Italian Industry, Twilight Of The Gods

A scandal touching Italy's Big Three signals the end of an era

The ground is shifting beneath Italy's two most hallowed business behemoths. At Fiat, 75-year-old patriarch and former Chairman Gianni Agnelli is recuperating from heart surgery. Fiat's current chairman, Cesare Romiti, will himself step down when he turns 75 in 22 months. And at Mediobanca, the Milan merchant bank that acts as Fiat's financial backbone, the career of 88-year-old Honorary Chairman Enrico Cuccia is drawing to a close. "The Big Three of Italy are leaving the scene," says a former Fiat top executive. "And that means uncertainty, because no one enjoys anywhere near their authority."

In a country where family control of businesses is more personal than anywhere else in Europe, generational change at Fiat and Mediobanca is bound to cause unease. But the passing of the baton could also be tainted with scandal. Gemina, the Milanese holding company in which Fiat and Mediobanca have long been key players, faces potential criminal charges for irregularities that could include falsified balance sheets, tax evasion, and insider trading. Gemina officials say they will not comment publicly on the investigation.

Indeed, the changes that shook up Italy's political old guard are now sweeping through the business world. Big companies, which often managed multimillion-dollar slush funds, have largely cleaned up their acts. Foreign investment banks and pension funds are more active than ever on the Milan bourse, insisting on transparency. And privatizations, such as the projected sell-off next February of state-owned telecommunications giant Stet, stand to create new centers of corporate power.

Neither Fiat nor Mediobanca will comment on the Gemina scandal until the investigation is complete. And although indictments seem highly likely, Agnelli, Romiti, and Cuccia will probably not be touched directly by them. But the Gemina affair has already inflicted damage. For example, last September Cuccia announced an ambitious plan to create a new $24 billion industrial group by merging nine public companies controlled by Fiat and Montedison. But barely three weeks after the merger was announced, Gemina stunned the market with news of massive, unexplained losses at its Rizzoli publishing unit. Only days before, Gemina management had painted a rosy picture of a turnaround at Rizzoli. Gemina shares, essential to securing the merger's no-cash stock swap, plunged in value as investors bailed out.

Soon afterward, Italy's tax police raided Gemina's neo-Renaissance headquarters in central Milan. That afternoon, prosecutors said that 10 top Gemina managers were under investigation on charges of falsifying company balance sheets to hide losses. Thousands of seized documents provided fodder for the broader upcoming investigation, too. Cuccia's master plan was history.

It was a defeat for Cuccia--and an embarrassment for Maurizio Romiti, Cesare's son and a top Mediobanca official who oversees Gemina's business within the bank. "The Gemina affair is a great loss of credibility for Mediobanca and is the beginning of the end of the system it has ruled over," says Salvatore Bragantini, head of Milan-based merchant bank Arca Merchant.

The bad news from Gemina seems endless. In late June, management announced revised consolidated 1995 losses of $464 million, way beyond the $290 million in losses it had forecast last November. And the scandal could affect the relationship between Romiti and Agnelli. Although the two men publicly deny any rift, Romiti and Agnelli recently broke ranks in public. In June, Romiti declared that family capitalism in Italy was ending. That brought an immediate public rebuke from Agnelli, who warned Romiti to keep focused on Fiat and not get caught up in Italian politics.

FRESH FACE. Observers say Agnelli may be trying to reassert family control at Fiat. But even if the Agnellis win the power struggle for Fiat's future, the new management style won't look like the old. In June, Gianni Agnelli pushed through the appointment to Fiat's board of Paolo Fresco, General Electric Co.'s Italian-born vice-chairman. Insiders say the Agnellis want Fresco to replace Romiti as Fiat's chairman in 1998, when Fresco turns 65 and must resign from GE. Waiting in the wings: Giovanni Alberto Agnelli, Gianni's nephew.

Fresco's appointment would show that Italy's business culture is indeed changing. "Fresco may know nothing about cars," says one banker close to the Agnellis, "but he's totally new, totally clean, and has had no involvement with the past." Considering the story of Gemina, those may be the most important credentials the next generation of Italian business leaders can have.

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