The world's richest person is trying to head off a succession battle

Bernard Arnault is aware of how succession can make a company vulnerable and how divisions can prove fatal. He has exploited weakness in other family-run businesses including rival Hermes International to try and gain an upper hand in takeover battles in the past.

Now the 73-year-old LVMH founder is using that knowledge in a bid to cement his family's control over the world's largest luxury goods company and prevent sibling infighting. The exercise is fraught, as fights within other famous billionaire clans from the Murdochs to the Kochs and Ambanis can attest.

Through a series of moves over the past year, many of which have escaped public attention, Arnault has laid the groundwork he hopes will prevent such an outcome for his own family empire. At the heart of the plan is a new holding company, control of which is split equally among his five children. It already has power to influence major decisions affecting the luxury goods group. This is the vehicle the patriarch hopes will prevent divisions among his heirs and ensure LVMH Moet Hennessy Louis Vuitton SE will remain under family control for decades to come.

Left unspoken in the plan is whether one of the five children will replace Arnault in the operational role of chief executive officer of LVMH, the business he created in the 1980s by merging the companies that now make up the name. The potential contenders would be Delphine, 47, and Antoine, 45, from a first marriage, and Alexandre, 30, Frederic, 28, and Jean, 24, a trio he had with his wife, the Canadian-born pianist Helene Mercier. Rapid growth, fueled by global demand across its 75-strong stable of brands ranging from Dom Perignon and Fendi to Louis Vuitton and Tiffany & Co., has made LVMH Europe's most valuable company, worth more than €400 billion ($433 billion).

Speculation about the succession battle at LVMH was revived by the promotion in January of Delphine to head the Christian Dior Couture brand, just as her brother Antoine became CEO of a main holding company of the luxury group. Both have spent decades climbing the corporate ranks. The three younger siblings are also gravitating up through the group, adding to the impression of a race to the top.

"Every time there is transition, this is the most vulnerable period in the life of a family-controlled company," said Raffi Amit, a professor at the Wharton School of business, who studies wealth across generations at family firms. "Families where each generation feels as though their role is to create wealth, rather than consume wealth, will sustain themselves for a much longer time.''

The LVMH chairman and CEO, who replaced Elon Musk as the world's richest person in December, has no intention of stepping down anytime soon. In April, Arnault orchestrated the raising of the age limit for his roles by five years to 80. Observers point to his vigorous health and fitness. At an earnings presentation in January he looked trim and was combative, dodging questions about the succession. Those who know him well say he is likely to try and extend the age rules again, with some even raising the possibility that he will die on the job.

LVMH declined to make Arnault and his children available for interview about his succession plans.

'A wolf in cashmere'

Arnault has never watched the HBO series Succession, said a person close to the LVMH boss, but he will be more than aware of the family dramas that fed the idea of the streaming show. His plan to hand the business to his children is an attempt to avoid the pitfalls that have bedeviled other families as wealth moves from one generation to the next.

The billionaire Murdoch family, widely believed to be the inspiration for the TV show, has seen bouts of bitter rivalry among children challenging for power within the empire of 91-year-old founder Rupert. In Asia, India's Ambani clan will be forever scarred by the 2002 death without a will of the patriarch, which paved the way for a protracted public battle for control between his two sons, who were both involved in the business at the time.

Another of the world's wealthiest people, Charles Koch, triumphed in a family fight. He and his three brothers inherited Koch Industries Inc. from their father, in 1967. A feud broke out and brother William was ousted in 1980 after trying to wrest control. Charles and another brother David bought out William and Frederick in 1983, but their legal disputes lasted for nearly two more decades.

If there is any discord among the Arnault children it has yet to seep into the public domain. And none of them have shown any resistance to joining the family business.

Arnault's fortune is up almost $34 billion this year and is valued by the Bloomberg Billionaires Index at $196 billion. Last year Arnault outlined — in a four-page stock market filing — how LVMH ownership would look post-founder and in December reorganized his holding company, Agache SE, to protect the family's hold on power. Agache controls Christian Dior SE, which in turn holds 41% of LVMH. Overall, the Arnault family owns 48% of LVMH's share capital and has almost 64% of the voting rights, meaning that the chances of a predator gaining control of Europe's biggest company are practically nil.

"What's important for the heirs to understand is that if there is discord between them, these misunderstandings could affect the performance of the group," said Philippe Pele-Clamour, adjunct professor at business school HEC Paris about the LVMH succession. "The problem will be even more complicated in the generation after them, that of the grandchildren."

The critical switch contained in Arnault's succession plan, was the transformation of Agache SE into a limited joint-stock partnership, Agache SCA, a corporate structure that permits a shareholder with a relatively small holding to have a huge sway. A measure described by one legal expert as a "very significant padlock."

A notorious example in France was Lagardere SCA, which allowed second-generation scion Arnaud Lagardere to retain control of the industrial and media conglomerate he inherited, with just 7% of the stock. His frittering away of the family fortune is considered the highest-profile succession debacle in recent French corporate history.

The LVMH founder plans to remain head of the joint partnership until another newly-created company, Agache Commandite SAS, decides to remove him and take over. That holding is owned through equal stakes by his children. On paper, it gives the heirs a measure of power. In reality, there are likely to be confidential conditions that dictate the circumstances required to trigger the transition, leaving the founder firmly in control for the foreseeable future.

