Commentary: Mediobanca Needs Competitors, Not A Crackdown

Having struggled to clean up its corrupt political system, is Italy now backtracking on reforming its economy? Take a look at what Mediobanca and its 87-year-old honorary chairman, Enrico Cuccia, have been concocting lately. The secretive Milan-based merchant bank is the house bank of northern Italy's huge industrial companies such as auto giant Fiat and tiremaker Pirelli. If you're part of that exclusive club--which means your surname is probably Agnelli or Pirelli--Italy Inc. is working just fine. Cuccia, after all, has been Italy's premier financial alchemist for almost five decades, helping the richest industrial dynasts in the land to stay on their feet in an often hostile environment.

But if you're not part of the club--and that includes just about every other Italian business group plus the dozens of foreign merchant banks that are all but shut out of the market--Mediobanca is on your hit list. For many, the Milan institution represents all that's worst in the peninsula's business life, from incestuous cross-shareholdings to a contemptuous disregard for minority shareholders.

That's a large part of what's keeping Italy a bit player in the global competition for capital. Italy's economy may be the fifth largest in the world, but its equity market ranks a lowly eleventh, with Milan's entire market capitalization less than 40% of the Paris Bourse. What's more, the lion's share of value in Milan is concentrated in a handful of companies--almost all Mediobanca allies.

POWER GRAB? Now, following Mediobanca's early September announcement of the largest financial restructuring in Italian history, it's set to swallow up even more. In a classic Cuccia financial maneuver, Mediobanca combined the industrial holdings of the bankrupt Ferruzzi group with chemical and biomedical units controlled by Fiat and transferred them to Gemina, a Milan investment company whose main holdings are in fashion and newspapers. With its $24 billion in annual sales, Gemina will overnight become the second-largest industrial group in Italy and one of Europe's biggest.

Mediobanca's allies are cheering the move as a brilliant financial operation that will allow Fiat to focus on its core car business. For others, including shareholder groups, free-market advocates, and the political left, it's an unacceptable extension of the power of Mediobanca and its chief client, Fiat, over huge areas of Italian business. Following the Gemina deal, for example, almost every major national newspaper and newsmagazine in Italy will be controlled by or linked to Mediobanca or Fiat.

Yet clamping down on Mediobanca would be a dangerous call for Italian policymakers. Italy needs a more open market, but it's so capital-starved it can't do without the expertise and deep-pocketed network of Mediobanca. Critics often forget that without Mediobanca, Pirelli would have collapsed years ago, while Fiat probably would have been sold off. Just days after the Gemina deal, Mediobanca got another chance to be a miracle worker when it announced a $1.4 billion rescue plan for computer group Olivetti. "One reason Mediobanca gets all the business is they are willing to go where others won't and can marshal the resources others can't," concedes the head of the Italian operations of a major U.S. merchant bank.

What the Italians should be doing fast is creating some real competition for Mediobanca. That means shaking up Italy's financial markets to create a true equity culture. There should be much greater encouragement for small and medium-size companies to use equity capital rather than bank debt. Furthermore, Italy's lackluster privatization efforts must be speeded up--with sizable chunks of companies going to foreigners. To prevent Mediobanca and Fiat from snapping up the state sell-offs, muscle has to be put into the country's anti-trust authorities. And Rome has to start enforcing the rights of small shareholders.

Italian citizens, who are big savers, should also be brought into the act. Thanks to limits on how much individuals can invest in privately run pension funds, most Italians stash their cash in government bonds. Pension reform would likely democratize Italian capitalism by giving power to mutual funds. A few million zealous shareholders voting their interests would be the best possible way to neutralize Mediobanca and its powerful allies.

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