Olivetti’s Carlo De Benedetti: The man who won’t quit centre stage

On August 27, worried representatives of seven UK fund managers met at the London offices of Baring Asset Management at 155 Bishopsgate. They had all bought sizeable chunks of Olivetti stock at the start of the year ­ most in an internationally syndicated rights issue ­ paying around L1,000 ($0.65) a share. In total they held a 25% stake. They had believed that a turnround at the troubled Italian information technology group would soon boost its share price, which had fallen from nearer L3,000 at the start of the 1990s. They had been bitterly disappointed.

Instead of turnround, the company had delivered profit warnings and growing management turmoil. The shares were down to L800. Shareholders were now cursing themselves for buying Olivetti stock and privately complaining that they had been misled at the time of the January 1996 rights issue.

“It was not so much a question of having being fed inaccurate information in the rights-issue prospectus, which nobody really read anyway because they are always full of legal gobbledygook,” says one fund manager who attended the meeting. “It was the enthusiasm of investment banking analysts and the company for the turnround story which was misleading.”

At the meeting were representatives of Baring itself, the largest single foreign shareholder in Olivetti with a stake rumoured to be as high as 5%; Nomura Capital Management, which had initiated the meeting by contacting other worried shareholders; Old Mutual; Henderson; Robert Fleming Asset Management and one or two others. At the last minute, fund managers from Phillips & Drew Fund Managers were unable to attend. But with 2% of Olivetti’s shares, they were there in spirit.

The meeting lasted an hour and a half. Fund managers speculated about the departure of Corrado Passera ­ former head of Olivetti’s troubled personal computer (PC) division and a key man in pitching the turnround story at the time of the rights issues; about the likely strategy of new Olivetti CEO Francesco Caio; and the role of Carlo De Benedetti, the dominant figure at Olivetti for 17 years. On the surface De Benedetti appeared to be taking a back seat to Caio, but deeper analysis showed him to be retaining a Machiavellian influence.

The fund managers also talked about how Olivetti might realize some value from joint-venture mobile-telecoms company Omnitel, Olivetti’s most promising business and the reason why most had bought shares. Naively, some foreign fund managers may have assumed they could force the company to spin off Omnitel to them. They knew there were rules against this. The Italian government had imposed restrictions on ownership changes when it granted Omnitel a valuable operating licence in 1995. Maybe foreign investors thought these rules might be waived to protect Omnitel against growing chaos at Olivetti.

“There were various views about what should be done ranging from the extreme to the moderate,” says one person present at the London meeting. The angrier shareholders half-joked about taking out a contract on De Benedetti’s life. In the end, they settled for having Baring request Olivetti senior management to meet them to provide some answers. They would have to wait until October for this, by which time Olivetti had slipped even further into financial and managerial chaos.

The significance of owners of 25% of Olivetti’s stock meeting together could not have been lost on the company’s board. That’s the number of votes required to summon an extraordinary general meeting. Each fund manager knew that they were on the brink of something quite unprecedented. Olivetti is unique among large Italian industrial conglomerates. Since the rights issue, most of its shares ­ up to 70% ­ are now owned by non-Italian fund managers. The meeting was a clear first step towards open conflict with company management and other entrenched Olivetti interests: the De Benedetti family and its allies including all-powerful Milan merchant bank Mediobanca.

“We knew that the next step, becoming truly active, would require us to know our way around EGMs, Italian company law, articles of association, legal fees, and we simply decided to cross that bridge if we came to it,” recalls one of the fund managers.

Factions entrenched

But courageous as it sounds, a fight with the vested interests of a major Italian corporate was the last thing the fund managers wanted. It was bound to be messy, time-consuming and expensive and might not deliver the intended result ­ an improved share price.

Two months on from the fund managers’ meeting little has changed for the better with De Benedetti and many of the old management factions still entrenched. To De Benedetti the battle is about winning, not about the share price. “We assumed that our interests and those of De Benedetti and his family were aligned. The actions they have taken during 1996, would not appear to bear that out,” says Mark Pignatelli, head of the European investment team at Baring Asset Management. So while some sort of showdown is still likely, other investors may decide that selling at a loss is a less painful option. This is the route already taken by Nomura.

