Mediobanca - The emperor strikes back

For five decades, a small Milan bank has wielded power over Italian finance and industry. It has anointed and toppled bosses, fostered and blocked mergers, and defeated every attack on its influence. Its secretive machinations have infuriated supporters of transparent markets. In recent years, Mediobanca was presumed in decline as the world around it modernized. But in 1999 the firm struck back, steering the consolidation of Italian finance in its favour with help from its patriarch, Enrico Cuccia. Yet even in its year of triumph, Mediobanca faces a worsening internal split: between an old guard obsessed with power and intrigue, and a young investment-banking team who want to be less Cesare Borgia, more Goldman Sachs. Marcus Walker reports

On the move: Braggiotti

On Thursday 28 October, Vincenzo Maranghi was in full conciliatory flow. The chief executive of Mediobanca told his shareholders' annual assembly that the bank had only friends. Relations with the Agnelli family of Turin were "extraordinary". There was no rift with the Lazard group either. And Mediobanca wouldn't dream of trying to control the affairs of its own largest shareholder, Banca Commerciale Italiana (BCI). The notion that Mediobanca had been fighting wars on several fronts was invented by Maranghi's pet hate: the press. The lanky chief executive used the colourful word untorelli, an untranslatable literary reference likening journalists to malicious spreaders of the bubonic plague in 16th-century Milan.

In reality, Maranghi has not so much won friends this year as battered all his enemies into weary submission with a series of vintage intrigues. The only part of Mediobanca accumulating friends is the section that does conventional investment banking in open markets. "The fact is that they are the best in Italy," says a senior banker from a global house who has worked with Mediobanca on equity deals. But it is doubtful whether Mediobanca will allow its investment-banking side to flourish. It would need to go pan-European, along with the future flow of deals.

That would conflict with keeping Mediobanca small, secluded and independent, so that it can maintain its role as power-broker extraordinary in the world's sixth-largest economy. The preference for power games over investment banking has prompted a string of disillusioned executives to leave Mediobanca during the 1990s. The pedigree of a Mediobanca employee speaks for itself, and defectors get snapped up by international finance houses. Some of them agreed to speak to Euromoneyon a no-name basis, affording a unique insight into the secret, fractious world of Mediobanca.

Anglo-Saxon aspiration: Arpe

Cuccia and MaranghiThe institute clings to its traditional power game because it remains under the spell of an extraordinary individual. Honorary chairman Enrico Cuccia, who turned 92 on November 24, has famously never sat for an interview. A rare public appearance occurred last May, when the great and good of Milan gathered at the church of Santa Maria delle Grazie for the unveiling of its restored Last Supper mural, painted by Leonardo da Vinci on the refectory wall. Only the observant noticed Cuccia, a frail old man walking very slowly through the chattering, champagne-drinking crowd.

He is sometimes spotted in the narrow streets around Mediobanca's only office, an orange-plastered, 18th-century palazzo at number 10, Via Filodrammatici, hidden behind the Teatro alla Scala opera house. Those who try to approach him are made to feel as if they don't exist. Even Mediobanca staff seldom see Cuccia. The exception is his anointed successor, Maranghi.

But friends who have crossed Cuccia's protective barrier of silence encounter a genial character. A long-time acquaintance says: "He is one of the most charming people you can imagine. He has an enormous level of culture. He can entertain you on any type of topic or discussion." He lives ascetically; now a widower, his love besides Mediobanca is his library. Literary tastes include Joyce, Molière, and the Latin and Greek classics.

Cuccia approves major business decisions together with Maranghi, but the latter is now the bank's day-to-day boss. An ex-colleague describes Maranghi as "a monk, like Cuccia. He is more interested in power than money." Then again, his wealth is assured - he married into the Castellini family, an old Milanese line with interests in local banks. He is as secretive as Cuccia, whom he has served for 40 years, but without the underlying charm. An acquaintance says: "Vincenzo is much more abrupt and abrasive. He doesn't have the warmth and ability to fascinate that Cuccia has." Maranghi exercises Mediobanca's influence clinically, whereas Cuccia was able to charm others into believing his schemes were in their interests.

A former colleague describes Maranghi as highly intelligent but volatile. "He gets angry, and says 'this is my way - you're either in or out'. It's a black and white attitude. He doesn't forget his friends or his enemies, and he is adamant and transparent about both."

Maranghi represents continuity in Mediobanca's strategy. This frustrates those former employees who believe the quality of the firm's personnel ought to give it a bright future as a market-friendly investment bank. One of their number says: "Maranghi does not understand that the business model that was very successful in the 1960s and '70s is in big danger in a completely different context. For him, it is very difficult to consider things that are different from the original view of Cuccia and what Cuccia did in the past. Maranghi believes in the history of Mediobanca."

Rise and decline

Mediobanca was founded in 1946 by BCI as a subsidiary for medium-term lending and underwriting securities, with the right to take equity stakes in companies. Cuccia, its first chief executive, took it upon himself to act as guardian to Italy's fragile private sector in an era of state industrial empires and feeble financial markets. For four decades, Mediobanca helped keep such famous names as Fiat and Pirelli in business and their founding families in control through ingenious financing strategies. Cuccia orchestrated a system of defensive cross-shareholdings and control pacts among his circle of clients.

Even Mediobanca's critics acknowledge its achievements in serving these clients and helping to preserve an independent private sector in Italy's state-dominated economy.

