Hermes fends off Louis VuittonHermès -- the French fashion house that has evolved over its 174 years from selling harnesses and saddles to $7,000 handbags -- is refusing to be worn on the arm of competitor Louis Vuitton Moët Hennessy (LVMUY). On Thursday, a French court of appeals confirmed a January decision that will allow the descendants of Thierry Hermès to form a holding company, blocking 50.2% of Hermès (HESAF.PK) shares from being purchased by outside buyers like LVMH.

On Friday, Hermès shares dropped by 7.3% after trading opened. As of Monday, share prices had not yet fully recovered, hovering around 255 euros ($349) per share.

However, the company's value remains significantly higher than it was a year ago, when shares were trading at around 160 euros ($219). Amidst rumors of a buyout, prices have steadily increased ever since since LVMH first acquired 17.1% of Hermès International shares in October 2010.

LVMH's scavenging for equity hasn't been well-received by the current owners of Hermès. At its annual shareholder meeting in May, Chairman Bertrand Puech accused LVMH Vice Chairman Pierre Godé of "attempts to undermine us the likes of which we have not known in 174 years."

Today, LVMH owns 21.4% of Hermès, though the court decision last week will prevent it from acquiring any more than the 7% of shares currently available in the market. About 72% is owned by members of the Dumas, Puech and Guerrand families, all descended from the original founders. The holding company will group together the equity of 52 family members and company insiders until 2031, keeping those shares from being publicly traded, and thus, out of the hands of competitors.

Preserving a Culture of Meticulous Craft

Typically, shareholders forming a holding company must first make a public offer to buy out minority shares. As such an offer could be easily countered by LVMH or other competitors, Hermès has requested to bypass this requirement on the grounds that the family already controls the majority of the company. In January, the French Financial Market Authority approved the request. Still, only after Thursday, when the court denied an appeal made by an independent minority shareholders' advocate, was the Hermès family holding company allowed to proceed.

While twenty years may seem like a long time for a family to freeze its investments, time has never been of much importance for Hermès, which has built its brand around tradition and stability. The family-owned company makes its best customers wait years on lists to purchase bags. Trends are eschewed in favor of lasting materials and meticulous craft.

As the company stated in a press release Thursday, "The creation of this [holding] company, which will take place in the next few weeks, will strengthen the independence of the Hermès Group over the long term, as well as as supporting the continuation of its strategy of creativity and excellence in its craftsmanship and observance of its values." Reading between the lines, it is clear that the families saw not only their ownership of Hermès under siege from LVMH, but also the company's particular strategy and culture.

As David Wu, a luxury goods research analyst at Telsey Group and a former brand manager at LVMH explains, points out, Hermès is expecting a sales deceleration in the second half of the year due to capacity constraints. "As the holy grail of luxury retail, they are very cautious," he says. "They don't want to become too big too soon." Still, with popularity of Hermès' bags increasing, particularly in Asia, LVMH could potentially help Hermès meet demand though productive synergies in manufacturing and distribution, Wu says.

Would LVMH-backed factories for Hermès have meant that bags would have ceased to be hand-sewn? Wu thinks not. "LVMH lets its brands have their own autonomy and creative freedom," he says. More than their products, the Hermès families wants to protect ownership in the business.

The holding company will almost certainly ensure that. Still, with LVMH out of the picture and the speculative market starting to deflate, perhaps a Birkin bag would be a better investment for fall than shares in Hermès.



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