Don't use the bag to be a notary: the Hermès case

Hermès, on the other hand, chose well by deciding to go public in order to liquidate the hypothetical family member? It could have gone into long-term debt, with a bank or through a bond, and bought, as its own shares, that million. Without repaying the debt but only the interest, the cost to date of those shares would be 3.3 million (+230%, the average yield since 1993 of an AA bond), their value, as seen, 254.4 million. Certainly, debt would have had to be issued in 1993 amounting to about 25% (!) of the company's value: it would have taken a lot of entrepreneurial courage, but from a financial point of view it would have been sustainable debt. It had already happened in the history of the family: in 1922, Émile-Maurice, grandson of founder Thierry and grandfather of Jean-Louis Dumas, the leader in 1993 at the time of the listing, took over his brother Adolphe's share, becoming the sole owner of Hermès and giving birth with his four daughters to the current ownership branches, Dumas, Guerrand, Puech.

Hermès, since 1993, has never made capital increases only by 'splitting' shares to avoid a share price too high, and has never made acquisitions with share swaps, instead distributing dividends of around 13.5 billion; since 1993, it has therefore not exploited any of the advantages offered by the market; it has, however, had some disadvantages: the costs, between initial and annual estimated at around 70/80 million, and the risks of opening up capital.

Patrick Thomas, the French maison's executive chairman, a trusted non-family manager busy finalising the transition from Jean-Louis to Axel Dumas, realised the risk of opening up the capital when one Sunday in October 2010, while out cycling in the south of France, he received a phone call from LVMH's Bernard Arnault announcing that he owned 17% of Hermès and that he would continue to buy shares the next morning when the stock exchange opened. Arnault is known in the markets by the nickname 'the wolf in cashmere' for his aggressiveness in acquiring luxury companies especially when they are in crisis and at times of transition between generations. LVMH had started to acquire 4.9% of Hermès in 2000 and in 2010, at a moment of weakness due to the generational transition that Thomas himself was managing, Arnault showed up to acquire shares from the market and family members with the aim of incorporating Hermès into LVMH.

Patrick Thomas called Bernard Arnaul's behaviour 'peu galant' (inelegant) on the phone, then called Bertrand Puech, chairman of the supervisory board and the family's representative to address the issue, declaring: 'The battle we are waging against LVMH's presence in our capital is not a financial battle, it is a battle of civilisation'. Thomas created H51, a company in which most of the family shareholders conferred around 51% of the shares, committing themselves not to sell for at least 20 years (today the commitment is extended to 2040), to give pre-emption on the shares not conferred, to pass any sales between family members through H51 and to use 1/3 of the dividends received to buy Hermès shares on the market. This last step could highlight the entrepreneurial family's desire to delist the company in the future by remedying the 1993 listing.

The 'battle of civilisation' came to an end in 2013 when the AMF, the French market authority, condemned LVMH to pay a ten million fine for accumulating Hermès shares through equity swaps with several banks to avoid market disclosure obligations and to redistribute the 23% stake it held in Hermès to its shareholders and institutional investors. In February 2014, sixth-generation Axel Dumas declared at the shareholders' meeting that appointed him CEO of the family business: 'this has been the battle of my generation'.

The Hermès case is particular both for the extraordinariness of the company's returns and for the enormous danger taken in the opening of the capital, but it remains an interesting case for those families who think that listing or selling a minority to third party investors rather than going into debt is the best way to liquidate a branch of ownership.

(*) Lecturer in Family Business Strategy - University of Turin - bernardo.bertoldi@unito.it