By the 1980s, however, Italy was starting to develop the capital markets it had previously lacked. Mediobanca's position at the centre of an oligarchy came under attack from supporters of a pluralistic financial culture, particularly the state-sector industrial reformer and later prime minister Romano Prodi. Cuccia and Maranghi began a long fight to maintain Mediobanca's power.

From the 1950s, Mediobanca's core shareholders were three state-owned banks - BCI, Credito Italiano and Banco di Roma - and Cuccia's circle of private-sector allies including Fiat, Pirelli and Lazard Frères. Since 1988, the three banks have together held 25% and Cuccia's business allies 25%, with the remaining 50% traded publicly. Mediobanca enjoyed cosy relations with the three state banks: their branch networks and balance sheets were available on favourable terms for placing the merchant bank's securities deals. Although Mediobanca's parents on paper, the banks acted more like Cuccia's servants. A Milan banker recalls: "Mediobanca used to ring up BCI and inform them: 'you are now the proud owner of such-and-such securities.'"

In 1993-94, when Credito Italiano and BCI were privatized, the aged Cuccia and his trusty Maranghi made sure they remained in Mediobanca's sphere of influence, thanks to personal ties and cross-shareholdings. BCI's board in particular contained friends of Mediobanca, notably the powerful insurer Assicurazioni Generali, in which Mediobanca held a controlling minority stake.

Mediobanca had to ensure its major shareholders did not fall into the wrong hands as financial industries across Europe consolidated. In 1996, it tried to merge Credito Italiano, BCI and Banca di Roma (the expanded successor to Banco di Roma), to form a defensive shareholder with the scale to survive. The plan was scuppered by a rebellion from Credito Italiano. Its chairman, Lucio Rondelli, was a close friend of Cuccia, but he had come to believe that the world was changing.

Two years earlier, Rondelli had hired a former McKinsey consultant, Alessandro Profumo, as his chief executive, and Profumo was transforming Credito Italiano into the country's most dynamic and profitable banking group. Rondelli and Profumo preferred to pursue their own mergers, focused on creating a stronger retail franchise rather than satisfying Mediobanca. The result is today's UniCredito Italiano group.

Maranghi followed up this defeat with a set of failed mergers among industrial holding companies. The firm's schemes to create unwieldy conglomerates were poorly received by the market and even its own allies. Mediobanca appeared to be losing its relevance and its grip, obsessed with issues of control in increasingly market-oriented times.

Braggiotti's revolt

Mediobanca's capital markets department was frustrated at having largely missed out on the privatization process. The lion's share of mandates from 1993 to 1997 went to the Rome-based house Istituto Mobiliare Italiano (IMI); the treasury ministry was deliberately trying to build up IMI as a serious investment-banking competitor to the long-dominant Mediobanca.

The head of capital markets at Mediobanca was Gerardo Braggiotti, son of a famous former boss of BCI. For several years, Braggiotti had argued that the firm needed to reinvent itself. Traditional income from lending margins was in decline. Commission income from investment banking was the future, but Italy's deal flow was limited and IMI and the top American houses were picking up much of it. In Braggiotti's view, the firm had to adapt to industrial and financial globalization. A former member of his department says: "Braggiotti wanted stronger market relationships with foreign partners: an alliance with Lazard or an Anglo-Saxon investment bank, something to boost Mediobanca's presence abroad."

Maranghi rejected the idea of linking Mediobanca into an international network. It would lead to a loss of privacy, secrecy, and perhaps management independence. And in his position as chief executive, Maranghi had the final say.

In 1997, the disagreement over strategy erupted into a power struggle that still haunts the bank. Braggiotti, with the support of Mediobanca's more forward-looking core shareholders such as Marzotto, Credito Italiano and Pirelli, pressured Maranghi into appointing him general secretary. But this meagre sharing of responsibilities was not enough for Braggiotti, who pushed to have the leadership.

At this point, honorary chairman Cuccia threw his considerable moral weight behind Maranghi. An ex-Mediobanca staffer says: "There is a dynastical passage of powers within the bank. Since Cuccia elected Maranghi as his successor, he couldn't accept that Braggiotti could overcome him." With the patriarch behind him, Maranghi forced Braggiotti out of Mediobanca just before Christmas.

Others resigned in the aftermath, including Braggiotti's right-hand man, Roberto Notarbartolo. Braggiotti soon resurfaced at Lazard Frères: the hiring contributed to the decline of the two firm's historical friendship and like-mindedness. Now in charge of Lazard in Italy, Germany, Spain and Scandinavia, Braggiotti arranged to combine the company's Milan operation with that of advisory boutique Vitale & Borghesi from September 1998. He helped spearhead the Lazard group's global overhaul in 1999. In Italy, Lazard stopped deferring to Mediobanca and confining itself to small-scale advisory work. It has begun to win bigger mandates in the past year, including for Telecom Italia, UniCredito Italiano, News Corp, Banca Intesa, Autostrade, Enel and Pirelli.

Many of the younger generation at Mediobanca had looked up to Braggiotti as the bank's last great hope and the only credible successor to Cuccia and Maranghi. They had felt keenly the need to update strategy, but speaking out was strongly discouraged. A former member of the capital markets team says: "It was a big mistake to fire Mr Braggiotti, because his knowledge, his competence, and his relations with many important clients was necessary to allow the bank to develop." Maranghi, he says, "thinks that personnel are fungible, or even that you can do business without people."

