Divorce, Italian Style

A banking upheaval destroys an old alliance

Antoine Bernheim is usually the soul of self-control. Yet the 74-year-old senior partner of French merchant bank Lazard Freres & Co. was shaking with rage on the evening of Apr. 30. Just hours earlier, the board of Trieste-based insurance giant Assicurazioni Generali had voted to oust Bernheim as its chairman. The move was a slap in the face from Mediobanca, the powerful Milanese merchant bank and longtime Lazard ally that controls Generali's board. "Mediobanca suspected me of treachery," Bernheim told reporters. "But in reality, they were the treacherous ones."

The break between the banks marks the end of one of Europe's most durable alliances. Mediobanca, through its holdings in northern Italian banking and industry and ties with Fiat's Agnelli clan, held absolute sway in Italy. Its link with Lazard gave it access to a web of international relationships in London, New York, and Paris. Now, on their own, the two banks will be much less powerful, competing not only with each other but with a host of more efficient rivals. And they may have turned Generali--and possibly Mediobanca itself--into takeover bait.

U.S. CLOUT. The divorce is the latest example of the upheaval that's rocking Europe's former financial champions. Across the Continent, institutions like Mediobanca are going the way of the formerly independent British merchant banks that dominated the City of London before the deregulatory Big Bang of 1986. This time, the impetus comes from European integration. As Continental companies restructure, they need state-of-the-art help from investment banks. But while Europe's common currency is creating a vibrant capital market for the first time, U.S. firms--not local banks--are cashing in on that demand.

The Americans offer sophisticated techniques and services few European banks can hope to match. And the huge distribution networks of a Salomon Smith Barney or a Morgan Stanley Dean Witter give them a golden advantage over locals. "Without a doubt," says the Italian head of a U.S. investment bank, "the American firms have broken the equilibrium in Europe."

For example, when auto makers Daimler and Chrysler joined forces last May, Goldman, Sachs & Co. acted as marriage broker on the deal. Now, Goldman is advising Banque Nationale de Paris CEO Michel Pebereau on his hostile bid for Paribas and Societe Generale. In Italy, Lehman Brothers Inc. and Donaldson, Lufkin & Jenrette Inc. helped convince Olivetti Chief Roberto Colaninno to launch his $62 billion raid on privatized phone company Telecom Italia. Goldman designed Deutsche Telekom's counterbid.

It was a far more insular Europe that nurtured outfits such as Mediobanca and Lazard. Indeed, the intimacy of their relationship has everything to do with the rancor of today's drama. In 1946, up-and-coming banker Enrico Cuccia helped set up Mediobanca to rebuild Italy's war-torn industry. He had become friendly with Lazard chieftain Andre Meyer when both belonged to the resistance movement. By 1956, Lazard had a stake in the Milanese bank. All through the Cold War, the Franco-Italian financial axis was unshakable.

It was also lucrative. When the Agnellis went shopping for suburban malls in the U.S., Lazard held their hand. When Fiat wanted to buy France's Citroen, Lazard sweated to make the doomed deal work. And through a 26-year-old shareholding pact, Lazard and Mediobanca hold joint control of Generali, whose $36 billion in 1998 premiums make it Europe's No. 3 insurance powerhouse.

Things started unraveling at the end of 1997, when Mediobanca Executive Director Gerardo Braggiotti was forced out after losing a power struggle over succession with 92-year-old Honorary Chairman Cuccia. Young, ambitious, and aggressive, Braggiotti had tried to shake up the staid bank. And just weeks after his departure, he took a job with Lazard in Paris. Such defections are common in the U.S., but in the world of European high finance, Braggiotti had committed high treason.

Joining Lazard as a partner was just the beginning of Braggiotti's revenge. First, he advised Milan's UniCredito Italiano on a planned takeover of Italy's No. 3 bank, Banca Commerciale Italiana (BCI). That was a direct affront to Cuccia, who wanted to merge BCI with Banca di Roma, and is now bringing in Milan's Banca Intesa with a white-knight bid for BCI.

The dance between the two former allies has since taken some baroque turns. Mediobanca in 1996 had served as a key adviser on Telecom Italia's mammoth privatization. Yet in February, it supported Olivetti's hostile move on the phone giant. Now, Lazard is helping Telecom defend itself. "Treachery between Mediobanca and Lazard?" asks one Generali executive. "We saw it just about every day."

TAKEOVER? Bernheim believes Cuccia kicked him out of Generali to show that no one gets away with defying Mediobanca, and that the Italian house can still maintain its influence. Indeed, Mediobanca has stalled UniCredito's advances on BCI. "I was fired from Generali for facilitating and not discouraging Braggiotti," says Bernheim. With Bernheim out of Generali, Mediobanca has better access to the insurer's vast resources, which many believe could help the bank cement control over BCI.

But Lazard has plenty of its own ammo. Already, the bank is suggesting that Bernheim's ouster invalidates a shareholder pact with Mediobanca under which the French and Italians enjoy rights of refusal on each other's Generali shares. If Lazard offers its 4.76% stake, it could attract raiders, such as Claude Bebear, CEO of France's Axa--Europe's No. 1 insurer and a driving force in financial consolidation on the Continent.

If there's a lesson to be learned from the intrigue, it's that European banks can't operate in their old cocoons any more. "Mediobanca and Lazard should have worked more closely with U.S. banks rather than with each other," says one banker who knows Cuccia and Bernheim well. In the chaos likely to follow the messy separation of two European powers, more Continental banks may decide that joining forces with the American enemy may be their best protection against obsolescence at home.