With a net worth of 200 billion dollars, the French businessman Bernard Arno is the richest man in Europe and the second richest man in the world. Although the position on the top spot changes every few weeks based on the erratic moves of Tesla's share price, Arno is a CEO chairman and controlling shareholder of Lvmh, the massive luxury conglomerate behind Louis Vuitton Fendi Celine Blagari, Hennessy and 70 other brands with such a powerful portfolio of iconic Brands, It's unsurprising that Lvmh has attained a half trillion dollar market cap and with our no owning about 40 percent of the shares, he has become one of the richest people in the world. But you might be surprised to hear that Arno is not the founder of Lvmh. In fact, he hasn't founded a single fashion company in his life.

So how is it possible for him to acquire almost half the shares of a half trillion dollar company? Arno Amassed his position of wealth and power through multi-decade-long scheme of financial engineering, anti-competitive business strategies, backstabbing and exploitation join us as we peel back the layers of the onion and see how Bernard Arno earned the moniker wolf and Kashmir foreign. Ard Was born into a wealthy family in France with his father owning a successful real estate company. After graduating from an elite French University he started working in the family business, becoming president after his dad retired in the early 1980s. Bernard moved to New York hoping to expand the family real estate business into the U.S This was during the Reagan Era of deregulation and Wall Street was becoming increasingly sophisticated with its Financial engineering.

One of the most significant developments of this era was the rise of private Equity firms or corporate. Raiders as they were called at the time. they would identify publicly traded companies which they viewed as being mismanaged, then proceed to borrow a bunch of money and take the company private via a hostile takeover. They would then replace the entire management team, layoff workers, and liquidate some or all of the business when done right.

This can be extremely lucrative because the investment returns are multiplied by leverage. Our note was captivated by the obscene amounts of money that America's corporate Raiders were making in such a short period of time. It was anathema to the conservative of culture of family-run businesses in Europe where wealth is slowly accumulated over Generations Our no took his learnings from New York and went back to France. He was dead set on disrupting the Sleepy luxury fashion industry.

Upon Returning to France Bernard Arnold said his sights on Busock, Saint Perez a beleaguered conglomerate with operations and clothing manufacturing. and Retail the company had recently declared bankruptcy. but nobody wants to buy out of bankruptcy court because it was seen as a failed business with investor interest so low. Arno was able to buy it for just 60 million dollars.

He used 15 million dollars from his family fortune and secured a loan for the remaining 45 million. So why was Arno willing to buy this failed business that nobody else in France wanted? Armed with what he learned in America Arno was able to view Busock differently from his French peers. Amidst the struggling segments of Usok's portfolio, there was one sparkling gem Dior a prosperous luxury fashion house steeped in Rich history as a standalone company Dior would be extremely valuable, worth far more than 60 million dollars, but it was being dragged down by the rest of the group upon taking control of Busak, our nose swiftly implemented as private. Equity Playbook laying off 9 000 employees and liquidating most of usage assets except for Dior With these actions, he turned a bloated, unprofitable conglomerate into a much smaller but profitable company.

With a successful acquisition of Dior Our No had already established his net worth in the hundreds of millions of dollars. but this was just the beginning of his ambitions. Louis Vuitton was and still is one of the most prestigious luxury brands in France It was founded by a woodworker named Louis Vuitton in 1854 who made wooden trunks for horse-drawn carriages. Eventually, they expanded to leather handbags and clothing items, which is what it is best known for today.

Control of Louis Vuitton was passed down through the generations and in the 1980s it was run by Henry Rackamere, who married into the Vuitton family. One of Rack and Mirror's biggest fears was that an outside investor would make a hostile bid to buy out the company, while most shareholders would love to receive a buyout offer at a premium to the current Share Price family run businesses often take a completely different view. They don't care about the financial gain alone. They want to maintain control of their business Empire so they can pass it down to Future Generations as a standalone company with a relatively small market cap.

Louis Vuitton would be a bite-sized Target For larger European conglomerates, Racket Mirror came to the conclusion that it was eat or be eaten. The only way he could prevent a larger competitor from acquiring Louis Vuitton was to make Louis Vuitton too big to acquire. He accomplished this by merging with the luxury alcohol company Moet Hennessy to form the combined company. Lvmh Moat Hennessy is a premium alcohol brand producing expensive champagne and cognac.

It was structured as an all-stock merger. The Baton Hennessy and Moet families would collectively own 51 of the combined company. If they all stuck together, a hostile takeover would be mathematically impossible. Everything appeared to be going smoothly.