The new generation

The loss of Braggiotti, as well as head of shareholdings Maurizio Romiti and a year later loans head Edoardo Lecaldano, left Mediobanca short of experience in key positions. Romiti's replacement was obvious: long-time understudy Renato Pagliaro became head of what is known as the department for participations and special affairs. This unit runs the M&A deals for most of Mediobanca's shareholder-clients. It also wields the bank's investments, including 12% in the insurer Generali, 15% in the sprawling industrial holding company Compart, 13% and 12% in holding companies Gemina and HdP, 14% in insurer La Fondiaria, 5% in tyres-and-cables group Pirelli, 4% in the Montedison conglomerate and 3% in Fiat. These associated corporations' own strategic shareholdings extend the influence of Mediobanca to other companies, notably BCI.

Pagliaro is said to be a true Mediobanca animal: shy and uncommunicative, modest and uninterested in personal enrichment, but a shining talent at behind-the-scenes dealmaking. "He loves his job, and loves the power, the ability to decide events," says a former insider.

To fill the various other holes, Maranghi elevated a group of employees in their early 30s, three of them to become departmental heads. Alberto Nagel took over the general secretariat created for Braggiotti, adding M&A responsibilities for financial institutions. Matteo Arpe became head of what is called the financial department, which covers equity and debt capital markets, treasury, and M&A business involving market operations. Massimo di Carlo became head of the loans department in early 1999.

Giving big responsibilities to these three and other young bankers had several advantages for Maranghi. It avoided diluting Mediobanca's culture by hiring senior people from outside. It helped to retain a crop of talent at a time when the small company was losing around eight to 10 disillusioned executives a year. And it solidified Maranghi's rule. A former insider says: "It is easier to exercise your influence over a 30- to 35-year-old than an experienced guy with a big name like Braggiotti."

Mediobanca's youngsters combine elegant deportment with sharp wits. An Italian investment banker who knows them says: "There is a degree of arrogance in all of them, which comes from the power of the house. It is like the arrogance of an overprotected child." But despite being products of a Mediobanca education, they are likely to play very different roles in the firm's future.

Di Carlo is described by former colleagues as "a solid and effective commercial banker," and "in favour of reform, but not a visionary." His loans department continues to be impeccably run: it has always consisted of top quality credits and has rarely lost a lira. But nowadays the unit is the poor relation of participations and capital markets in terms of revenues and influence.

Nagel is the most likely to lead the bank one day - if it survives that long. One reason is that he is friends with Maranghi. Paradoxically, his views on strategy are said to be the closest to Braggiotti's, including a willingness to drop unprofitable equity participations and to consider giving up independence. Pessimistic about the firm's prospects, Nagel supported the BCI-Credito-Banca di Roma merger in 1996 with a view to making Mediobanca the investment-banking arm of a big universal bank.

That way, Mediobanca could leverage off the three commercial banks' widespread corporate relationships and gain direct access to the retail market. A former insider recalls: "Nagel was outspoken on the need to change the business model, in order to compete with the US investment banks coming into Italy. But Maranghi perceived Braggiotti as bringing these arguments to further his own power interests. With Nagel, this was more of an intellectual discussion."

Despite his radical views, Nagel is viewed as being in tune with the bank's monastic culture. Another ex-colleague says: "He takes a 360 degree view of the problems of the bank, and doesn't consider his personal success. Maranghi considers him the real future of the bank."

Arpe, on the other hand, already appears to have severe tensions with Maranghi. He is a controversial figure inside 10, Via Filodrammatici. A former insider says: "Arpe has no link to the culture, the ethical principles of the bank. He is aggressive, like someone from an international investment bank." Though this is meant as a criticism, the source admits that it could equally be a compliment. On appointment, Arpe came under fire within the bank for being too close to Goldman Sachs, which he is said to admire. In a firm that stresses self-effacement, his personal domination of several deals led to accusations of being a prima donna. One ex-colleague says Arpe is "not an easy person to live with"; another says his style is "tough sometimes... but needed."

Even Arpe's critics view him as a skilful operator on capital markets. "He was the star in the Braggiotti group," says an ex-insider: "He is a very sharp technician, and a charismatic marketing man." In autumn 1997, Braggiotti and Arpe ran Mediobanca's first major market deals, floating Telecom Italia and selling the government stake in Banca di Roma. After taking over from Braggiotti, Arpe reorganized the financial department. The tradition of staff generalism was sacrificed in favour of specialists, including building up a trained sales force and Italian sector research.

In the past, Mediobanca placed securities on the balance sheets of allied commercial banks. But over the past year, it has acquired the ability to sell directly to the market.

Creating a sales force has required hiring investment bankers from outside firms including Deutsche Bank, Paribas and Société Générale. In some cases, the attraction to Italians of working for their country's elite institute outweighed lucrative offers from US houses. Unusually for Mediobanca, the financial department recruited several female executives. But Arpe's style and centralizing rule led to a falling out with some of his Braggiotti-era colleagues. Saverio Vinci and Maurizio Cereda, respectively in charge of treasury and equities, may be relocated within the bank or take up offers from elsewhere.

Two Mediobancas

While Braggiotti fought a power struggle with Maranghi, Arpe appears to lack the interest and affinity for the wider affairs of the firm. His narrower focus poses a different kind of challenge to Maranghi from Braggiotti's: it is leading to the emergence of a bank within the bank.

