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Fashion Faux Pas

15 February 2007 Fashion Faux Pas: Gucci vs. LVMH In the financial aspect, the main goal of a business organization is the maximization of shareholder value. This, in turn, is determined by the various decision implemented by the company’s management. The case solely looks at how shareholder value is affected through the different strategic moves of the fashion leader Gucci.
In its quest, to raise financing, Gucci has embarked in an initial public offering in 1995. One of its largest competitors, LVMH, has take advantage of this event by buying Gucci’s shares and being the company’s single largest stockholder. Alarmed by a potential takeover, Gucci has defended its position and ownership though the creation of an employee stock option plan. This move has matched and diluted the ownership of LVMH in the company. After the aggressive moves of LVMH to defend its interest as a stockholder, Gucci further forged partnership with PPR thereby giving the latter 40% of the company and in the end, buying out all the shares of LVMH. The main problem faced by Gucci then is how to maximize its strategic partnership with PPR which will not hurt its stock prices and minor shareholders in the long run. With the criticisms from expert, the company is also urged to maintain a fair dividend policy.
In considering this issue, Gucci must consider limiting the power that PPR has in the business organization. High level of ownership often implies over dependence and dilution of management’s power to decide for the company. Gucci should seriously consider the offer of PPR to buy all the shares of its minor stockholders. If this happens, Gucci might be in the same threat that it had with LVMH. On the other hand, Gucci should also be able to look at the interest of its minor stockholders and their reactions’ effect on the share price.
This paper recommends that Gucci limits the power of PPR in its organization by giving it a limited involvement in its operation. The company should not adhere in having minor stockholders sell their shares to LVHM. Gucci must focus on improving its financial performance in order to drive its stock price up and prevent fluctuations due to speculations. The company should also pay dividend according to the earnings of the stock to all its shareholders including PPR.