Fund managers have learnt the hard way that, despite paying lip service to modern methods of corporate governance, much of Italian commerce is conducted the traditional way. The old cliché that Italian shares are weighed not counted ­ the political weight of an investor being more important than the number of shares he owns ­ holds true. As long as it does, Italian share offerings will be heavily scrutinized by foreign investors and may be ignored altogether.

Says Paolo Braghieri, head of Milan-based CS First Boston Italia (Sim): “Every time something like this happens it is another black spot on the reputation of the Italian market, regardless of whose fault it is. It is still too
early to talk about corporate governance in this country for there are no truly public companies.”

The Olivetti affair has done considerable damage to Italy’s investment prospects and its standing with fund managers. Only a year ago, before the problems at Olivetti, fund managers believed that significant changes were under way. Then Milan financiers began talking excitedly of three rights issues vying for support among equity underwriters and investors. All three ­ Cofide, Cir and Olivetti ­ were closely linked to Carlo De Benedetti. Cofide is a financial holding company controlled by the De Benedetti family. It owns 50.1% of Cir, a second De Benedetti vehicle which in turn is the largest single shareholder in Olivetti, Italy’s fourth-largest industrial company, with 15%.

Olivetti needed to raise capital to escape from its past and secure a brighter future. It had to pay for restructuring its troubled PC division and to finance further investment in Omnitel, in which it is the leading shareholder. The PC division has been responsible for Olivetti’s reporting heavy losses for five years. By contrast, Omnitel is hugely promising and poised to move from its investment phase into high profits, probably from 1998. Fund managers were attracted by what they saw as a restructuring stock, but they were soon disappointed.

Hidden promise

The three fund-raising efforts have sucked in an unlikely cast of irate foreign shareholders, worried politicians, stressed regulators, angry union leaders, zealous magistrates, even a campaigning bishop. Managers, chief executives and chairmen have arrived, been sacked and in some cases have returned ­ all with bewildering speed. Olivetti is still struggling to cope with what new chief executive Roberto Colannino, appointed at the end of September, describes as “a financial crisis” and a “disaster”.

Last December, De Benedetti needed to raise funds at Cofide and Cir in order to subscribe to his quota of rights under the Olivetti issue and so retain control of just over 20% of the company. In Italy a stake of over 25% allows any investor to dominate shareholder meetings. De Benedetti was chairman of Olivetti, and in the previous 10 years his stake had fallen from over 40%. He didn’t want it to fall further. But the Cir and Cofide issues never got off the ground. Olivetti’s fund-raising, though, led by De Benedetti’s closest domestic and international investment banking allies ­ Mediobanca and Lehman Brothers ­ was a huge success.

Surprisingly, given Olivetti’s record, international investors were enthusiastic buyers. “We were absolutely not investing in the Olivetti people had known over the past 10 years,” says Baring Asset Management’s Pignatelli. “We were buying for one reason only: Omnitel.”

In February 1995, Omnitel Pronto Italia ­ 51% owned by Olivetti ­ had been awarded the second licence to operate in the world’s second-best cellular phone market. Olivetti stood to benefit enormously from the strong performance of Omnitel. Far from worrying about the PC division, some investors were pleased about its problems because they thought these were letting them get at Omnitel on the cheap.

Talal Shakerchi is a fund manager at Old Mutual who has enjoyed good results from buying out-of-favour stocks in which a turnround seems in sight. He bought Olivetti shares in March and April. “Following the rights issue, the shares fell and on our valuation were priced at half their fair value. We were influenced by the message the company gave at the time of the rights issue that it was putting its problems behind it. They were saying ‘we have disappointed you in the past, but this time we have sorted ourselves out’.”

The company was telling investors exactly what they wanted to hear. For example, it said that the PC division would break even by the year-end and, if it did not, Olivetti would sell it or close it down. It mentioned L400 billion ($261.44 million) as the possible cost of closure.

When the dust had settled on the rights issue, Olivetti had raised L2.257 trillion selling shares at L1,000 each. Cir’s stake in the company had fallen to 15%, while 70% or more was held by non-Italian institutions, mainly based in the UK and US. “From that moment there was a huge hole in the Chinese-box system,” says one Milan-based investment banker. (Chinese boxes are the series of holding companies investors like De Benedetti use to control large Italian companies while having only small direct shareholdings.)