The 100-strong financial department under Arpe has begun to collect admirers in the marketplace. The reformist technocrats of the treasury ministry are also pleased with the work of this emerging side of Mediobanca. In contrast, they were annoyed by the old guard's schemes, including Maranghi's attempt to buy control of the state telecoms holding company Stet in 1994 (instead, Stet became Telecom Italia and was floated by Arpe and Braggiotti).

Rival investment bankers report that the financial department is starting to hunt for business around Italy, pitching to corporates and investors like a standard capital markets house. This departs from the traditional source of deals: the narrow circle of establishment clients and shareholders who talk to Maranghi. Mediobanca has a growing schism in culture and methods.

Conflict within Mediobanca is now structurally determined. Firstly, the firm's vague delineation of responsibilities is a recipe for turf battles. M&A work, for example, is done by Pagliaro if the client is part-owned by Mediobanca or vice-versa; Nagel if the client is a bank or insurer; and Arpe if a public securities placement is involved. Clearly, these can overlap. Thus Olivetti's takeover of Telecom Italia began as job for Arpe and Pagliaro (who is much closer to Maranghi). But Arpe soon pushed the special affairs department aside.

Secondly - and this is the biggest strategic headache - the two natures of Mediobanca, capital markets house and manipulative holding company, are contradictory. For though the core circle of clients close to the holding company is a source of mandates, it is also a limited pool in which to fish. Telecom Italia doesn't get taken over every year.

And in the search for a broader set of clients, a capital markets house needs a reputation for transparency and straightforwardness. Although Arpe's unit does not always please the market (see the abandoned autumn restructuring of Telecom Italia), it is Mediobanca's first serious stab at embracing market culture. But Maranghi's manoeuvres to undermine Italian bank mergers this year have reinforced Mediobanca's reputation as the master of backroom cabals.

Thus while Maranghi may dislike the financial department's style, the department has a bigger problem with Maranghi's strategy.

The tensions may already be turning into combat. On 29 October 1999, the day after Maranghi poured vitriol on the press at Mediobanca's annual general meeting, the Milan newspaper Il Giornalepublished a short report about Arpe. It claimed that Maranghi had felt obliged to withdraw his own idea of making Arpe his deputy: Arpe's crime was using the influence of his brother and political friends to get the promotion by his own means.

The brother concerned is an executive in the Banca Intesa group; his influence in the closed-off and autocratic Mediobanca is probably zero, especially since Intesa chairman Bazoli (a new business ally of Maranghi) is excused involvement. It is hard to tell whether the government in Rome would or could interfere in Mediobanca on behalf of a young executive. One ex-Mediobanca source calls the claims "ridiculous"; another gives more credence to the treasury ministry's sponsorship of Arpe.

The article also claimed Arpe's style had alienated colleagues in the financial department. This part is real. But the twist in the plot is that Il Giornaleis in the unique position of having a hotline to Maranghi. For this reason, some sources believe the story was planted to stop Arpe from becoming the primus inter pares of Mediobanca's new generation. Maranghi's possible motives are unclear. He may dislike the financial department's attempt to develop an Anglo-Saxon culture, but its money-spinning deals have reduced the pressure on him from shareholders. And if Arpe walked out it would discredit Maranghi for having elevated him and fired Braggiotti. The truth is known only to a silent few.

From Olivetti to Enel

The new-look financial department received its first big tests during 1999. It was central to marketing the world's largest hostile tender to date, Olivetti's takeover of Telecom Italia in May (see Euromoney, July 1999). In late October, there followed the world's largest IPO: raising €18 billion for the treasury ministry by floating 34.5% of the utility Enel. It was a technically tricky task for lead managers Mediobanca and Merrill Lynch.

Critics said the deal was great for the Italian treasury, less so for investors: Enel was priced aggressively at €4.30 a share, made possible by naïve retail enthusiasm and index-trackers' obligation to buy. Early aftermarket performance was mediocre, although Enel was starting to pick up by late November. Dante Roscini, head of European equity capital markets at Merrill Lynch, responds: "I personally believe that over time we will be proven right." Enel is not comparable to other European utilities, he says, and it can look forward to a friendly regulatory and competitive environment. The main problem with the IPO was digestive, says Roscini: "You have to remember that the mass of stock that was put into the market was unprecedented."

For Mediobanca, Enel was a bold deal because it participated in a global syndicate (ie, no territorial division of investors). Previous Mediobanca transactions had always ringfenced Italy. Roscini asked Arpe whether he was afraid the other 18 banks would bite off chunks of the Italian market, but Arpe was eager to prove himself. In the event, Merrill and Mediobanca dominated the institutional orders, with Mediobanca wrapping up Italy and even selling to a number of foreign institutions. It was a step forward for a firm that, even a year ago, hardly knew any Italian investors beyond the major commercial banks, let alone foreign accounts.

As the new Mediobanca developed its abilities, the old guard had other battles to fight.

The battle for BCI

After Braggiotti's expulsion, Maranghi ostensibly embraced a new business model. An extraordinary shareholders' meeting in late March 1998 heard a three-year plan to become a more accessible, market-friendly firm. The future, said Maranghi, lay with investment banking, commission income, seeking a broader client base, and divesting unprofitable strategic holdings. Mediobanca announced an agreement with UK stockbroker Cazenove to supply European research. The statement could have come from Braggiotti himself - except that it was, according to a former insider, "absolute bullshit. There was no internal conviction." The plan was written to calm down the angry shareholders who had supported Braggiotti.

