Mediobanca: A Titan Trembles

Is Italy's secretive financial powerhouse losing its grip?

For Milan's discreet financial powerbrokers, it was a rare bare-knuckled confrontation. In September, dissident shareholders of Italy's largest merchant bank, Mediobanca, publicly lambasted Chief Executive Vincenzo Maranghi for flouting the bank's own rules and ignoring the interests of investors. Then, tension mounted for weeks as the rebel shareholders openly plotted to install a new chairman over Maranghi and bring the management to heel. Never before in the history of obsessively secretive Mediobanca had such flagrant boardroom discord erupted in public.

The opposition forces failed to win enough backing at an Oct. 28 board meeting to sack Chairman Francesco Cingano. But the revolt nevertheless signals a seismic shift in Italian finance. Founded just after World War II as a vehicle to help rebuild Italian industry, Mediobanca has long been the covert power behind Italy Inc. For years it provided the only source of private capital in the country's state-dominated economy, and often took stakes in the many enterprises it funded. But now, critics charge that the influence it enjoys through its cross-holdings, industrial alliances, and shareholder pacts is wielded more for power than for profit. Worse, at a time when Italy is becoming more integrated into a united Europe, this blocks a much-needed consolidation of Italian companies, undercuts competition, and thwarts the modernization of the country's financial system.

The struggle to drag Mediobanca into the 21st century is just beginning and could take at least a year to play out. But as antitrust watchdogs begin circling, investors agitate for reforms, and competitors pry away more business, there is a growing sense that clinging to the old ways is a losing cause for Mediobanca. "We are witnessing an unprecedented battle for transparency and accountability of the management of Mediobanca," says Carlo Alberto Carnevale-Maffe, a professor of strategic management at Bocconi University in Milan. "It will be forced to change."

A key step in making that happen, critics say, is the ouster of Maranghi. Hand-picked by Mediobanca's founder, Enrico Cuccia, who ran the bank from 1946 until his death in June, 2000, Maranghi, 65, carried on Cuccia's tradition of operating as an all-powerful overlord unaccountable to shareholders. Mediobanca executives still refuse to meet with analysts or grant interviews to journalists. Requests for information are directed to the company's Web site. You won't easily find Mediobanca's headquarters, a tightly guarded 17th-century palazzo off central Milan's Piazza della Scala; there's no nameplate on the door.

But powerful forces are determined to push open that door and change the bank's culture. Leading the charge are two of Italy's biggest commercial banks, UniCredito Italiano and Capitalia (formerly Banca di Roma), which are also Mediobanca's two biggest shareholders. "Mediobanca is not playing the role it should of supporting industry," says UniCredito CEO Alessandro Profumo. While criticisms like this aren't new, few executives voiced them openly until recent weeks. Now, even the country's top banking authority has entered the debate. On Sept. 25, Antonio Fazio, governor of the Bank of Italy, called for a "needed renewal" of Mediobanca as a financial institution.

With Maranghi battling on all fronts, Mediobanca's investment banking business is under pressure from tougher competition and the bear market. For the fiscal year ended June 30, Mediobanca's profit dropped 14%, to $255 million, on revenue that fell 35%, to $1.14 billion. For the quarter ended Sept. 30, write-downs of its holdings resulted in a $346 million loss. The bank's shares--viewed as a proxy for Italian industry because of its diverse holdings--have plunged 40% this year.

In fact, Mediobanca's shares are trading at a 35% discount to the market value of its assets. Those assets would soar in value if Maranghi were ousted, a recent poll of Italian fund managers concluded, because investors would then expect Mediobanca to be split in two--a holding company with industrial stakes and an investment bank--unleashing a wave of stock sales, consolidation, and restructuring across Italy. Suddenly in play would be a treasure trove of assets ranging from Europe's No. 3 insurer, Assicurazioni Generali, to HdP, the parent of media group RCS and Italy's largest newspaper, Corriere della Sera.

Generali, in fact, has become a sore point with shareholders. Antitrust officials are investigating Mediobanca's impact on competition in the insurance industry, putting the bank in an unwanted spotlight. And shareholders are enraged by Maranghi's summary firing of Generali CEO Gianfranco Gutty on Sept. 12 without consulting the Mediobanca board. Maranghi replaced Gutty with a 78-year-old former partner at French investment bank Lazard Freres, Antoine Bernheim, who reestablished ties with Maranghi after having been ousted himself from Generali's management in 1999. With three chairmen in less than four years, investors worry that the performance of the $230-billion-in-assets Generali is being hurt. "Mediobanca doesn't care about value generation," says one Milan-based bank analyst. "Generali's strong brand is not being exploited to advantage." Indeed, Generali's shares have plunged 55% since the beginning of last year.

In Milan's stylish corridors of power, Italian bankers and industry chieftains concede that removing Maranghi won't be easy. For one, he can count on the support of shareholders who are also creditors and fear Mediobanca's wrath. He also controls a cash hoard of some $1 billion, generated partly by the recent sale of some industrial stakes. In June, Maranghi wrested a deal away from the clutches of UniCredito and Capitalia by paying cash-starved Fiat a rich price for a 34% stake in its Ferrari unit. "This was Maranghi saying: `I'm the most important banker in Italy,"' says one Milan bank analyst.

To bolster his position, the embattled Maranghi has brought new shareholders into Mediobanca. French corporate raider Vincent Bolloré, Generali Chairman Bernheim, French insurer Groupama, and the family owners of aerospace group Dassault Aviation together hold at least 7%. The French may stick by Maranghi, despite Mediobanca's mediocre performance, to get a seat at the head table of Italian dealmaking. "Maranghi is definitely a good fighter," says Gabriele Capolino, director of the financial daily Milano Finanza. "He gives his best when on the ropes." The trouble is, the longer Maranghi stays, the higher the price that Mediobanca, and Italy Inc., will pay.

By Gail Edmondson in Milan

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