It seemed that ownership and power in Olivetti were passing to a new class of Anglo-Saxon shareholders and that the company was restructuring itself in a way that would improve returns to them. The advent of US-style corporate restructuring in continental Europe ­ involving lay-offs, cost-cutting, mergers, demergers, share buy-backs, rationalized business lines ­ is an investment theme brokers and investors in Europe have picked up on recently. The financial comunity wants to believe in it.

Olivetti seemed to fit the pattern. At the end of 1995 it was reorganizing key business areas into stand-alone divisions, including PCs and its printer, photocopier and fax machine manufacturer Lexicon, offering the hope that either these would be sold off or, at least, that investors would gain a clearer picture of each segment’s true profitability. “We bought on the story that this was the new Olivetti,” recalls Mark Rogers, senior portfolio manager at Nomura Capital Management.

Things went wrong quickly and badly. “We were mugged,” says one UK-based investor. “We were lied to,” says another, “it’s quite obvious they were having us on.” Pain flows around the world as easily as capital. In San Francisco, Michael Mahoney, portfolio manager for LGT, was equally distraught: “Owning Olivetti shares has been a drastic mistake.”

Bad to worse

On January 8 1996, the rights issue was finalized and fully subscribed. On January 23, Olivetti issued a profits warning. Far from overcoming its problems it was set to make a 1995 loss just as bad, if not worse, than in previous years. It projected a pre-tax loss of L500 billion, compared with L605.6 billion for 1994. Bad became worse. In April, Olivetti unveiled a pre-tax loss for 1995 of L1,523 billion, largely because of restructuring costs and provisions. There was still substantial net debt, even after the rights issue.

Most worrying, while the PC division’s losses did indeed appear at last to be under control, now, unexpectedly, the other businesses were struggling. The PC division still made losses, though smaller ones. Now apparently, Olivetti systems and services, the main source of operating profit, had suffered from a margin squeeze. So too had Lexicon, delaying the company’s plans to float off equity in that division on Nasdaq.

Investors had focused their worries on the PC division. Olivetti produced quarterly reports on PCs, half-year results for everything else. The company has cut employees in the division from 4,500 18 months ago to 1,750. That accounts for much of last year’s large restructuring charge. PC’s capacity to lose money is much reduced. Investors were looking out for trouble, but in the wrong place. “We didn’t expect that it [the PC division] would produce a return above its cost of capital. But we did expect it to stop losing so much cash,” says Rogers. “What no-one imagined was that the other divisions would turn sour just as PCs seemed to turn around.” Inevitably, sceptical investors are now wondering whether problems hadn’t been transferred from one division to another. Olivetti shows the earnings for its divisions but not the assets within them, so it’s hard to get an accurate picture of their true profitability.

The company’s share price had started to slide. Over L1,200 at the time of the rights issue, it slipped towards L900 at the end of January and reached L780 in April, before recovering to around L1,000.

Management changes at Ivrea, Olivetti’s corporate HQ near Turin, were as worrying and confusing as the share price. In July, Corrado Passera, head of the PC division and credited with pushing through its restructuring, left to become chief executive of Banco Ambroveneto. Passera had played a big part in pitching the turnround story to investors and had also been negotiating a disposal of the PC division with a Japanese company.

Then, a few weeks later, De Benedetti announced that Francesco Caio, a former McKinsey consultant and head of the highly succesful Omnitel Pronto Italia, would now take over as Olivetti’s CEO. De Benedetti remained as chairman but resigned as managing director of the Olivetti board. Some outside shareholders took this as a good sign. LGT’s Mahoney remembered Caio in his McKinsey days, when Mahoney himself had worked at Bain & Co. “He was regarded as a real smart guy, a hot shot, a real shaker-upper.” Olivetti needed shaking up. Though individual divisions might have good people running them, the company seemed to lack strong management at the very top, capable of making tough decisions. For example, over the years there had been several opportunities to sell the PC business but it had never happened. Perhaps it was coerced by politicians and labour unions to preserve jobs. Perhaps De Benedetti never believed he was being offered a good enough deal.

