases that were easy to carry and stack, and later the ‘Tumbler Lock’ which is deemed unpickable.
Moët Hennesy is made up of a merger between Moët & Chandon and Hennessy Cognac. Moët & Chandon was founded in 1743 near Epernay, in the Champagne region of France. After having established a client base amongst the French Elite, Moët gradually expanded throughout Europe and the rest of the world. Hennessy Cognac was founded in 1765 and is now the world’s best-selling cognac brand. It gained its success through starting to export to the US in 1794 and through shifting production from barrels to bottles in 1804, making it easier for the brand to ship internationally. In 1971 Moët Hennesy was established due to increasing competition and a statute limiting growth in the Champagne region to 34,000 hectares. This led Moët to wanting to diversify its brand and form a merger with Hennessy to protect its business.
Louis Vuitton and Moët Hennessy merged in 1987 to create LVMH, the world's largest luxury conglomerate. At the time of the merger many French companies, including Moët Hennessy, were vulnerable to takeovers. Due to both Louis Vuitton and Moët Hennessy wanting to expand their businesses, merging seemed to be the ideal option, with both brands being able to maintain their unique identities whilst coming together to create a luxury powerhouse. Ever since the merger, LVMH has been focused on acquiring high quality and sustainable brands to grow its presence in the luxury sector. Currently, LVMH owns 75 Maisons, including Christian Dior, Sephora, Dom Pérignon and Bulgari. In 2023, LVMH became the first European company to surpass $500bn in revenue, achieved through its commitment to the company's values of quality and craftmanship, timelessness and longevity, rarity and exclusivity, creativity and innovation, and exceptional customer experience.
LVMH's success in its acquisition strategy has largely been due to Bernard Arnault's leadership, who has been the chairman and CEO of LVMH since 1989. In 1984 he acquired Boussac Saint Frères, the parent company of Dior that had recently filed for bankruptcy. Following this, Arnault restructured Boussac by selling off the divisions and assets that did not align with the luxury brand he wanted to maintain whilst retaining its most valuable assets, Dior and Le Bon Marche. A couple years after the takeover, Boussac was turning over $100 million in profit. Inspired by this success, Arnault had the idea of creating a luxury group, comprised of competing brands in the luxury industry. Since becoming CEO of LVMH, Arnault’s strategy has followed a similar pattern to his first ever deal. LVMH takes struggling luxury brands from diverse sectors that have a rich heritage and synergises their supply chains and distribution to make them run more efficiently. This, combined with effective marketing that emphasises the target company’s unique identity is what transforms that business into a success under LVMH’s roof.
Company Details: Target - Tiffany & Co.
Founded: 1837
CEO: Anthony Ledru
Tiffany& Co was founded by Charles Lewis Tiffany in New York, in 1837. It is known for its sustainable and timeless jewellery, in particular the Tiffany Yellow Diamond, one of the largest diamonds ever discovered. Tiffany has consolidated its dominance in the jewellery industry through its innovative designs, including the Tiffany Setting which is now one of the most popular engagement ring designs, wherein the diamond is raised above the band to elevate the gemstone. Tiffany's brand has further been strengthened through trademarking the robin-egg blue colour associated with the company as 'Tiffany Blue' in 1998, and through its well-known role in the film 'Breakfast at Tiffany's'.
Acquisition Overview
On the 25th of November 2019, after weeks of negotiations, LVMH announced it would be acquiring Tiffany & Co for $135 per share ($16.2bn in total). Initially, this deal appeared advantageous for all, with LVMH using the acquisition as a strategic move to improve its position in the jewellery market and Tiffany needing LVMH's expertise due to having slow growth in recent years. The announcement saw an increase in share price for both businesses, yet the COVID-19 pandemic hit shortly after, and Tiffany's net global sales dropped 45% in the first quarter of 2020 and another 29% in the second quarter due to having shut most of its stores. As a result, Tiffany's share price fell by 8.9%.
On the 9th of September 2020, LVMH declared that it could no longer acquire Tiffany for the original agreed upon price and the transaction would not go ahead. This decision was based on three reasons put forward by LVMH:
1. A material adverse effect (MAE) had occurred.
2. Tiffany did not operate the business in the 'Ordinary Course'.
3. LVMH had received a letter from the French Minister asking them to defer the transaction until January 6th, 2021.
On the same day that LVMH announced it would not be completing the deal, Tiffany filed a lawsuit against them in the Delaware Chancery Court seeking specific performance, arguing against all three reasons given. In response, LVMH countersued. However, before the trial date could arrive, the two parties decided to renegotiate the deal due to LVMH’s lack of confidence in its case. Instead, they ended up closing on the 7th of January 2021 with LVMH acquiring Tiffany for the lower price of $131.50 per share, totalling $15.8bn.
Points of Consideration
The MAE Clause
An MAE clause is one that is usually written into M&A deals, it allows the buyer to back out of the acquisition should a situation occur which significantly reduces the target company’s value. Within LVMH's and Tiffany's agreement there was an MAE clause that allowed LVMH to walk away from the deal in certain circumstances, but which also contained eight carveouts. Carveouts work as exceptions to what may trigger the occurrence of an MAE. These carveouts included specific events which could have significantly diminished Tiffany's value but prevented LVMH from refusing to go forward with the transaction.