The combined Lvmh company would be too big for an outside company to acquire, allowing control to stay within the Baton family. While Ragamir thought he was building walls to defend Louis Vuitton from corporate Invaders, he had inadvertently led the enemy in through the front door before the merger. Moet Hennessy was run by a man named Alan Chevalier Chevalier and Rakimir agreed to a power sharing Arrangement where recommir would run the fashion side of the business while Chevalier would run the alcohol side. This was an untenable way to run the combined company because the two men almost immediately had disagreements about the Strategic direction of the company specifically.

Reckoner thought that Louis Vuitton was given a back seat compared to the larger alcohol business. Around this time, Recommir gained the acquaintance of Bernard Arnold who would become a rising star in the luxury industry following his successful takeover of Dior. Given our nose success in the fashion industry, Recommir believed he would be a much more suitable business partner than the Hennessey and Moet families. Racket Mirror offered a proposal to Arno using his existing wealth as leverage.

Arno would purchase 25 of Lvmh's stock on the open market Arno had already amassed a personal Fortune of hundreds of millions of dollars as a result of his masterful Dior acquisition. Plus, he had good relations with investment Banks who could lend him money as well, so he would have the financial wherewithal to buy 25 of Lvmh's shares. With this, the Baton family and Arnold combined would own a controlling stake in Lvmh. They could then push out the Hennessy and Moat families, allowing the Baton in our no families to run Lvmh together as equals, but Arno had much bigger Ambitions Instead of sharing power with Rick and Mirror, he wanted the whole company to himself and the infighting between Recommir and Chevrolet year gave him an opening.

Arno Teamed up with the Irish alcohol giant Guinness and together they bought 24 of Lvmh's shares on the open market for a cost of about 2.6 billion dollars. Guinness Was interested in Lvmh because they wanted to form a strategic partnership with MOA and Hennessy Guinness could leverage their existing distribution Network in the UK and North America to greatly increase sales of these alcohol brands are no promised Guinness that they could get the Strategic partnership so long as they supported him becoming chairman and CEO of Lvmh in addition to the 24 he bought together with Guinness Bernard bought an additional 1 billion dollars worth of shares on his own, bringing his ownership stake to 43.5 This made our note the single largest shareholder in Lvmh. Although he didn't quite own a controlling stake, he convinced the moat and Hennessy families who collectively owned 18 of the shares to support him. Having secured more than 50 percent of the sheriff's to vote in his favor, Arnold was able to kick out Rakimir and install himself as chairman and CEO Foreign 1989, it had a market cap of just 5 billion dollars.

Today, that value has increased 100 fold to almost 500 billion dollars. So how were they able to achieve such an extraordinary growth rate? Since our Note took over, the company has been on Non-Stop acquisition spree, doing a major acquisition almost every single year. These include the Cosmetics retailer Sephora The Watchmaker, Tag Heuer The Fur and Leather Clothing Maker Fendi, the jewelry producer Tiffany and many others. These Acquisitions are largely responsible for driving Lvmh's revenue and share price growth.

The cumulative cost of these Acquisitions adds up to almost 50 billion dollars, the vast majority of which was paid in cash. So where'd they get this money? They borrowed it. Lvmh's debt has been increasing substantially from about 5 billion euros in 2008 to almost 20 billion euros today. Despite the large amount of Leverage, the company has maintained a pristine credit rating, allowing them to issue bonds at very low interest rates as they acquire rival fashion brands.

This increases the group's operating profit. The higher operating profit means they have a greater ability to service debt, so lenders are willing to lend them even more money. They use this to do even more Acquisitions and repeat the cycle. Of course, this strategy only works if Lvmh can increase the operating profit of the brands they acquire.

For example, in 2020, they acquired the American Jewelry Company Tiffany. Within two years of Lvmh's ownership, profits doubled. While Tiffany is perhaps an extreme example, they have consistently been able to increase the profits of Brands they acquire. There are a few ways they have done this.

Firstly, the luxury goods industry as a whole has been growing at a compound annual rate of six percent per year over the past decade. This far exceeds GDP growth, with the majority of the growth coming from China. As the Chinese economy grew, more and more people could afford luxury items, resulting in sales growth across the industry. But this is only part of the story.

By acquiring so many brands, Lvmh has amassed the tremendous power to set prices and Crush their competitors. While China is the most important market for luxury goods today, up until the mid-2000s the top spot was occupied by Japan. At the time, Japan was the world's second largest economy and they had a massive upper middle class with the means and desire to purchase luxury products. American and European fashion brands alike were expanding aggressively into the country and competition was fierce.