Caio offered the promise of new credibility. Certainly he had impressed investors with the way he and his largely McKinsey-trained team ran Omnitel. “They were very impressive and fully in command of all the figures,” recalls Baring’s Pignatelli. “They had carefully planned their investment spending for 1996 and intended to break even at the end of 1997 and by then to have zero equity left.” In other words, Omnitel was not asking its shareholders for any capital beyond that needed to complete its network.

Though Italian, Caio brought an American approach to his new task. If anything he was too aggressive. “He went in there like Arnold Schwarzenegger, firing people left, right and centre,” says one analyst. During July and August there seems to have been a power battle between him and De Benedetti. It seems Caio wanted to manage down the market’s expectations, produce a really bad set of figures for the first half, get as much bad news out as possible ­ for which he could not be blamed ­ and then with luck take credit for a turnround in the second half.

Olivetti’s accounting practices provided the perfect opportunity for this. Because much of its revenue is seasonal ­ more money comes in during the fourth quarter than any other ­ the company also accounts for a higher proportion of its costs ­ roughly 60% ­ in the second half. By shifting to a 50-50 cost allocation, Caio could make the first-half results appear truly awful.

Foreign shareholders were getting more and more worried as the shares slipped again, towards L750. Passera had left and they feared that his strategy for PCs was in tatters and the rest of the company was also deteriorating. By now Olivetti’s senior executives weren’t talking to foreign shareholders. Nomura Capital Management’s Rogers began calling around brokers and other contacts trying to identify other worried shareholders ­ hence the August 27 meeting.

Three days later, De Benedetti resigned as Olivetti’s chairman and appeared to step even further into the background. It seemed his grip on power was still slipping and that Caio had ousted him. The share price rose 15% on the news. It looked like dramatic proof of Anglo-Saxon shareholder power. The London fund managers had flexed their muscles and De Benedetti was gone. But in reality it was nothing of the sort. Nor did De Benedetti’s departure resolve any of Olivetti’s problems.

Caio says goodbye

Caio arranged to come to London, but then postponed coming twice, saying he would delay until the first-half figures due on September 30. In fact, these results were announced early, on September 3. They were dire: an operating loss of L80.8 billion (compared with a L73.4 billion profit for the first half of 1995) and an after-tax and extraordinary charges loss of L440.2 billion. Worryingly, net financial indebtedness was up to L1.26 trillion from L774.8 billion at the end of 1995.

Communication from the company remained poor. A conference call was arranged for Caio, now in charge of the executive management committee, to discuss the numbers at 5pm London time on the day after they came out. Investors were disappointed. Instead of analyzing the results, Caio spoke for an hour in broad terms about strategy. To most of his audience it was hot air.

Unknown to investors, a bitter argument had been raging inside Olivetti about the numbers. On the day of the call, Olivetti director general Renzo Francesconi had resigned after just six weeks in charge of finance and auditing, claiming that published interims understated the disaster. Trading in the company’s shares was suspended.

It’s difficult to say with certainty what had happened. Perhaps Caio had reconsidered his strategy of getting all the bad news out at once and this change of heart had led him into disagreement with Francesconi.

What ensued was near chaos. Olivetti denied Francesconi’s charges and said it would take legal action. Italian stock market regulator Consob demanded that Olivetti should respond to 16 questions about its accounts. Company managers were summoned before the Italian senate’s industrial committee. De Benedetti himself visited an old sparring partner, Italian prime minister Romano Prodi, apparently to reassure him that there would be no need for a state bail-out. Aside from Consob’s investigation, public prosecutors in Turin announced they were investigating Caio. On September 18, just 11 weeks after being appointed CEO and five weeks after seeming to best De Benedetti in boardroom combat, Caio was ousted. De Benedetti was back.

The company’s Anglo-Saxon shareholders were bewildered. Who did they complain to now? If even the published figures were in doubt, how could they make any judgements? How could they even trade the shares? Following the initial suspension, the shares were freed to trade, suspended again, freed to trade, sometimes several times in the same day. Italian shares are automatically suspended if they fall 10% in a day. Some days this rule was applied to Olivetti, on other days it was waived. But the trend was obvious. The shares hit L465. Nomura Capital Management, for one, had seen more than enough. It sold.

The company’s shares had now fallen into the realm of the extreme and the bizarre. The rights issue amounted to L600 per Olivetti share. With the price now below this, the market was effectively saying in September 1996 that the value of the business of Olivetti in December 1995 had been less than nothing.

Investors who hung in began to justify doing so on break-up valuation. Its holdings in Omnitel were worth between L750 and L800 per Olivetti share. Add perhaps L250 per share for the value of Lexicon and total up a few other assets, like Olivetti’s shares in UK company Acorn Computer, factor in L2.7 trillion of tax-loss carry-forwards ­ of some value to a prospective corporate buyer of Olivetti ­ and investors could convince themselves of a theoretical value of L1,500 per share or higher. Such calculations aside, few investors could stomach taking the loss of selling out below L500, when they had bought at L1,000 or higher.

The real conundrum now was Olivetti’s published accounts. Investors pored eagerly over Consob’s questions and Olivetti’s answers ­ assuming that these contained the heart of Francesconi’s accusations. Investors dreaded a black hole and looked for evidence of serious losses, of the company being milked by unscrupulous insiders. Rumours circulated of questionable internal transfers, high inventories and off-balance sheet exposures. Was systems and services the biggest customer of the PC division? Were serious bad debts lurking in Olivetti’s non-consolidated finance companies?

Closer scrutiny of Consob’s questions drew the conclusion that on a whole series of accounting issues, where it had a legal right to choose to be more or less conservative, Olivetti had taken just about the least conservative approach it could. It had limited its provisions against payments due from customers in the former Soviet Union; it had taken no reserve against payables overdue from various arms of the Italian government; it had booked the proceeds from the sale of a block of shares in Acorn, even though Lehman Brothers was still executing the sale; it had included in its factoring of some supposedly non-recourse trade receivables a 10% guarantee to the buyer against possible non-collection.

What investors want from a company in difficulties is the exact opposite. Instead of fully valuing its assets and receivables and downplaying its exposures, a restructuring company should lay out the worst of its troubles to investors and explain its plans to improve.

Enter Colaninno

The company had perhaps stretched its accounts and balance sheet, but none of this was illegal. “It’s hard to see a big black hole there,” concludes Shakerchi. “It’s hard to see a massive fraud. It would have to have been going on over many years and the company does have Coopers & Lybrand as its auditors.”

But investors were worried. They were coming under pressure to explain the losses they were sitting on. By mid-September, Olivetti’s shareholders could see no other choice than to await the appointment of a new chief executive. They didn’t have too long to wait. Olivetti quickly appointed Roberto Colaninno, founder and head of Sogefi, a medium-sized auto-components company. Some 16 years earlier, De Benedetti had tried to lure Colaninno, then an engineer with UK company T&N, to work for him. He settled for having Cir take a 57% stake in Sogefi. Because of these links and because Colaninno lacks experience of the information technology sector and of running an international company, investors remain suspicious.

Meanwhile more and more problems were emerging at Olivetti. Union leaders were unsettled by talk of selling or closing the PC division and threatened strikes. The bishop of Ivrea has taken up the cause, buying a few shares in Olivetti so that he can oppose redundancies.

One of the few questions Consob put to the company following Francesconi’s departure that Olivetti did not immediately answer concerned its net debt from end-June to end-August. It pleaded the difficulty of obtaining exact figures from over 200 separate group companies. When the figures did come in on September 30, they were alarming. In the two months to end-August net debt had risen to L2.4 trillion from L1.26 trillion at end-June. “There has been a very surprising increase in net debt which is as yet not satisfactorily explained” says Barings’ Pignatelli. Once again, investors puzzled over money unaccountably whizzing in and out of Olivetti. Amazingly, just nine months after its huge rights issue, Olivetti once again needed to recapitalize.

Fund managers came away from informal discussions with Olivetti directors far from convinced they had a full grasp of the figures. But by the beginning of October it was clear that high debts and weak operating performance had reached crisis point. Olivetti could not generate the operating profits needed to pay the interest on its short-term debt. The reasons for the debt increase have still not been adequately explained. The company has mentioned restructuring charges and capital calls at Omnitel ­ both of which should have been covered by the rights issue ­ plus seasonally high payments falling due (suppliers are probably in no mood to extend it much credit) and debt service. It has been borrowing to meet interest payments on its existing debt.

Next year Olivetti will need L200 billion for interest payments. Investors had feared that this would eat up the entire profits of its only profitable division ­ systems and services. The company now says it’s even worse than that. Systems and services will provide only L100 billion.

“I start from zero”

Finally, foreign shareholders could be ignored no longer. In London on October 4, just 12 days into a fearsomely daunting job, Colaninno confronted aggrieved shareholders, confused analysts and worried bankers.

The audience blamed Carlo De Benedetti, who had run Olivetti since 1978, first turning it around, then propelling it into the personal computer market in the 1980s. Since then, it seemed, he had lost his magic touch. If Colaninno came across as a De Benedetti puppet, his inquisitors were ready to turn nasty. But he didn’t. “I took this job on three conditions,” Colaninno announced, “that De Benedetti is considered a normal shareholder, with the same rights as any other; that my job is to relaunch this business as a profitable company and that I be given enough power to do all this.”

His audience seemed impressed though no-one thought to ask what mysterious authority had enabled him to strike this bargain ­ with De Benedetti himself perhaps who regards the company as his own, or with De Benedetti’s ally Mediobanca, the Milan merchant bank which acts as financial guardian to the interests of Italy’s wealthy industrial families and is a shareholder in Olivetti. “I am not interested to make comments on De Benedetti,” Colanino insisted with some passion. “I know him, he’s a friend ­ but he’s just another shareholder.” With the same passion he dismissed the ghosts of Olivetti’s recent past. “I don’t know Caio or Francesconi and I’m very happy I don’t,” said Colaninno. “I’m not involved in this funny story. I start from zero.”

“I have found a very critical financial position,” Colaninno continued. He vowed to reduce and better control working capital. “The first priority,” he said “is credit management. In the last three months, credit management at this company was horrible.” Colaninno had started well, coming across as the bluff, plain-talking entrepreneur charged with cleaning up the mess the bunglers had left behind. Unprompted, he had distanced himself from De Benedetti, stressing that he only took the Olivetti job because the 70% to 80% foreign ownership guaranteed that he would be able to implement restructuring free from interference. He also reaffirmed the plan to sell the PC division and to ensure there was no negative cashflow in 1997.

Once again, foreign fund managers faced an Olivetti executive telling them exactly what they wanted to hear. Plans for the future sounded good. But the meeting was not entirely satisfactory, especially when Colaninno was quiet and other entrenched Olivetti executives had to speak. Their explanations of how net debt got out of control and what lay behind margin pressure on key businesses were murky.

Not all investors liked everything Colaninno had to say. As part of his emergency asset disposal plan to raise cash, he intends to sell off an 8% stake in Omnitel-Sistemi Radiocellulari, acquired last year from Lehman Brothers for L283 billion. Olivetti now owns 59% of Omnitel SR, which in turn owns 70% of Omnitel Telecomunicazioni Cellulari, the mobile-phone operating company set up this January. Thus, Olivetti reasons, it can sell off this stake ­ probably to Mannesman of Germany, an existing investor in the project ­ without losing majority control of the whole venture.

Family silver

This, together with the sale of PCs, Tecnost and a few other assets, should, so the plan goes, help raise L800 billion by the year-end. It intends to continue sales into 1997, including the delayed part-flotation of Lexicon, with the aim of raising L1.2 trillion. Some investors accept the need to unload the Omnitel stake but many others dislike it.

Olivetti directors had mentioned the possibility of this sale to some shareholders during informal discussions in September. They opposed the idea. Omnitel is all that underpins Olivetti’s share price now that systems and services’ results are unpredictable. Reducing its holdings in Omnitel is hardly calculated to help Olivetti shares recover. Questioners asked Colaninno why he proposed to sell an attractive, marketable asset in an off-balance sheet, self-funding company with strong profit potential and use the cash to prop up less-transparent, cash-consuming businesses. His reply: “It’s like going to the doctor and realizing you have to lose a finger to save your hand.” In other words, pressure to sell Omnitel shows the depth of Olivetti’s financial crisis.

“I would far rather they pledged that stake to the banks to raise money. But I don’t want them to give up actual long-term ownership of a single share,” says LGT’s Mahoney. Barings’ Pignatelli suggests Olivetti should instead sell its investment in Infostrada, its joint venture with the Italian railway network to compete in fixed-line telephones. It’s an attractive long-term prospect but one that requires high short-term capital expenditure. “Its a luxury the Olivetti balance sheet cannot afford,” says Pignatelli. Analysts guess it might get L300 billion of cash for it.

It’s not just shareholders who are breathing down Olivetti’s neck. It has bankers to worry about too. For the moment, Italian banks, which provide between 70% and 80% of credit lines, are supporting management. US vulture funds have made inquiries in Milan hoping to pick up bank debt at between 60% and 70% of face value, the kind of distressed levels associated with companies in the sort of trouble Eurotunnel faces. They have found none. Banks in the Mediobanca galaxy, Credito Italiano and Banca Commerciale Italiana, support Olivetti. Other Italian banks take comfort from this. Few in any case have enough capital to take a big write-down on their Olivetti exposure.

This support may not hold. Mediobanca’s attitude is crucial but hard to read. For the moment, it has blessed Colaninno’s appointment. For all Colaninno’s protestations of independence, the cynical view in Milan is that De Benedetti still calls the tune, with Mediobanca’s help. But Mediobanca’s support for De Benedetti did not extend so far as to help him out with the failed Cir and Cofide rights issues last year. Its attitude to him then, says the Italian head of a foreign bank in Italy, was: “‘You have other assets you can sell to raise cash, that’s your problem.’ Mediobanca probably thinks there is a chance to turn Olivetti around and save everybody’s money. And Mediobanca are the guys who can keep you alive when you should be dead. But I do not think Mediobanca is in love with this asset in the same way as with Feruzzi or Montedison. Like everyone else, they want to resolve the problem, but this could go to a debt-equity swap.”

Since De Benedetti’s resignation and the ensuing chaos, some foreign banks have reduced their exposure by not renewing lines as they fall due. “We used to have an extremely good dialogue with Olivetti management at many levels,” says the country head of a large foreign bank in Milan and a lender to the company. “But during this crisis they have made no effort to contact us, which shows how bad their management has been. If this uncertainty continues it may have a substantial impact on the company’s commercial activities and that will feed through very quickly to its cashflow.”

This banker, like the shareholders, is awaiting the outcome of investigations by Consob and the Ivrea magistrates into allegations of false accounting and the progress of Colaninno’s disposal and rescue plans. Creditors take a different view to shareholders. The company’s convertible bonds, which had traded down as low as 80% of face value, have recently recovered to 86%. “The sale of the Omnitel stake is good for bond holders because it produces cash to meet maturities,” says Julian Nichols, an analyst of distressed debt at Bankers Trust in London. “But shareholders see the future disappearing.”

So what can shareholders do? The boldest suggestion would be to call an EGM, kick out the present management and vote in a new board to run the company properly. But Colaninno deserves his chance.

Shareholder options

In Milan there are mixed views on Colaninno. Braghieri says: “He is a very capable hands-on manager and I believe he has a wide scope in his mandate to act independently. He is the right man, though the challenge is tough. But I think he will succeed. What he has promised so far is not impossible.” Others are less sure. “He has already made mistakes,” judges the head of one bank in Milan. “It is unnecessary to go to quarterly statements [something Colaninno promised at the London meeting]. No-one else in Italy does that. No-one will care and it will just put more stress on the few good managers he has left.” He adds: “And the last thing he should be doing is talking about another capital increase.”

On October 10 Colaninno told the Italian senate industry committee that if the plans to solve the immediate financial crisis work out, the company might return to shareholders at the end of 1997 to fund a more strategic three-year restructuring plan.

