Olivetti's bid for Telecom Italia a shock to the system


Even as the trenches were being dug for what could well be a month long bitter corporate battle, there was one aspect of Olivetti's $60 billion (€54.54 billion) takeover bid for Telecom Italia on which everyone seemed to agree. Within minutes of Olivetti's announcement last Saturday of its hostile bid for the formerly state-owned telecommunications group, market analysts and leader writers alike were falling over themselves to explain the "significance" of this particular corporate battle.

"Olivetti's bid, if successful, could redraw the map of Italian capitalism," pronounced the International Herald Tribune. "This is an attempt to modernise Italian capitalism so that it can be integrated into Euroland," commented Rome daily, La Repubblica.

The Financial Times considered the bid a possible "milestone in the history of Italian capitalism" while economist Mr Francesco Micheli, consultant to American bank Donaldson, Lufkin & Jenrette, suggested that the Italian stock exchange would "never be the same" after this "epoch-making change".

Many commentators were stunned by the sheer audacity of the bid, the largest ever takeover deal in Italian history. After all, Olivetti with $4.8 billion dollars worth of sales in 1997 and 26,000 employees is clearly much smaller than Telecom, with its 126,000 employees, and which, in 1997, returned a profit of $1.99 billion dollars on a turnover of $24.4 billion dollars.

For many, however, the real significance of this bid is that it could represent the definitive demise of the inner sanctum or "gentleman's club" that has run the Italian private sector for much of the post-war era, a period when the Italian economy has been dominated by a large, often inefficient and clientelist public sector (until recently responsible for more than 50 per cent of industrial output) and a small, protectionist private sector dominated by powerful family companies such as FIAT, Pirelli, and Montedison.

Analysts have constantly argued that the private sector was not a truly open market since it was controlled by longstanding alliances between key banks and industrial companies.

At the heart of these alliances was the Milan-based merchant bank Mediobanca and its enigmatic octogenarian boss, Mr Enrico Cuccia, who devised a complex spider's web of power which weaved together layered shareholding networks in such a way as to allow minority stakes exercise effective business control. Amongst Mediobanca's strongest allies in this arrangement was IFIL, the holding company of the Agnelli family, owners of motor car giant FIAT.

A significant aspects of the Olivetti-Telecom battle is that Mediobanca and IFIL, for so long allies, appear to be on different sides of the fence this time with Mediobanca acting as one of Olivetti's takeover advisers while IFIL is one of Telecom Italia's core group of shareholders.

When Telecom Italia was privatised in 1997, 89.64 per cent of shares went on the market while the Treasury retained a controversial 3.4 per cent "golden share" (controversial because the European Commission questions the legality of such a stake). The remaining 7.96 per cent of share were divided amongst a core group of shareholders including IFIL, Assicurazioni Generali, INA, Credit Suisse and other banks.

Commentators have suggested that via its network of interwoven links with other shareholders, IFIL has managed to exercise an influence out of all proportion to its 0.6 per cent holding in Telecom. If the Olivetti takeover were to go through, it would be the end of such spider's web networking. If the deal were to go through, it could also represent the first real and bloody head-on collision between the market-place logic of profit and the (often inefficient) reality of Italy's former state monopolies.

It is believed that if Olivetti take over, they will implement radical restructuring, creating up to 25,000 redundancies amongst the 126,000 strong Telecom workforce. Not surprisingly, the confederated trade unions have expressed their concern to government about the takeover's implications.

Olivetti have offered 10 euros ($11.07) per Telecom share, an offer that divides into six euros in cash, 2.6 euros in bonds and 1.4 euros in shares in its information technology subsidiary, Tecnost. The deal will be 60 per cent funded by a coterie of domestic and foreign banks including Lehman Brothers International; Chase Manhattan Bank; Donaldson, Lufkin and Jenerette Inc., and Mediobanca.

Olivetti will further fund the purchase by selling its stake in the cellular phone company, Omintel, and in fixed line phone company, Infostrada, to its German partner Mannesman which on Sunday confirmed that it will pay Olivetti $7.8 billion dollars...if the Telecom takeover bid goes through.

Even if, for the time being, Italian Prime Minister Mr Massimo D'Alema has guaranteed his government's "neutrality" in the takeover, Olivetti still face serious problems. Firstly and foremost, Telecom Italia has described the offer (for a 67 per cent shareholding) as "full of holes" and is currently considering a series of retaliatory options ranging from merging with its own mobile phone company Telecom Italia Mobile (TIM) to luring in a "white knight" such as British Telecom.

Secondly, market analysts suggest that the 10 euro per share pricetag is too low. Thirdly, on Monday the Italian stock exchange's regulatory body, Consob, rejected the takeover bid as inadequate claiming that it was dependent on too many regulatory approvals, in particular in relation to the sale of its Omnitel mobile phone company. Olivetti, undeterred, announced that the takeover goes ahead...The battle lines have been drawn.