One of the brands attempting to make inroads in Japan was the leather purse maker Coach. According to Coach Ovmh, Representatives contacted Japanese department stores and threatened to stop selling them Lvmh products. If they also sold Coach products, they could either sell Lvmh or Coach, but not both given the massive number of Brands Under the Lvmh Umbrella Most of the department stores chose the French conglomerate. If these allegations were true, this Behavior would be blatantly anti-competitive and illegal.

In 2005, Coach made an official Complaint to the Japan Fair Trade Commission. The commission ultimately ruled in favor of Lvmh as they did not find sufficient evidence of anti-competitive behavior. According to Coach, Lvmh stopped Its anti-competitive Behavior only after they filed the lawsuit. So by the time the commission made its ruling, the offending it activity had already been stopped As an outside Observer it's difficult to tell what actually happened.

It's possible that Coach was over exaggerating their claims against Lvmh, but what is indisputable is that Lvmh's consolidation of the industry had given them a tremendous amount of Market power and we can see this in the numbers. One of Louis Vuitton's most popular products is their Speedy bag. They've been selling this bag since 1930, so we can use it as a proxy for how Louis Vuitton has increased its prices over time. According to an analysis by Luxfront, the price of the Speedy 25 bag in the US has increased from 350 in 1998 to 1350 in 2022.

Adjusted for inflation, the 1998 price is equivalent to about 600 today. In real terms, the price of the bag has more than doubled over the past 20 years. In fact, this actually understates the price increases. In 2011, they launched the Speedy B which is the exact same thing, but with a shoulder strap added.

This shoulder strap will cost you an additional 300. Only a company with significant Market power can do something as ridiculous as charging an extra 300 for a strap. The price increases are not the result of the bag becoming more advanced or increasing in quality. The only difference is that the industry is more Consolidated today than it was 20 years ago.

Many of Louis Vuitton's competitors are owned by Lvmh, allowing the company to strategically limit the quantity produced to achieve higher prices. The benefits of Lvmh's market dominance can be seen in their ability to raise prices faster than their competitors. According to an analysis by Deloitte Louis Vuitton increased its prices in China by 11 in 2020. Despite the pandemic, this increase was Far higher than competing luxury.

Brands Now we can start to see the rationale behind all their acquisitions. by gaining more and more control, Lvmh has achieved near Monopoly status, allowing them to raise prices, increase profits, and acquire even more of their competitors. Of course, generating revenue is only half the battle. Your profits are also determined by how much it costs you to generate that.

Revenue When people shell out two thousand dollars for a jacket, they expect the quality to be very high and producing high quality products costs a lot of money for Louis Vuitton and most of Lvmh's other premium. Brands They manufacture the products in France or Italy. This is a major selling point for consumers if a bag is handmade in Italy by highly skilled Artisans It reasons to believe its quality will be far higher than mass-produced bags you would find at Walmart Louis Vuitton Posted this video on their official YouTube Channel showing the inner workings of one of their factories. in France it has over 13 million views.

This is the site of the supply chain that they want you to see according to European Union regulations, when a product is made in more than one country, the country of origin is the one where the item underwent the last substantial economically Justified processing. It appears that Lvmh's lawyers spent tremendous efforts finding the bare minimum amount of processing they can do in Italy and still put on a made in Italy label. In 2017, the Guardian investigated a contract manufacturer in Romania that made shoes for Louis Vuitton. They would complete everything except for the soul which was then sent to a factory in Italy to attach the soul.

This way they could put a maiden Italy label even though the majority of the work was done in Romania. The factory building also had no visible logos on the outside and its managers took great pains to conceal the fact that they were supplying. Louis Vuitton Romania is a far poorer country than Italy and workers at the factory are paid the equivalent of three hundred dollars per month, a fraction of what equivalent Italian workers would make when confronted with this information. Bernard Arnold Denied that Louis Vuitton makes its shoes in Romania but eventually the Guardian gained access to insiders at the Romanian contract manufacturing facility and confirmed that they are in fact suppliers to Louis Vuitton One of the most difficult types of clothing to make are hand embroidered lace dresses such as the one sold by Dior an Lvmh company.

For some complex designs, it can take hundreds of hours of Labor to produce one dress, even if you sell the dress for thousands of dollars, this can be prohibitively expensive according to an investigation by the New York Times Dior uses contractors base in India who paid their workers the equivalent of a few dollars per day and offer unsafe working conditions. Now we can see how Bernard Arnold became the world's second richest man. He conducts leveraged buyouts of his competitors, gaining Market power and raising prices. He then ships a manufacturing overseas to minimize the cost and thus maximize profits.