Instead, the old guard went on the rampage. Maranghi had unfinished business: determining the fate of his major shareholders. Credito Italiano (soon to expand into UniCredito Italiano) was out of reach. That left the illustrious but stagnating BCI, and the financially shaky Banca di Roma. Maranghi mobilized his friends on the board to push BCI into merger talks.

For BCI's chairman, Luigi Fausti, the shotgun wedding had at least to be on his terms: a takeover of Banca di Roma following due diligence of its flawed loan book, not a merger of equals. This was unacceptable to Banca di Roma chairman Cesare Geronzi, a Cuccia ally. When Geronzi wrote to Fausti in June blaming him for the breakdown of talks, BCI staff gave Fausti a standing ovation. Their separatist spirit was strong, but their independence was doomed.

To Mediobanca's displeasure, a rival group, Istituto Bancario San Paolo di Torino, expressed interest in BCI, writing to chairman Fausti in August. Sanpaolo had long been an opponent of Mediobanca's circle, and was to merge with Mediobanca's investment-banking rival IMI later that year.

Because Fausti was sympathetic to Sanpaolo's overture, Mediobanca allies including Commerzbank raised their stakes in BCI and ousted him at a board meeting on 30 September. (Commerzbank, a founding investor in BCI in the 19th century, has an alliance with Generali to sell insurance in Germany; thus in Italy it cooperates with Mediobanca.)

Fausti's replacement Luigi Lucchini, a director of Mediobanca, resumed merger talks with Banca di Roma's Geronzi in October, but proved less flexible in delivering BCI than Mediobanca had hoped. Lucchini's co-chief executives, Alberto Abelli and Pier Francesco Saviotti, continued to fight for a deal only on terms that suited BCI's interests. By December, the talks were in trouble; by March 1999, they were effectively dead.

Mediobanca's pro-reform shareholders were growing agitated with Maranghi's string of unconvincing merger schemes. They included Pirelli chairman Tronchetti, UniCredito chief executive Profumo, and Fiat under its new chairman, Paolo Fresco, who replaced Cuccia loyalist Cesare Romiti in June 1998.

In late January, fearing for his position, Maranghi gambled in authorizing Matteo Arpe to join the syndicate of US investment banks advising Olivetti on how to take over Telecom Italia. An ex-Mediobanca source says: "The deal went absolutely against the culture of the bank, launched by clients who a few years ago wouldn't have been allowed to enter the bank. The point for Maranghi was to do a big deal, make some money, and take the pressure off."

But Olivetti's hostile reverse takeover of Italy's biggest listed company looked a long shot to succeed, until Telecom Italia stumbled repeatedly with its defence plan. In March, the pressure on Maranghi grew to the extent that his resignation was in the air. What saved Maranghi was the miscalculation of UniCredito Italiano and Sanpaolo IMI.

The parallel offer

In 1996, Credito Italiano boss Alessandro Profumo had resisted a merger with BCI on Mediobanca's terms. By 1999, the enlarged UniCredito Italiano was more confident and independent, and looked again at BCI. Profumo knew Mediobanca would be opposed to a single, rebellious bank owning 17.6% of its shares. To overcome the old oligarchy needed the full momentum of the market, Profumo thought. He coordinated his tactics with Sanpaolo IMI, which was now interested in expanding its southern Italian presence by acquiring Banca di Roma.

On Sunday 21 March, the two groups made simultaneous public offers, billed as friendly. That day, Sanpaolo IMI chairman Luigi Arcuti phoned his opposite number at Banca di Roma, Geronzi, and believed to have reached agreement. In fact, Geronzi's insistence on a merger of equals soon raised itself, and the accord evaporated.

On 20 April, Bank of Italy governor Antonio Fazio said in a speech to parliament that he opposed bank mergers that weren't on explicitly friendly terms. The Bank of Italy's only ground for vetoing mergers is to uphold the stability of the financial system for depositors, but the consensus-loving Fazio was interpreting his remit broadly. From Mediobanca's point of view, it remained only for Geronzi to get his board to reject the Sanpaolo bid on 22 April.

UniCredito's parallel offer for BCI ran aground on the divisions within the target. BCI's co-chief executives, Abelli and Saviotti, supported UniCredito's project, but BCI directors allied to Mediobanca, led by Generali chief executive Gianfranco Gutty, resisted. For a month, chairman Lucchini strove to keep BCI united. He lost control at the fractious annual general meeting of 28 April, when shareholders close to Mediobanca tried to make Abelli and Saviotti resign. That night, BCI's board held a crisis meeting. Unable to reach agreement in favour of merging with UniCredito, the directors avoided a split by abandoning it. Instead, they agreed to consider an alternative merger partner supplied by Mediobanca: the Intesa group.

Mediobanca had defeated Profumo's attempted revolution by taking two steps. One was to mobilize every personal relationship and and minority shareholding available, to outnumber those managers and directors of BCI and Banca di Roma who supported the parallel offer. The unsolicited bids by UniCredito and Sanpaolo IMI were thus deemed hostile. The other was to create a political atmosphere in which both Sanpaolo and UniCredito felt afraid to pursue hostile takeovers.

