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In merger dispute, Tiffany’s shows what’s wrong with American business
With LVMH, the world’s largest luxury goods conglomerate, unleashing a counter-lawsuit against Tiffany & Co., the bitter fight about what was supposed to be one of the biggest mergers in the luxury goods sector in recent times enters the next round. The suit claims that Tiffany executives “mismanaged” their company during the coronavirus pandemic, leaving it with “dismal” future prospects. LVHM also claims that the jeweler is therefore no longer the vibrant firm it once was when the merger deal was originally agreed last November, making it impossible for the French group to go through with it.
LVHM’s move comes mere days after Tiffany won a motion to have its lawsuit against the French luxury consumer goods group expedited – one it kicked off in early September when the Americans accused LVHM of stalling. However, even if Tiffany cheered the ruling of the Delaware court, the jeweler has in reality very little left to celebrate.
Indeed, the American icon didn’t seem to have things under control during the pandemic, which so painfully exposed Tiffany’s calcification as a result of inefficiency and hubris in the face of a changing market. The aborted tie-up has now become the biggest merger to fall victim to the pandemic and is seen by many as a portent of more economic doom looming on the horizon – and Tiffany has only itself to blame.
Body blows and bad decisions
Tiffany’s leadership surely thought to have hit the jackpot when LVHM announced last November its intention to acquire Tiffany for $16.2 billion. The retailer has been suffering from years of falling sales caused by a failure to adapt to the evolving tastes of American customers, but just as the fortunes were seemingly on an upward trend again – fueled by rising demand in China – the pandemic dealt another body blow to the company. At a time of desperation, the LVMH merger was the lifeline Tiffany’s management was betting on.
However, looking at Tiffany’s performance over recent months makes it hardly surprising that LVMH is pulling the plug on the deal now. Tiffany executives gravely misjudged the economic conditions and made financial choices that LVHM rightfully considers questionable in times of heightened uncertainty and trouble. Most blatant was the paying out of dividends worth $140 million to shareholders during the pandemic – despite Tiffany’s sales crashing by 45 percent and accumulating a $64.6 million loss.
It seems likely that Tiffany made the decision to pay out these huge sums of money it didn’t realistically have on the assumption that LVMH was about to acquire them, in effect expecting LVMH to cover its losses. Seeing how the French moved to slash its own dividends in the face of uncertainty, it’s more than understandable that the conglomerate’s confidence in Tiffany, as well as its ability to deliver profits, create value and make sensible decisions, is irreparably shattered.
America’s ailing business culture
For investors the world over, the Tiffany debacle is a wake-up call, because it reflects the dominant deficits in America’s business sector: rigidity, an inability to adapt, and overconfidence. The issue has become so ingrained in the executives sitting in American boardrooms over the last decade that the Boston Consulting Group devised its own concept of corporate hubris. According to the consultancy, this hubris is characterized by short-termism and denialism, where a focus on delivering long-term value has been lost while bad performance is shrugged off “as evidence that the market misunderstands the company’s terrific work or to point to a great quarter…as a reason for ignoring any deterioration in the business fundamentals.”
Tiffany is one of the unwitting prime examples of this decline – as far as the firm is concerned, it’s neither taking responsibility nor making moves to future-poof its operations, including self-reflections on underperforming company portfolios. If history is a lesson, then a company reaches this point when its leadership shifts from creating long-term value to prioritizing personal gain.
Hubris before the fall
The accusation that Tiffany’s top executives were to pocket $100 million in bonuses upon successful conclusion of the deal, then, weighs just the heavier in the light of this. Many telling examples exist that illustrate how firms lose their edge – or perish altogether because of the leadership’s greed. Enron is perhaps the starkest example, where accounting tricks bloated the executives’ wallets but turned Enron from a company of innovation into a scandal-ridden shell of its former self whose name is synonymous with corporate greed.
In no way are these toxic patterns of behavior limited to the US, but it’s there that they’re most developed. Even so, the example of former Nissan CEO Carlos Ghosn serves to illustrate like no other the personal fall from grace thanks to greed – and should be a warning to Tiffany’s leadership. With too much power concentrated in his hands, Ghosn was able to systematically underreport his earnings, and is now a disgraced international fugitive. At the core was his taking for granted all the perks that came with the executive position. But this often leads to an untethering from the community and withdrawal into a bubble dominated by other business magnates.
It is this detachment of the business elites that has led to the destructive trend so visible today. If the trend cannot be stopped, American businesses will become less innovative, inefficient and unable to handle growing international competition. If the US want to maintain their bragging rights as a country whose entrepreneurs and businesses can reinvent themselves most easily, then Tiffany should lead by example and clean its act up first. If saving an iconic brand is at stake, then its leaders should realize that they shouldn’t rely on foreign conglomerates to pull its name out of the mud.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes