How else to describe the chain of events that led up to last week’s proposed–but by no means certain–85.5 billion [Euro] merger of Telecom Italia and Deutsche Telekom? Two years ago the Italian government privatized Telecom, but neglected to put a strong leader in charge. In the 12 months following the public sell-off, there were three different CEOs. Last November Franco Bernabe (who had won kudos for transforming ENI, the bloated state oil company) was brought in to turn things around. But he’d barely got behind his desk before Olivetti showed up last February and spoiled his reform plans. A newcomer to the telecommunications business, Olivetti made a hostile, 60 billion [Euro]offer to buy TI. Olivetti claimed that its bid would keep the venerable firm in Italian hands–an argument that swayed the government, but not Bernabe, whose job was on the line.
Bernabe devised a defense strategy, but his own shareholders rejected it. That forced him to search, frantically, for a foreign partner. At the eleventh hour, he found his white knight–Deutsche Telekom. The German giant offered to join forces with Telecom Italia in a “merger of equals.” At a press conference in London last week, the two companies announced that they would create the largest public company in Europe–and one of the world’s biggest telecom companies. Sitting beside Deutsche Telekom CEO Ron Sommer last week, Bernabe was as bubbly as Roberto Benigni. He had bested Olivetti and made himself co-CEO (with Sommer) of a massive company. He even joked about the union of “two old dinosaurs.”
Unfortunately, Telecom Italia’s shareholders seem to agree with that assessment. They’re not thrilled by Olivetti’s offer–and they don’t much like the monster merger with Deutsche Telekom, either. That’s left great uncertainty about the future of Telecom Italia. “Neither offer appeals to me,” says a representative for a large U.S. institutional shareholder in Telecom Italia. TI’s stock price languished last week–a sure sign, says this source, that investors don’t think the Deutsche Telekom merger will go through. There are simply too many political and regulatory hurdles.
For one thing, the European Commission has promised a thorough antitrust investigation. But there is a more pressing problem. Rome remains wary of mixing an important Italian company with Deutsche Telekom, which is still 72 percent state owned. Analysts say that Rome is more likely to meddle with the new company than Berlin, which has pledged to keep its hands off. Still, some Italian ministers are unhappy with the German deal. Finance Minister Vincenzo Visco complained that the merger seemed more like an “acquisition” of Telecom Italia by DT than a partnership. (DT shareholders would control 56 percent of the new company’s stock.) Beyond that, several of TI’s Italian shareholders favor the Olivetti bid.
Bernabe and Sommer foresee the creation of “a European powerhouse” that can compete against ATT, MCI Worldcom and other major U.S. firms that have targeted Europe. Their new company would certainly be big. Between them, Telecom Italia and Deutsche Telekom have more than 100 million customers worldwide, along with 300,000 employees and sales of h60 billion –second largest in the world for a phone company (behind Japan’s NTT). But analysts say that while Bernabe and Sommer are both corporate reformers, linking two massive national utilities beneath a cumbersome dual-CEO structure is not the surest path to success in the fast-moving communications industry. “As former state monopolies, neither company has much experience in the harsh new world of com-petition,” says Roberto Grindle, a Milan-based analyst for Societe Generale.
If the deal has an improvisational quality, it may be because both Telecom Italia and Deutsche Telekom are attempting it for defensive reasons. Deutsche Telekom has been clobbered by deregulation and a raft of new competitors in all of its businesses. DT has lost 30 percent of its market share in the lucrative long-distance business and been forced to dramatically lower its prices. Revenues from its phone operations plunged 20 percent last year. DT has established strong ties to France Telecom, in an effort to find new revenue sources, but the French now feel betrayed by the German-Italian alliance. DT is also starting to feel pressure from Mannesmann, its most formidable competitor. To finance its planned acquisition of Telecom Italia, Olivetti planned to sell its stake in Omnitel–Europe’s second largest wireless company–to Mannesmann. Had that happened, Mannesmann would have become a full-fledged, pan-European operator before DT, though its telecom sales are much smaller. “For Deutsche Telekom, this merger is to prevent Mannesmann from getting Olivetti’s mobile business,” says Michael Schatzschneider, an analyst with BHF Bank in Frankfurt.
Telecom Italia’s big problem, say experts, is that its shareholder base is highly fragmented. It’s got four classes of stock, and few friendly investors. On April 10 Bernabe called an extraordinary meeting of TI’s shareholders. He needed one third of the company’s voting capital to approve his defense strategy against Olivetti. But only 22 percent voted for his plan. According to Italian press reports, a group holding 5 percent of TI’s shares lingered in the hallway, refusing to register its shares. A source close to Telecom Italia calls Bernabe “a spectacular talent–the right person to rationalize this company, which has enormous potential. But the Olivetti offer interrupted the transformation.”
At first nobody gave Olivetti much chance of winning Telecom Italia. But its bid has slowly gained momentum. “The government has had many opportunities to blow Olivetti away, but they haven’t done it,” says Roy Smith, a professor of finance at New York University. Fausto Vigenani, an under secretary in the Italian Treasury Ministry, says that Italy is experiencing “the growing pains of modernizing an archaic economic system.” As Bernabe himself said in a recent TV interview, the old rules in Italy are all gone, but the new rules have not yet been made up.
So what’s next? Almost anything. Olivetti will go ahead with its tender offer to TI shareholders, starting this week. It isn’t likely to win a majority of shares, but it could receive 35 percent, or a so-called blocking minority, which would enable Olivetti to foil the Deutsche Telekom deal. Trying to allay fears of cultural colonization, Sommer said last week that, although the new company has not been named, “it will not have the word ‘Italia’ or ‘Deutsche,’ and Telecom will be spelled with a ‘c’.”
If it sounds a bit like Euroland’s business leaders are making it up as they go along, well, they are. Remember America’s Roaring ’80s? Back then it often seemed a time of greed, opportunism and ill-advised deals. Now it looks more like the decade when a frenzy of corporate restructuring laid the foundation for America’s current prosperity. And guess what? It was both.
The Story So Far…Who will win Telecom Italia? The saga has already seen plenty of twists and turns–and it isn’t over yet.
Privatization: In October 1997 government begins sell-off of Telecom Italia. But the former monopoly stumbles, and a year later Franco Bernabe is brought in to turn it around.
Olivetti pounces: On Feb. 20, 1999, Olivetti releases details of a hostile h53 billion bid for TI. Telecom calls the takeover plan “full of holes.”
Counterpunch: On March 11 Bernabe announces Telecom’s defense measures, which include buying Telecom Italia Mobile (TIM) shares.
Raising the stakes: On March 29 Olivetti increases its bid to 60.4 billion[Euro].
Bernabe rebuffed: On April 10 Telecom fails to get a quorum at a crucial shareholder meeting called to consider defense measures.
Rumors and politics: British Telecom and Spain’s Telefonica confirm they won’t buy Telecom. On April 15 Italian Prime Minister D’Alema phones Chancellor Schroder to express concern that a Deutsche Telekom deal would give German government control of TI.
White knight enters: On April 21 Telecom and DT announce that their boards have agreed to an 85.5 billion [Euro] deal.
