Business Week International Finance
LOOK WHO'S JUMPING OVER THE COUNTER
Free-market advocate Silvio Berlusconi, Italy's tycoon-turned-Prime Minister, is practicing what he preaches. To start disentangling the conflicts of interest between his political and business personas, he is turning to the stock market. On June 16, Berlusconi's Arnoldo Mondadori Editore publishing company, part of his privately held Fininvest media conglomerate, went public by selling 53% of its shares for $600 million in a heavily oversubscribed offering.
Soon, in a revolutionary development, less prominent Italian entrepreneurs will also be able to raise funds publicly. A new stock exchange is being designed for the owners of the small- and medium-size businesses that are the backbone of the country's economy. In late May, Italy's market watchdog, CONSOB, issued guidelines for the creation next January of an Italian over-the-counter market modeled on the booming U.S. NASDAQ.
The result could be a boon for Italian business. Although midsize companies powered much of Italy's postwar economic miracle, most have remained undercapitalized family concerns. Now, injections of fresh funds from public stock sales could give them new dynamism. Washington (D.C.) lawyer Arthur J. Gajarsa, who is setting up closed-end mutual funds to invest in small Italian companies, foresees the day when an Italian NASDAQ could even overtake the Milan Bourse, where Mondadori's shares are traded.
The prospect of tapping a new source of capital is good news for Carlo Baldi, chairman of Yama, a $245 million maker of equipment such as lawn mowers and chain saws in Reggio Emilia. Yama needs fresh funding to sell its gardening machines outside Italy. "Going public is a must for us if we want to keep growing and competing in Europe," says Baldi. The alternative, he says, is to be gobbled up by rivals such as Sweden's Electrolux, which took over Italian white-goods maker Zanussi in 1985.
The potential of an Italian NASDAQ-style market, as yet unnamed, is huge. Small and midsize companies, with annual sales up to $200 million, account for 60% of the country's gross national product, 40% of exports, and 80% of employment. Already, says CONSOB, around 1,300 such companies meet the requirements for listing on the new exchange, of which 500 have expressed an interest in going public.
That's a major change in itself. Until now, Italy's family entrepreneurs have depended on loans from local banks while maintaining a kind of cultural aversion to selling shares to outsiders. Partly, it's an expression of first-generation pride. "Italian industrialists can't tell the difference between their company and their house, their boat, their children. It's all the same to them," explains Alberto Guidi, head of the regional industrialists' federation in Emilia-Romagna. Nor have they been welcome at Milan's bourse, dominated by large companies such as Fiat, Pirelli, and Olivetti. To be listed there, companies must meet costly requirements such as three years of audited balance sheets.
BANKRUPTCIES. Now, to help companies go public, Berlusconi's new business-friendly government in early June introduced a package of tax incentives, including a corporate tax-rate cut from 36% to 20% for the first three years for newly quoted companies with sales below $300 million. "This could help overcome resistance from entrepreneurs who prefer keeping their accounts secret in order to hide profits and pay less taxes," says Malcom Duncan, a Milan-based financial consultant.
The move is well-timed. Italy's overstretched banks are no longer willing to pour cash into highly indebted companies because of current record-low interest rates and the wave of bankruptcies in the wake of Italy's corruption scandal.
Another spur to going public is the generational shift under way in Italian business. Many entrepreneurs who founded companies in the postwar boom years are leaving the scene, and their heirs want to cash out. What's more, heirs are often more amenable to professional management. Take Treviso-based Tecnica, a mountain- and ski-boot maker with $130 million in sales. Tecnica's second-generation owners, the Zanatta brothers, are planning to float the company through Rome merchant bank Sofipa as soon as Italy's NASDAQ is set up.
To publicize the merits of the brand-new market, Giovanni Palladino, a finance expert at Confindustria, the industrialists' federation, is planning a nationwide road show scheduled for September. Many small entrepreneurs "don't know what their options are in the world of finance, because until now it was easier for them to just borrow," Palladino says.
CUSTOM DESIGNED. Still, promoters of the Italian NASDAQ are confident that it can avoid problems such as the high entry fees that have beset London's ill-fated Unlisted Securities Market and Paris' Le Second Marche. Provisions such as self-regulating bodies and entry requirements tailored for different trading categories "will finally give smaller companies a market better suited to their needs," says Mario Bessone, a top CONSOB official.
Ultimately, what small Italian companies--and their European counterparts--need is a Europewide NASDAQ that can attract capital from around the world. The Brussels-based European Venture Capital Assn., a grouping of merchant banks, is already masterminding such a project. But for now, Italy is gambling that its own small companies are ready to cut the family umbilical cord.Silvia Sansoni in Rome