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Mention Italian business these days, and what comes to mind is Parmalat, the dairy company whose financial shenanigans, exposed one year ago, rivaled those of Enron. To the chagrin of executives from Venice to Rome, Parmalat's subsequent collapse fueled stereotypes about Italy's cozy, Old World ways. Although the entire Continent struggles to reconcile such practices with the so-called Anglo-Saxon rules of the United States and Britain--which demand greater transparency and accountability--Italy's entrepreneurs have exhibited a particular resistance to change. Italian capitalism is still dominated by family companies and their bankers. Capital markets are shunned in favor of loans negotiated among friends over a fine glass of Barolo. Relatively few firms bother to list their shares, and Italy's corporate bond market is the weakest in the Eurozone.
Relentless pressure from global competition and the international flow of money, however, is pushing corporate Italy toward more modern business practices. Telecom Italia's decision this month to buy up the 44 percent of Telecom Mobile (TIM) it didn't already own is a case in point. The deal removes some of the byzantine layers of ownership that blurred the accounting and management lines of responsibility in these two firms. Telecom Italia Chairman Marco Tronchetti Provera is a master at what the Italians call "capitalism without the capital," in which a small stake in a company at the top of a pyramid is leveraged into decision-making power through to the bottom. He controls TIM through a complex pyramid of five public and private companies that includes Olimpia, which owns 17 percent of Telecom Italia.
The merger will remove one link in the chain of command, which could make the combined company more efficient and transparent. That, in turn, should gladden the hearts of investors. "There are mainly financial reasons for this [deal]," says Patrizio Pazzaglia, fund manager at Bank Insinger de Beaufort in Rome. "But the fact that it also meets the interest of the market is a positive thing."
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The buyout seems to mark a newfound willingness on the part of corporate dealmakers to grant shareholders an equitable share of the spoils. The last time Tronchetti Provera removed a layer from his pyramid--in 2003, when he engineered the merger of Telecom Italia with Olivetti--holders of Telecom Italia shares raised an uproar, claiming that all the benefits went to Olivetti shareholders. One fund manager took out full-page newspaper ads criticizing the deal and another tried to block it in court. Now, says Carlo Alberto Carnevale, professor of business policy at Bocconi University in Milan and a critic of the 2003 merger, international investors have forced a change in governance at Telecom Italia. Independent directors sit on the board, and minority shareholders were offered cash for their shares. "Management now understands that it has to move with the markets and not against them," Carnevale says.
The markets have noticed. In 2003, investors' concerns about corporate governance knocked 15 percent off the share price, says Lehman Brothers analyst Paul Norris. "This time nobody has a problem with the terms, which are perceived as fair." Indeed, the share price has climbed since the plan was announced. The new structure also makes financing easier. After borrowing $12 billion for the TIM purchase, Telecom Italia now has $44 billion of debt. Yet debt is more clearly identified, and can be paid off by full access to the cash flow from the mobile unit, says Carlos Winzer, an analyst at Moody's. "It's a transparent transaction that improves the corporate structure," he says.
This being Italy, of course, the windows of corporate governance aren't crystal clear. Some observers grumble that so far, all the benefit seems to go to Olimpia and, by extension, Tronchetti Provera. The industrialist, many analysts believe, made the deal more to prop up the finances of Olimpia than to improve the competitiveness of the fixed line and mobile-telecom businesses. It is not yet clear what industrial synergies will come from merging the two firms. Telecom Italia officials won't discuss that until March; analysts' estimates of cost savings range from zero to 1 billion euro. "I see a certain Machiavellianism in presenting it as an industrial deal without giving the market information on the economic value of synergies," says Massimo Mucchetti, author of "Fire the Bosses," a book on Italian capitalism. And yet, he says, "the whole operation goes in the direction of modernizing the market." In Italy, that's progress.
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