In Tiffany's lawsuit, Tiffany referred to two carveouts set out in their agreement. The first one stated that a change in the 'general economic or political conditions' will not constitute an MAE, arguing that this general category encompassed situations such as a pandemic. The second carveout stated that 'changes or conditions generally affecting the industries in which the Company and any of its Subsidiaries operate' shall not be deemed an MAE. Tiffany argued that although the company did decrease in value, other luxury retailers were similarly impacted by the pandemic and Tiffany had not been disproportionately affected. Thus, according to Tiffany, COVID-19 was not grounds for the use of an MAE.
LVMH in their counterclaim put forward that the carveout clauses notably did not refer to a 'pandemic', yet attorneys for Tiffany had negotiated other deals which specifically contained pandemic or public health carveouts and thus, if Tiffany had wanted to exclude a pandemic from being an MAE, they would have done so. As a result, COVID-19 did constitute an MAE and therefore this was grounds for LVMH to walk away from the deal without breaching the contract.
The Ordinary Course Covenant
Within the agreement there also existed an Ordinary Course Covenant, which is a clause that requires the target company to carry out their business as usual between signing and closing. This ensures that the target does not substantially decrease in value so that the buyer effectively receives what it paid for. The Ordinary Course Covenant in this deal stated that LVMH would be able to cancel the transaction if Tiffany failed to operate their business in the ordinary course. LVMH asserted that during the pandemic, Tiffany had cut marketing costs and capital expenditure and had acted irresponsibly by continuing to pay out substantial dividends to its shareholders despite their drop in sales. These steps, LVMH claimed, would significantly hinder Tiffany's chances of restoration back to pre-pandemic levels. According to LVMH, Tiffany was no longer the luxury retail brand it initially sought to acquire, and what remained was a ‘mismanaged business that over the first half of 2020 haemorrhaged cash for the first time in a quarter century, with no end to its problems in sight'.
In response to these claims, Tiffany argued that it had a strong precedent for paying out dividends and had never decreased them or failed to pay them out since 1987, including throughout the 2008 financial crisis.
The Letter
One of the conditions to closing the original deal required that no Government Entity shall have enforced a restriction or injunction preventing or impairing the transaction from taking place, including preventing the deal from closing by the outside date (24th November 2020). On the 31st of August 2020, LVMH received a letter from the French Minister of Foreign Affairs asking the company to delay the deal with Tiffany due to the US's decision to impose tax on French goods. LVMH argued that this letter meant that the aforementioned condition could not be met.
Tiffany contended that the letter from the French Minister did not constitute such a restriction and therefore did not obstruct the condition to close. This was because an order from a Government Entity could only prevent the deal from closing if the order was ‘final and non-appealable’, whereas the letter from the Minister appeared to be more of a recommendation, rather than a strict order. Tiffany also alleged that LVMH had solicited this letter from the French Government, although this was never proved. Finally, there were doubts about the Minister's authority over whether he could actually demand such a delay. Tiffany asserted that only European Union anti-trust regulators would have the power to intervene and that ‘LVMH nowhere contends that the foreign minister has any jurisdiction over the transaction’.
The New Deal
Instead of battling it out in court, LVMH decided instead to return to the negotiating table with Tiffany, likely because their claims would not have succeeded. MAEs, in particular, can almost never be relied upon, with the Delaware Chancery Court having only ever found one instance where an MAE had occurred and could be used to terminate a deal. It was unlikely that the MAE LVMH sought to depend on would have been an exception, since the pandemic was a global event which affected all luxury retail stores and not solely Tiffany. In fact, shortly after LVMH and Tiffany’s dispute, the Delaware Chancery Court considered a case in which they determined that a pandemic does not constitute an MAE unless the target had experienced a 50% fall in sales (Snow Phipps Group, LLC v KCAKE Acquisition, Inc, et al., C.A. No. 2020-0282-KSJM (Del. Ch. April 30, 2021) (McCormick, V.C.).
Although LVMH managed to negotiate a lower price for Tiffany in the end, this discount came with no walkaway rights for LVMH, with the agreement stating that should LVMH take Tiffany back to court in an attempt to exit the agreement again, the price would revert back to $135 per share. There were also no provisions in the new deal allowing LVMH to back out of the transaction should another letter from the French Minister appear. The agreement also allowed Tiffany to pay all its usually quarterly dividends to shareholders. Therefore, despite the lower acquisition price, the new deal seemed to put Tiffany in a better position than the original one.
Post Covid-19
Recovering from the pandemic, Tiffany managed to beat Wall Street expectations, bouncing back quickly under LVMH's new leadership. Previously, Tiffany had been struggling to appeal to younger generations, but under Alexandre Arnault's guidance they were able to turn this around. This included using celebrity endorsements and brand collaboration to boost Tiffany’s appeal to a modern audience. Recently, Bernard Arnault announced that Tiffany’s profits for 2024 was double what it was in 2020 prior to the acquisition. LVMH has also shown powerful growth after the acquisition, exceeding that of its competitors, largely due to the strong performance of Tiffany. In 2021, it was announced that Tiffany generated an income of $900 million Ultimately, LVMH's acquisition strategies prove to remain as successful as ever, with the brand continuing to dominate the global luxury sector.