No More Olivetti As We Know It?

With the stock in free fall, investors are talking split-up

Break it up. Fast. That's the prescription of some big institutional investors for Olivetti, the $6.5 billion Italian telecom-and-computer company whose chairman, Carlo De Benedetti, abruptly resigned on Sept. 3. Since then, Olivetti's already-battered stock has slumped further, going from 49 cents a share to 38 cents in a week.

The tumble reflects the bafflement and rage of the many foreign investors who poured nearly $1 billion into an Olivetti rights issue in the past year. Some of them are selling out because they fear more bad news is coming from Olivetti's embattled PC business, which analysts estimate has been losing money since the early 1990s.

RICH PROFIT. But other shareholders are girding for a showdown. On Sept. 17, when Olivetti's new CEO, Francesco Caio, is scheduled to meet with fund managers in London, several of these big investors plan to put the possibility of Olivetti's split-up at the top of the agenda.

One is Talal Shakerchi, head of the European equities team at Old Mutual Portfolio Managers, which owns more than 1.5% of Olivetti's shares. He has a simple, brutal plan. First, Olivetti should takes its 41% stake in Omnitel, a successful cellular-phone marketer, and either distribute the shares directly to Olivetti shareholders or sell the holding to another company at a rich profit. Next, he wants Caio to sell or close down the PC business and squeeze better results out of other parts of the company, especially the division that designs computer systems for such customers as McDonald's Corp. and British Telecommunications PLC.

"FED UP." By Shakerchi's reckoning, the Omnitel stake is worth up to 53 cents a share. The systems business along with some other odds and ends could be worth an additional 50 cents. Olivetti's huge losses will shelter future income from taxes for years to come. Shakerchi pegs the tax savings at 73 cents a share. "That adds up to a big pile of value," he says. Shakerchi is so confident of his calculations that his group is considering raising its stake in Olivetti stock.

One big beneficiary of a boost in Olivetti shares would be the deposed Carlo De Benedetti. He runs a holding company, CIR, that owns 14% of Olivetti. But CIR used those shares as collateral for a $198 million loan last year. Now, the collateral has lost 40% of its value. Analysts think that to pay off the debt, CIR may sell its holdings in Cerus, another De Benedetti vehicle that controls 28% of Valeo, the French auto-parts maker.

Of course, before Olivetti stock soars again, outside investors must persuade Caio to act--and he has yet to commit to anything radical. But Caio will have to do something to appease these angry money mangers. "We can passively sit here, as 90% of investors do, or exert our influence as owners of the company," explains another big holder who wants action. "We're fed up with Olivetti's not having a consistent or arguably truthful information policy."

But there was plenty of warning for investors to avoid the stock altogether. When the Italian company was raising fresh capital last December, its poor reputation for enhancing shareholder value was already well known. More ominous, many Italian investors were holding back from giving De Benedetti any more funds. In contrast, foreign institutions found the Omnitel franchise so alluring that they figured an Olivetti investment was worth the risk. The moral here: Assess a company's past as well as its future. Especially a company like Olivetti.

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