Higher profits allows him to borrow even more money, rinse, and repeat. foreign. If you look at Lvmh's portfolio of 75 brands, most of them are what you would expect premium alcohol, leather goods, perfumes, watches, and cosmetics retailers, but the last category seems off. The conglomerate owns a collection of some of France's most popular newspapers.

Specifically, they own Lay Echoes Investor and Leperazine, which collectively have millions of regular readers in. France These newspapers contribute a minuscule amount of Revenue little more than a rounding error compared to the luxury. Brands Not only that, but they are also burning cash. In 2022, the parent company had to inject more money into LA Parison to offset its losses.

Why would Bernard Arno one of the world's most Savvy businessmen acquire these newspapers which lose money and have nothing to do with the core business. I First thought: they might be trying to influence editorial decisions to promote their luxury. Brands But this doesn't make any sense. The newspapers that they own are normal newspapers that cover topics about the economy, politics, financial markets National and world events.

Etc They're not fashion magazines, they're just normal newspapers. Also, they only publish in the French language, giving them substantially zero readership abroad with only six percent of the group sales coming from France. This wouldn't be enough to move the needle. Anyway, the rationale for buying these newspapers is not to advertise their fashion brands.

It's far more sinister. On November 25th, 2019, Lvmh entered into a definitive agreement to acquire the American Jewelry Company Tiffany for 16.2 billion dollars large Acquisitions Like this one, always take at least a few months to close as they require shareholder votes and Regulatory approval. Within a few months after the deal was announced, the pandemic began, which greatly reduced International tourism a key source of Tiffany sales. This caused same store sales to decline a whopping 44 percent.

Lvmh's own sales were declining for the same reason: Arnold was worried about the financial health of the company. Paying 16 billion dollars in cash would stretch their balance sheet thin at the worst possible time. He wanted to pull out the deal, but because he had already signed a definitive agreement, he was legally obligated to follow through. At the same time, it just so happened that the U.S and France were in the middle of a trade spat.

France had recently proposed a tax on internet companies that would affect U.S tech giants like Google and Facebook. The US responded by threatening tariffs on French Imports specifically luxury goods. On August 31st 2020, the French Foreign minister John Yves Ladrian sent a letter to Bernard Arnold saying quo: the American government has decided to implement an additional customs duty on the import of certain French Goods In particular, Goods in the luxury sector France conserves these measures legally objectionable. Proposed Investments by French Companies in sectors that could be subject to such sanctions must be reevaluated in light of this new context.

In order to support the steps taken vis-a-vis the American government, you should defer the closing of the pending Tiffany transaction until January 6 2021. I Am sure that you will understand the need to take part in our country's efforts to defend its national interests. unquote. Lvmh put out a press release saying that the French Foreign Affairs Master sent them a letter directing them to defer their acquisition until after January 6 2021.

Because the acquisition agreement had an expiration date of December 31st 2020, it would not be possible to complete it. Lvmh claimed the situation was out of their control. The French government was forcing them to abandon the merger because of an unrelated trade dispute. The fact that Lvmh itself wanted to pull out the deal anyway was just a lucky coincidence.

Analysts were immediately suspicious of the letter. During a press conference, Lvmh's CFO was asked Point Blank whether the company had sought help from the government to block the deal. He replied quote, you must be joking Are you seriously suggesting that we procured the letter I don't even want to answer that question. unglow.

However, this story quickly fell apart responding to questions by French lawmakers. Ford Minister Drion revealed that he wrote the letter in response to a query the ministry received from Lvmh. This contradicted the conglomerates claim that the letter was unsolicited. shortly thereafter.

Bloomberg reported that Arno himself contacted the foreign Ministry asking them to help him pull out of the deal. With Lvmh having been exposed, they finally agreed to follow through, although not before Tiffany agreed to a 400 million dollar price cut representing two and a half percent of the purchase. Praise! The Tiffany controversy exposes a troublingly close relationship between Arno and the French government with our no having been a public supporter of President Emmanuel Macron Arno successfully established Lvmh as a strategically important company for France putting him in a position where he can call up high-ranking government officials to help with his legal battles. The fact that he owns three of the country's most read newspapers possibly gives an influence over politicians and greater access to government officials.

Our nose control over the news media also has other consequences. In 2016, a left-wing activist and filmmaker named Francois Ruffin produced a documentary film called Mercy Patron which translates to thanks Boss The documentary interviewed former employees of Busak. Saint Perez who were laid off after I know took the company over back in the 1980s. Needless to say, it is highly critical of Mr Arno and Lvmh Bernard Arno was not amused.

In fact, he was so angry that he banned any of the three newspapers that Lvmh owned from even mentioning the film. Alright guys, that wraps it up for this video. What do you think about Bernard Arno Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.

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