European Cover Story
Raiders at the Gate (int'l edition)
Olivetti's bold bid for Telecom Italia signals a turning point for European capitalism, shattering long-held taboos
After he was named to head Italy's Telecom Italia last November, Franco Bernabe had hardly settled into his sixth-floor offices on Rome's Via Flaminia when the rumors started. Taking a call from a top U.S. investment banker just after Christmas, Bernabe learned that Olivetti--a company one-fifth the size of Telecom--might be preparing a hostile bid. Bernabe was troubled, but with Telecom's stock price up 20% since his arrival, he figured the sprawling giant--with a market capitalization then over $40 billion--was just too big and politically protected to be raided.
For once, the savvy turnaround expert's instincts proved wrong. On Feb. 20, Olivetti lunged, proposing an audacious $58.5 billion offer for Telecom, the largest hostile bid ever launched in Europe. That afternoon, Bernabe convened an emergency meeting of board members and senior executives, with several top members teleconferencing in from Milan and Turin. The bespectacled, boyish executive did little to conceal his anger--and his determination. "We are going to fight this," he declared.
The battle for the company Bernabe has led for just 13 weeks is shaping up to be the biggest and bitterest Europe has ever seen. Although Italy's stock market regulatory commission, CONSOB, dismissed Olivetti's bid on Feb. 22, Chief Executive Roberto Colaninno is planning to launch a more powerful offer than the initial bid of 10 euros or $11 per share (table, page 16). He wants to move Olivetti from its niche in cellular phones to the wider arena of an integrated telecom operator, and he's willing to pay more to do it. A new offer could be 20% richer, say sources close to Olivetti.
The brawl signals nothing less than a turning point for European capitalism. Olivetti's bold move against its larger rival shatters taboos that have long held sway in Corporate Europe: It serves warning that nothing is too sacred or too big to be taken over. And the offer's structure--a hostile bid financed with cash, debt, and shares--could persuade other raiders in Europe that a takeover is easier than they imagined. "This is the opening of Pandora's Box," says Olivetti board member Peter Cohen, the former chief of Shearson Lehman Hutton and a big dealmaker himself in the 1980s. "People are going to say, `You can do this now in Europe."'HOTSHOT BANKERS. If these hostile deals proliferate, Europe could be in for the kind of wild ride that marked the heyday of the U.S.'s takeover kings. The result could be huge change in the corporate landscape. "It is a wake-up call to a lot of the large, publicly traded, state-oriented companies in Europe," says Daniel Dickinson, co-head of mergers and acquisitions for Merrill Lynch & Co. in London. "You are going to see increasing levels of shareholder activism and aggressive attempts to grow through acquisition like in the U.S."
There's already enough drama in the Telecom Italia tale to rival any of the boardroom battles of 1980s' America. On one side, there's Colaninno, the 56-year-old former accountant from the rich city of Mantua who has transformed Olivetti from a sinking computer maker into a nimble, $4 billion-a-year niche player in telecommunications in just over two years. On the other side, there's 50-year-old Bernabe, the workaholic economist who turned troubled oil-and-gas conglomerate ENI into Italy's most profitable company in 1994 before moving on to Telecom Italia last year. Both Olivetti and Telecom Italia are profitable: Olivetti earned $9.5 million last year, while Telecom earned $2.05 billion on its $30 billion in sales.
Behind both men stand some of the biggest investment-banking names in Europe and the U.S. These include hotshots from Lehman Brothers Inc. and Donaldson, Lufkin & Jenrette Inc., eager to play a part in Europe's mounting merger mania. The sudden appearance of these bare-knuckled bankers underscores how much has changed in Europe. The days of tight family control over industry, as in Italy and Sweden, behind-the-scenes shareholders' agreements, as in Germany, and France's noyaux dur system of friendly shareholders owning stakes in each others' companies are fast waning. Now, a new breed of raiders with access to capital in Europe's booming markets is targeting undervalued companies across the Continent.
Airlines, insurance combines, banking empires, and former state industrial giants could all become targets, as shareholders seek ever higher returns. As the banking industry consolidates in France, one hot banking takeover target is Credit Commercial de France. The battle for Telecom Italia is also fuelling a share run-up in companies once considered untouchable, such as Italy's giant insurer Assicurazioni Generale."SHOPPING LIST." The takeover targets may also be making themselves attractive by changing their ownership structure. To lure capital, European companies such as Telecom "are moving to U.S.-style one-man-one-vote shareholdings," says Marco Becht, head of the European Corporate Governance Network. Many companies are now widely held and the power of a few big investors to block deals is diminishing.
The Olivetti raid further ratchets up pressure on former monopolies such as France Telecom and Telefonica of Spain as they face new competition. Within a few years, industry insiders figure, Europe's phone market will be dominated by just a handful of Continentwide alliances. Olivetti's move is likely to speed the industry's consolidation, says Maximilian Ardelt, a member of the management board of German giant Viag and CEO of Viag Interkom, a joint venture with British Telecommunications. "Anyone who's not attached is on the shopping list," he says.
The raid also shows how takeover artists are prepared to play Europe's corporate assets like so many poker chips. To finance its bid, Olivetti plans to sell stakes in its fast-growing Omnitel mobile phone division and in Infostrada, which competes with Telecom Italia's fixed line services, to Germany's Mannesmann for $8.6 billion. That will turn Mannesmann, once a maker of auto parts, into a major player in southern Europe's telecom market. In Germany, its mobile-phone service has surpassed Deutsche Telekom's.