On 16 April, Enrico Cuccia went for tea at the Rome residence of the Banca di Roma director Alfio Marchini. The other guest that day was the prime minister of Italy, Massimo D'Alema. Their two-hour discussion is presumed to have covered the consolidation of Italian banking. Although the government's only power over bank mergers is moral suasion, this was apparently strong enough to dissuade Sanpaolo IMI from challenging Banca di Roma to a knuckle-fight.

Both UniCredito and Sanpaolo IMI know where they got it wrong. They had believed Italy to be a market-driven place. A source close to Profumo says: "In retrospect, we chose the wrong tactics. We shouldn't have made a parallel offer with Sanpaolo, because the government thought that Profumo and [core Sanpaolo shareholder] Agnelli are out to destroy Mediobanca. It was received as a great threat to the system." An inside source at Sanpaolo says: "One mistake we and UniCredito made is not declaring immediately that we intended to sell [BCI and Banca di Roma's] stakes in Mediobanca, to Generali or whoever. Neither of us wanted control of Mediobanca, that was not the motive. But it frightened Cuccia and the establishment."

Changing alliances

After defeating the parallel bidders, Mediobanca settled a score. On 29 April, Generali chairman Antoine Bernheim went to see Cuccia and Maranghi at Via Filodrammatici. The Frenchman, one of the most senior partners of Lazard Frères, learnt that Mediobanca would not support his reconfirmation at Generali's annual shareholder meeting in Trieste the following day.

Bernheim and his chief executive, Gutty, had tripled Generali's turnover and doubled its market capitalization in the previous three years. But they could no longer cooperate in wielding Generali's powerful shares in BCI. Though Gutty was a staunch Mediobanca supporter, the Lazard man had opposed BCI's merger with Banca di Roma and supported the offer from UniCredito. His Lazard colleague Gerardo Braggiotti had even advised UniCredito. On the afternoon of Friday 30 April, Bernheim stepped down as chairman of Generali, protesting that he had done what he thought best for the interests of all its shareholders - "not just a select few".

Mediobanca and Lazard had long run Generali as partners, and Lazard had been Mediobanca's main foreign ally since the 1950s. A former insider to Via Filodrammatici explains that, apart from Braggiotti's hiring and the disagreement over BCI, the personal relationships between the two firms' leaders had faded. Cuccia had been a close friend of Bernheim and of the deceased André Meyer; but Maranghi did not get on with Bernheim, and after the 75-year-old Frenchman, no senior Lazard figures were close to Mediobanca.

At the operational level, the two investment banks have normal relations, sometimes competing, sometimes working together for a client. But at a strategic level, the two holding companies have ceased to share a philosophy. Lazard retains a 2% stake in Mediobanca, and in October Bernheim was reconfirmed on the Italian firm's board as deputy chairman. But a source familiar with the situation reports "a volatile atmosphere". The remains of the partnership could unravel when Mediobanca's shareholder syndicate pact is renegotiated in 2001.

Maranghi's principal foreign collaborator, including over Generali and BCI, is now Germany's Commerzbank. The Generali AGM of 30 April approved Commerzbank's chairman Martin Kohlhaussen as a new director. Commerzbank took its stake in Mediobanca up to 1.2%, and its director Baron Axel von Ruedorffer joined Mediobanca's board in October.

Enter Intesa

Mediobanca moved to settle the BCI question within days of Profumo's offer of 21 March. The firm approached the most powerful banker in Italy as yet uninvolved in the spring wrangles: the law professor Giovanni Bazoli, chairman of Banca Intesa. A prominent former Mediobanca insider believes this creative solution bears all the hallmarks of Enrico Cuccia's masterly diplomacy, rather than Maranghi's more conflictual style.

The holding company Intesa, whose very name means agreement, was created at New Year 1998 and rules a federation of banking franchises. The predominant pair are savings bank Cassa di Risparmio delle Provincie Lombarde (Cariplo), and Banco Ambrosiano Veneto (Ambroveneto). The latter is the descendant of Banco Ambrosiano, which Bazoli revived in 1982 after it collapsed amid scandal.

Bazoli now runs Banca Intesa with former Cariplo boss Carlo Salvatori as his chief executive. They have focused on the domestic market and identified retail as the most profitable sector. The international commercial bank BCI was therefore not an obvious acquisition. But according to Salvatori, as 1999 began Intesa wanted a strong nationwide brand: its existing franchises covered only parts of the peninsula.

There were only three options. UniCredito Italiano was a growing success under Profumo, and not available. BCI was the next best choice, but it was still in merger talks with Banca di Roma. Salvatori says: "Our policy is not to interfere with other projects, because the strength of the banking system is the strength of the parts of the system." His words express a diplomatic approach to M&A far more congenial to the government and Bank of Italy than Profumo's attempted revolution.

In March, when BCI declared the Banca di Roma merger dead, the path was briefly clear for an approach. Salvatori recalls: "But immediately, there was the launch of the offer from UniCredito, and we thought we had missed our chance." Within a week, the picture had changed again: Intesa, Salvatori testifies, was approached by Mediobanca, and invited to communicate an interest in BCI to relevant parties.

"The way UniCredito managed the affair did not seem the proper way," says Salvatori. "We felt that the transaction needed to consider the stakeholders. Not only the shareholders, but the stakeholders. The market is not only the stock exchange. There are also the unions, the [core] shareholders ... and the different levels of shareholders. We very soon understood that there were parallel interests between Intesa and BCI shareholders: Mediobanca, Generali, and Commerzbank." (In fact, BCI is Mediobanca's shareholder and not vice-versa, but this is easy to forget when influence runs in the opposite direction.)