Agache Commandite has a rotating, two-year chairmanship with Delphine taking the role first, and a five-member board to guarantee a balance of power among the children. Key decisions such as doing away with Agache SCA — the joint partnership — when their father dies or carrying out a major strategy change at the Christian Dior SE holding or LVMH would require unanimous board approval.

Arnault has long held regular, formal meetings with his children at LVMH headquarters to discuss business but in the new plan he added a requirement that the siblings be involved in major decisions affecting the luxury empire with immediate effect. While he maintains broad powers over Agache SCA, "certain important decisions" like those surrounding LVMH strategy, the appointment or removal of board members, top executives and dividend payments will require consultation with the children via Agache Commandite. This will hold for at least the next decade or until the father is no longer at the helm.

The children cannot sell their shares in Agache Commandite for 30 years without unanimous board approval and no partner in the company can come from outside one of the five bloodlines. After this period lapses, only direct descendants of Bernard Arnault will be able to hold the shares, with the family having preemptive rights.

LVMH investors have largely shrugged off the children's new-found power, satisfied with the brands' performance and the prospects of post-pandemic growth in China.

Succession faultlines have been weaponized by Arnault in the past. One descendant of the Hermes dynasty called the LVMH founder "a wolf in cashmere" after he launched a failed bid to take over the rival luxury group and laid bare weaknesses in the family's shareholding defenses. The sowing by Arnault of family friction to his own advantage goes back even further, when he partnered with, and then ousted, heir Henry Racamier to gain control of the Louis Vuitton business in the 1980s.

Family affair

Families who have been able to sustain vast wealth over a very long period of time are relatively few and far between. In the US they include the Mars clan behind the eponymous candy company and the agro-giant dynasty of the Cargill-MacMillans, in their fifth and seventh generations, respectively. In France, the family behind Hermes used Arnault's attack to batten down the hatches, strengthening its control, installing a sixth-generation descendant as CEO and enjoying the fruits of an almost 900% share price increase since October 2010, when LVMH announced it had purchased a stake in the Birkin maker.

Yet even when harmony is sustained, profitability doesn't always follow. Fund manager Carmignac studied the stock market performance of hundreds of family businesses, and found that between January 2004 and October 2022 they outperformed their non-family counterparts. Over time, however, the research shows that there is a diminishing return and that family-owned companies managed by the first generation gained almost twice as much value as those run by the fifth. The decline is blamed on a number of factors from a lack of reinvestment of profits by subsequent generations to not having the same philosophy as a successful founder, according to analyst Obe Ejikeme. Governance is also a risk since the top management of family firms tend to remain in place for longer.

From an operational standpoint, the Arnault offspring still have not been trusted to head the companies that make up the lion's share of LVMH profits, which the founder has kept in the hands of trusted lieutenants from outside the family who have in many cases mentored the heirs.

Sales at Louis Vuitton, the biggest LVMH label, crossed €20 billion last year. It has been run for the past decade by Michael Burke and is now headed by Pietro Beccari, the former CEO of Dior, as part of the broader reshuffle which elevated Delphine.

LVMH does not break out the profitability of each of its brands, but analysts at HSBC in December put Louis Vuitton at the top of the list with an estimated €11 billion in 2022, three times more than Delphine's new remit Dior Couture. And while Tiffany contributed more than €1 billion in profit last year, Loro Piana, the cashmere brand, watchmaker Tag Heuer and shoemaker Berluti — all overseen by the children, don't feature in the top 10 of the brands analyzed by HSBC.

Delphine Arnault, head of LVMH's second-biggest brand Christian Dior Couture, on Jan. 23. Photographer: Cyril Marcilhacy/Bloomberg

"The question is whether one of the children really wants to be the operational head of the group," Pele-Clamour said. "Or do they consider that their duty and mission is to exercise control without necessarily being CEO. Maybe one would be chairman of the board."

Should Arnault opt for a CEO from outside the family, Italian-born Antonio Belloni, 68, might be an option. The deputy CEO joined the firm in 2001 and is part of the company's executive committee and, like Delphine and Antoine, sits on the board.

"It probably would be helpful for Bernard Arnault to appoint a replacement, there would probably be less friction if he does," Amit said. "but it appears there is no rush to do it."

"What's important," he added, to minimize poisonous rivalry among the heirs, "isn't just who will be appointed but the process by which this is done."

Bernard Arnault "has a very smart family around him, he's putting them in a position to get trained, to progress, to be more relevant when it comes to the business," LVMH Chief Financial Officer Jean-Jacques Guiony told Bloomberg on the sidelines of the group's annual results. "It doesn't mean that he's launching one more than the others in a perspective of succession. I'm not even sure he himself knows his plans.''

While some say there's an element of competition between Alexandre and Frederic, who are close in age, this could be seen as a healthy emulation for the group in the eyes of their father, who has always fostered a degree of rivalry among LVMH labels.

"I don't have a favorite brand," Arnault quipped in October when asked about his preference among the LVMH labels. "How can one say that one prefers one of his children?"

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.