Even if the Olivetti bid proves unsuccessful, it is the biggest consequence so far of the waves of privatization, deregulation, and modernization that have swept Europe. It signals the twilight of an era of control of Italy's bourse and industry by the salotto buono, the "genteel drawing room" of Italian big business, which revolves around the Turin-based Agnelli family, masters of Fiat. If companies changed hands, it was done through a gentlemanly swap of shares, far from the prying eyes of minority shareholders.
But the rules of the game are dramatically changing. Thanks to privatizations and rock-bottom interest rates, Italian savers are shifting massively into equities. That flood of investment is forcing Italian capital markets--and regulators--to grow more sophisticated fast. Once dominant players like the Agnellis and their allies are being sidelined. And old-boy relationships are fraying: For example, Milan's secretive Mediobanca, once the virtual house bank of the Agnellis, is backing Olivetti's Colaninno, while the Agnellis themselves are publicly backing Bernabe. That split "is a sign that Italy is finally becoming a modern Western country," says Paolo Panerai, CEO of Milan-based financial media group Class Editori.
Hordes of American investment bankers are speeding this transformation. In fact, it was bankers from Lehman and DLJ who came up with the idea for Olivetti's raid. They approached Colaninno last fall with their plan: Why not sell off Olivetti's developing mobile- and fixed-telephone services to Mannesmann, they argued, to whom Colaninno had first sold a minority stake in September 1997. The proceeds could then be used to make a play for Telecom.TURMOIL. Colaninno recognized the opportunity. Mannesmann was already pressing to gain more control of its joint operations with Olivetti. More important, Colaninno figured that while mobile operators such as Olivetti's Omnitel were growing explosively, it was wrong to count out fixed-line operators such as Telecom. The reason: They would have more capacity to meet the exponential demand in data transmission and Internet use. Colaninno "saw that he was on the losing side" of a big growth story, says Paul Ryb, a Paribas telecom specialist.
The Olivetti chief knew something else: Telecom was in turmoil. Just before the bulk of Telecom was sold to the public in October, 1997, the Italian Treasury had engineered a 6.6% core shareholding of big institutional groups such as Assicurazioni Generali and Italian banks to ensure stability. IFIL, an Agnelli family investment vehicle, signed up for a 0.6% stake--and through a tacit agreement with the government and other shareholders, the Agnellis began to call the shots at Telecom. Their first move: appointing their ally Gian Mario Rossignolo, a pliable but lackluster former Fiat and Electrolux manager, as Telecom chairman.
Rossignolo's 19 months on the job were nothing short of a disaster. AT&T fled as a potential strategic partner for Telecom, withdrawing $390 million in a pledged investment. And Rossignolo's erratic and dictatorial management style was leading to a forced exodus of the company's best managers. By last October, even the Agnellis were losing patience with Rossignolo, and Telecom's share price had plunged to barely $5, 20% less than its offering price just a year earlier.
Things were so chaotic at headquarters that some senior executives had begun to sound out possible rescue plans for Telecom--ranging from attracting potential investors to leveraged buyouts. Some suggest that Olivetti management was quietly approached in October. Whatever the case, says one Telecom board member, "the irony is that if Colaninno had moved quickly at the time, he could easily have walked away with Telecom for half the price he's willing to pay now."HEAVYWEIGHT HELP. That price is now set to balloon. By mid-February, just days before Olivetti's bid, Bernabe and his finance chief, Fulvo Conti, turned for defensive help to some heavyweights--J.P. Morgan, Credit Suisse First Boston, and Lazard Freres. They lost no time outlining to Bernabe one way to up the ante for Olivetti: absorbing the 40% it doesn't own of Telecom Italia Mobile, Telecom's rich cellular subsidiary, as well as $14 billion in nonvoting preferred shares. By so doing, Telecom could double its market capitalization to $100 billion.
Such a move could face legal and fiscal hurdles. But if successful, would it deter Olivetti? Even Bernabe's close advisors think Colaninno and backers such as Chase Manhattan Bank and Lehman will soon have a strong countermove ready. "These people have very heavy ammunition in that they can raise a lot of money," says a Bernabe adviser. "And they know they can immediately sell off key Telecom assets." Rich but not core Telecom assets, such as its stake in the Brazilian market, could bring top dollar. Olivetti could also sell part of its stake in Telecom's cell-phone division.
It helps that the environment for raising cash in Europe has never been better. "Capital is easy to find these days," says Colaninno adviser Francesco Micheli, a Milan-based consultant for Donaldson, Lufkin & Jenrette. "We're in a united Europe, inflation is zero, and not even politicians are going to block innovative deals."
As the Olivetti-Telecom Italia drama moves into its next act, it's too early to say how it will end. BT, keen on breaking into the rich Italian market, could enter the fray, likely combined with AT&T as a partner and core investor in Telecom. Nor does Olivetti have to remain a hostile player, say some Telecom board members. Instead of bidding for the whole company, one solution could be for Olivetti to emerge as the key core shareholder.
In the coming days, Italian politicians may find it hard to resist interfering in the high-charged battle--even though Prime Minister Massimo D'Alema has so far adopted a neutral stance. But whether Olivetti succeeds or fails in its brash attack is almost beside the point: For European capitalism, there is no going back.By John Rossant in Rome, with Kerry Capell in London, Jack Ewing in Frankfurt, and bureau reportsReturn to top