Since Intesa dislikes interfering in others' deals, it made no bid for BCI. However: "The board and management of BCI knew Intesa would be a candidate providing the offer of UniCredito was dropped." Might this gentle intervention have influenced BCI's decision against UniCredito? "Partially, of course."

The availability of Intesa instead of UniCredito helped BCI's board to stay united. Intesa made a formal approach to BCI in June, opened a public offer for 70% of its capital in September, and ended up with 88% of the venerable commercial bank when the offer closed on 15 October. The 70% tendered get stakes in Intesa; the excess tenders receive put options. As Euromoneywent to press, the formation of a new board was under way. Intesa's control syndicate is set to include Generali, Commerzbank, Mediobanca and HdP, alongside its traditional major shareholders: Crédit Agricole, insurer Alleanza, and a set of local banks and charitable foundations from the Lombardy region. Salvatori says: "Mediobanca is much closer to us than it used to be."

Intesa's partnership with Mediobanca in deciding the fate of BCI surprised many observers in Italy, since the two firms come from formerly opposed camps. Intesa's ancestors since Banco Ambrosiano have always been considered close to the Vatican; opposed to this Catholic banking circle stood the lay tradition, led by Mediobanca.

But the historical tribal tags now matter less than a mutual appreciation of interests. Intesa gets to become Italy's biggest banking group by every measure, create a national footprint, and diversify into foreign and corporate markets. In return, it shows a sensitivity and desire for consensus that makes Mediobanca believe it can live with Italy's new giant.

Carlo Salvatori says: "We always had respectful relations with Mediobanca, even in the periods when we were opponents. There was a very large esteem from our side, and I presume they used to esteem our behaviour. They know how we act."

Some in Milan financial circles doubt that the cosiness between Mediobanca and the wily Bazoli will last. Mediobanca turned to Intesa, "a bank for priests" as one critic calls it, because it was in trouble: the new world represented by Profumo risked overturning the old. For now, however, the BCI problem is solved.

The deal, probably engineered by Cuccia, also helped to ease the pressure from directors on Vincenzo Maranghi. The Mediobanca board meeting of 29 March, held around the days when Salvatori says Intesa received Mediobanca's suggestion, declined to challenge the chief executive.

The carve-up of INA

Cuccia and Maranghi's next preoccupation was the future of Assicurazioni Generali. The insurer was Mediobanca's most brutal weapon in defeating the threat from UniCredito Italiano. Generali was the strongest player in Italian insurance, but was less dominant at home than rivals Allianz in Germany and Axa in France. It could not be allowed to fall into the wrong hands. Axa's predatory chairman Claude Bébéar, a keen hunter in his spare time, was a particular long-term danger.

Generali needed to grow. The natural choice was Istituto Nazionale delle Assicurazioni (INA), a prospering company focused on the fast-growing life assurance market. But INA didn't feel like being swallowed by its bigger peer. Chief executive Lino Benassi was more in favour of a bancassurance deal. He began talking to his core shareholder, Sanpaolo IMI, in July 1999. Sources in each camp claim the other side played hard to get.

But the talks were worrying enough for Generali and its patron, Mediobanca. They proceeded to demonstrate how to do a hostile takeover in Italy. "Generali was cool," says an admiring investment banker on the losing side of the battle. "They prepared the ground, and then they attacked." Preparation meant lobbying the government. On 2 September, Enrico Cuccia had another long tête-à-tête with Massimo D'Alema, this time at the prime minister's office, Palazzo Chigi, off Rome's chic shopping thoroughfare Via del Corso.

Sanpaolo IMI later learnt from government sources exactly what had been discussed. Cuccia argued that Generali had to win INA to protect its own independence against Axa and Allianz, a logic of economic nationalism the prime minister could appreciate. Cuccia presented D'Alema with a carve-up in which Generali would sell INA's controlling stake in Banco di Napoli to Sanpaolo, thus expanding its southern Italian franchise as it had failed to do with Banca di Roma.

As Cuccia's slow footsteps left the prime minister's office, the government was left with the impression that Sanpaolo would understand this arrangement. The politicians were rather surprised 13 days later, when Sanpaolo core shareholder Umberto Agnelli denounced Generali's offer for INA as "an act of arrogance."

In early September, INA sensed that someone was buying up its stock. Benassi pressed Sanpaolo IMI to hurry up and make an offer. Generali, advised by Warburg Dillon Read as well as Mediobanca's Alberto Nagel, went public on 14 September, launching an €11.8 billion bid for INA. Sanpaolo preferred to wait and gauge the political mood. The message from the authorities was that D'Alema and Fazio wanted a compromise. Governor Fazio believed a bidding war would be destabilizing for all sides.

Sanpaolo concurred: it feared a hammering from the market if it used its relatively weak stock to top Generali's strong bid. Having found insufficient support among INA's control syndicate to build up a blocking minority against Generali, Sanpaolo pondered bidding for INA indirectly, using the more highly rated stock of asset management subsidiary Fideuram. But INA had little enthusiasm for acquisition by Fideuram, and wanted Sanpaolo IMI to make a bid. Benassi expected one to follow the Sanpaolo board meeting of Friday 8 October.

