Due to the quarantine caused by the epidemic, conflicts between husbands and wives who live at home have increased dramatically, and divorce rates have soared in many countries.
Now, this trend seems to be spreading to the commercial field.
In November last year, LVMH (LVMH Group) "proposed" to American jeweller Tiffany & Co. with a dowry of 16 billion U.S. dollars.
This is the largest transaction in the history of the luxury goods industry.
The industry generally believes that the two marriages will not only expand LVMH's brand lineup, but also enable Tiffany to get out of the trough. As expected, Tiffany agreed.
Everyone thinks this is a match made in heaven.
At that time, Bernard Arnault, President and CEO of LVMH, said with great enthusiasm that he respected Tiffany very much. He considered it so romantic and a globally recognized symbol of love, and promised to ensure that this jeweler would be a symbol of love in the future. Flourished over the past century.
It's just that nine months have passed, and now LVMH has repented.
In this issue, the Startup article "LVMH and Tiffany&Co.’s Messy Breakup" (LVMH and Tiffany&Co.’s Messy Breakup) is introduced by Annia Mirza.
In May of this year, the media reported that due to the epidemic, LVMH intends to re-examine its deal with Tiffany.
Therefore, it is not surprising that LVMH announced last week that it could not continue to complete the transaction due to a series of incidents.
In addition to the new crown epidemic, LVMH also came up with an unusual trump card.
The luxury goods giant said that because the United States threatened to impose trade tariffs on French products, it had received a letter from the French government asking LVMH to postpone the transaction.
Earlier this year, France imposed a controversial “tech tax” on digital companies, which hit the US technology giants such as Google, Facebook and Amazon the hardest.
To this end, the United States announced in July this year that it would impose tariffs on 25% of French products.
LVMH explained that this letter is a government order and the company has no choice but to comply.
The Tiffany representative only read the translated version of the letter for a few minutes and was prohibited from taking pictures.
However, the author believes that this is just a blindfold.
In fact, LVMH has been looking for a way to get out of this deal for several months.
Arnault is known as the "wolf in sheep's clothing" because of his aggressive business strategy. It is widely speculated that he may have asked the government for help.
Of course LVMH insists that these allegations are unjustified, but this is not the first time Arnault has been involved in the luxury war.
In 2017, LVMH threatened to suddenly launch a hostile acquisition of Hermès, a brand that prides itself on its tight family control tradition.
Twenty years ago, Gucci made similar headlines for trying to get rid of Arnault's predatory acquisition.
Although the two acquisitions were unsuccessful, they earned Arnault the title of master of strategy.
However, Tiffany refused to divorce after LVMH's abacus was struck, and immediately went to the Delaware court to file a lawsuit against LVMH.
Its chairman Roger Farah stated that the French government’s letter cannot provide a legal basis for breaking a binding contract. LVMH’s failure to engage Tiffany in negotiations with the government violated its merger. No other French company has received a similar letter urging it to "defend the national interest" for its consulting obligations in the agreement, which indicates that there is a problem with LVMH.
In the same press release, Farah further accused Arnault of procrastinating in the acquisition process. Tiffany was convinced that LVMH tried to use any possible means to avoid completing the transaction in accordance with the terms of the agreement.
Offended by Tiffany’s allegations, LVMH is not far behind and is preparing to launch a legal battle.
The luxury goods giant issued a statement on September 10 stating that Tiffany’s lawsuit was clearly prepared, which proved that Tiffany was dishonest in its relationship with LVMH.
LVMH disclosed Tiffany's financial status and subsequently announced that Tiffany's performance in 2020 was very disappointing, significantly lower than similar brands of LVMH Group.
It also questioned the way Tiffany’s management and directors deal with the new crown crisis, especially the decision to pay dividends when Tiffany is losing money.
LVMH is trying to invoke the "Material Adverse Effect" ("MAE") clause in the merger agreement, a clause of MAE that stipulates that if a major change in circumstances results in a decline in the value of the target company, the buyer can be allowed to terminate the proposed transaction.
As of July 31, Tiffany's global sales have fallen by 29%.
If LVMH can prove that this sluggish financial performance constitutes a major change in the corporate environment and reduces the value of the company, then it can exit the transaction with almost no impact.
The author stated that no one knows who will win this melee.
In May of this year, private equity funds Sycamore Partners and Victoria Secret also had a similar breakup experience.
The former wanted to withdraw from the acquisition of a 55% stake in the underwear brand, and also regarded the MAE clause in the agreement as a savior.
Sycamore argued that the agreement required Victoria's Secret to operate in accordance with normal business processes, but Victoria's Secret did not do this. Instead, it closed the store, gave employees temporary leave, and defaulted on rent.
In response, Victoria's Secret parent company L Brands pointed out that when the acquisition agreement was signed, the epidemic had already appeared.
Therefore, both parties have agreed that the MAE clause does not apply to matters related to the epidemic.
In the end, Sycamore and Victoria Secret agreed to "jointly terminate" the acquisition.
However, the author pointed out that this similar case did not have absolute reference value. When the acquisition between LVMH and Tiffany was announced, the epidemic did not exist, and it was decided whether the MAE clause was valid.
LVMH and Tiffany may also shake hands and terminate the transaction together.
Or, LVMH can use this legal battle as an excuse to lower the $16 billion purchase price.
Given Arnault's preference for long-term strategy, this is quite possible.
The outcome of this controversy in the luxury goods industry is very important. It will make people understand whether a public health crisis will become a reason to affect established commercial agreements.