That very evening, INA was stunned to learn that Sanpaolo had gone behind its back and accepted the compromise with Generali that Cuccia had explained to the government on 2 September. An investment banker close to INA says: "They felt betrayed. October 8 was not a good day inside INA." The source is scornful of how Sanpaolo allowed itself to be intimidated by pressure from D'Alema and Fazio, just as over Banca di Roma. "The power of the government depends on the attitude of those on the receiving end of its messages. Sometimes in life you have to make a decision: whether to accept an official position or challenge it. So far, Sanpaolo has always decided not to challenge."

INA surrendered on 4 November. Generali gave Sanpaolo IMI the right to buy INA's control of Banco di Napoli, as well as options on other assets that have no obvious benefit for Sanpaolo besides saving face.

Sanpaolo IMI has now lost BCI, Banca di Roma, Telecom Italia (which IMI defended), and INA. Meanwhile, Mediobanca has solved Italian financial consolidation on its terms. The future Italian banking landscape will include a rival Sanpaolo IMI-Banco di Napoli pole, as well an independent UniCredito Italiano pole including BNL. But Mediobanca stands at the apex of by far Italy's biggest banking and insurance empires: Intesa-BCI and Generali-INA. This by no means inevitable victory is partly because of the return to active service of the master, Enrico Cuccia.

Plus ça change

Vincenzo Maranghi had good reason for his confident performance before shareholders on 28 October. Mediobanca the holding company had won all its battles of 1999. The pressure on Maranghi that peaked in March was, for the time being, dissipated.

Mediobanca the investment bank had also racked up several jumbo bond, equity and M&A deals in the previous six months. Apart from the blemish of expecting the market to like Olivetti's restructuring idea for Telecom Italia in the autumn, the financial department has a strong track record to live up to.

It is convenient for Maranghi that the financial department has learnt to rake in big commissions, even if Maranghi dislikes its independence and desire to be market-driven. Whether Arpe and his more like-minded investment bankers can continue to live with Maranghi is another question. Maranghi's insistence on keeping Mediobanca as a 300-strong sect in a single Milanese palazzo probably means that the investment bankers are wrongly positioned for the coming generation of deals. The financial department may have floated Enel, but when a fully privatized Enel tries to buy Vivendi, Mediobanca won't get the mandate. An age of cross-border deals is more suited to a classic investment bank with 3,000 executives and pan-European sector coverage.

The currently high-flying financial department at Via Filodrammatici may thus find its deal flow drying up. Remaining domestic business for core shareholders, such as Pirelli's current purchase of INA's real-estate company Unim, will often be handled by Pagliaro's special affairs department. But Pirelli's bigger deals won't be such cosy domestic affairs. "In the future, it will be natural to have cross-border deals. I think Italian companies are more and more open to it," says Pirelli chairman and CEO Marco Tronchetti Provera.

For 15 years, reports of Mediobanca's decline have proved exaggerated. It is dangerous to write off this bank, as UniCredito Italiano knows. The financial department may sink back into obscurity thanks to Maranghi's conservatism, but the older, power-wielding side of Mediobanca is in no imminent danger.

Marco Stella, general director of Lazard Vitale Borghesi, says: "Investment banking in Italy continues to be somewhat different from the Anglo-Saxon style. It's true not only for Mediobanca. In Anglo-Saxon banking, there are rules. In Italy, there is always a suspicion that something was not right, that someone had hidden motives. This doesn't stop Anglo-Saxon banks from being here and making a lot of money. But when they deal in Italy, they are a bit different from how they are in their markets of origin."

A senior Milan banker puts it pithily: "It is not the case that Mediobanca is the devil, and all the others are angels. Mediobanca is the master, but the others would like to be good pupils."

The reality is that Italy, like France and Germany, is developing an Anglo-Saxon financial system only partially. Complex networks of cross-participations and control pacts among syndicates of minority shareholders survive. Pirelli's boss Tronchetti counts as a modernizer, one of a new breed of efficiency-minded Italian industrialists. Yet he explains why traditions change hard. "The key element [of a modern financial system] is to have a flow of capital based on professional investors and pension funds. The weakness of Italy, Germany and France is they don't have pension funds," says Tronchetti. In the absence of these independent institutions, too many managers of capital are tied to big banks. Tronchetti continues: "Without a natural flow of capital, it is difficult to avoid having a transitional time when you support the management of a company through some kind of shareholders different from institutional investors."

The constructive way forward, for Tronchetti, is to speed up pensions reform and create more numerous independent investors. He says: "This transition in Italy is too slow. If the process goes on more quickly, Mediobanca will speed up the changes that it is making inside. Mediobanca will move forward when Italy moves forward."

A one-time insider at Mediobanca says wearily that nothing will change. As long as Italy's financial system remains partly traditional, Mediobanca's power is useful for its owners. "These are not real shareholders, looking for returns. They are looking for other advantages." Even such progressive directors as Tronchetti are content to invest a small portion of their capital to keep the influential bank friendly for M&A questions or trouble-shooting. Tronchetti says: "In difficult times, it is the only bank able to raise capital with speed and professionalism and organize the restructuring of Italian companies."

The former insider says: "Mediobanca will continue, despite everything. It is not an ordinary bank. It has an unreal power. Even without Cuccia, there will not be much of a rethink. For Maranghi, the issue is: can he keep the relationships with the Bank of Italy, the government, and key Italian groups? Probably some relationships will weaken, but others will grow up."

Enrico Cuccia's slow footsteps will echo down Italy's corridors of financial power long after he is gone.

Cuccia keeps on walking