Although Colaninno has won some time from shareholders, many investors worry about some of the managers kicked out by Caio who have returned. And there is a strong sense that De Benedetti still exercises undue control. “Clearly they [foreign institutions] are not going to run the company themselves but trusting many of the people who have lost over $3 billion in the last three years to solve its problems is ridiculous,” says the Milan office head of one international investment bank. There is no shortage of voices urging on the shareholders to be more aggressive. “I have lost my respect for these guys,” says one Italian banker “They only squeal. But they don’t propose anything. Their behaviour is a little pathetic.”

The foreign shareholders have at least won one victory. On October 18, Olivetti appointed four new non-executive directors. Among them is Dario Trevisan, a 32-year-old Milan-based lawyer who has acted in the past as legal counsel for foreign shareholders of Italian companies. Foreign institutions had proposed his appointment as a director in September. The company itself had separately hit upon the idea of an independent director to reassure foreign shareholders. But it resisted Trevisan, furious that it should appear to have any outside director forced upon it.

At the October 4 meeting, Colaninno promised two new directors of international standing. But the company was still holding out against Trevisan, even though Baring Asset Management in particular was lobbying for him and US institutions also supported him. Shareholders feared that Olivetti would try to fob them off with cosmetic appointments, perhaps from Lehman Brothers or Lazard which has its own ties to Mediobanca. In the end, it appointed Bruno Lamborghini, an Olivetti insider, along with Trevisan and two other independents: Gordon Owen, former chairman of Mercury Communications and retired managing director of Cable & Wireless, and Gérard Worms, chairman of the board of general partners of Rothschild Bank.

On the day of his appointment, Trevisan told Euromoney: “My aim will be to ensure an adequate flow of information to shareholders, which has not existed in the past.” Even though he is not an executive director, as a board member he will have powers to request financial reports. He may want to push some ideas for allowing outside independent auditors better access.

Hold the crusade

Owen’s appointment came out of the blue. It pleased investors. He has strong industry experience and is clearly independent. It brings credibility. On the question of directors, Colaninno had promised and delivered, offering hope that he would do the same with the sale of PCs and the other elements of the recapitalization plan. Unfortunately, the share price has remained low, not helped by one or two large international investors bailing out.

Unless more bad news leaks out, most of Olivetti’s remaining outside shareholders will probably await events. They know that they look weak. But it would take two months from calling an EGM to holding it and voting the present board out. The two months from now to the end of the year are perhaps the most crucial ever for the company, as it tries to negotiate the sale of assets, get control of its internal cashflow and limit the damage being done to its underlying businesses. A battle with its own shareholders might push it to the brink of collapse.

The overriding interest of fund managers is share-price recovery. A battle with management would likely drive it further down. As one fund manager says: “You don’t necessarily get paid for going on a shareholders’ rights crusade.”

But while shareholders may have been persuaded to wait and see, things are set to erupt again on further evidence that De Benedetti is pulling the strings. De Benedetti clings to control of Olivetti ­ its four-man executive committee is stuffed with cronies, including his son and his lawyer ­ with a direct holding of only 3.5% of its shares, probably less than Baring’s.

The foreign shareholders, who had believed that their interests as owners and De Benedetti’s were aligned, have realized their error. De Benedetti seems to have a different agenda. Though he wants to keep the company solvent and out of the banks’ hands, he does not, so far as the shareholders see it, care too much about the share price. The Italian equity strategist at one international investment bank says: “De Benedetti loves power fights. And that’s what this is all about now: power, profile and status. He doesn’t want a bunch of young Anglo-Saxons telling him what to do, just because they happen to be the shareholders.” But the result of such intransigence is to blacken the name not only of Olivetti but also of Italy. *

Engineer of fortune

Carlo De Benedetti knows how to play the game from all sides. He started as an outsider and struggled until he became part of the Italian establishment. The tricks he learnt on the way up have proved useful in keeping other interlopers ­ such as foreign fund managers ­ at arm’s length.

De Benedetti was born in Turin in 1934. The son of a Jewish industrialist, he worked in his father’s steel and automotive parts company in the 1960s. He first rose to real prominence in Italian business and financial circles in 1976 when he emerged from a series of stock market deals with a strategic investment in vehicle-maker Fiat, eventually becoming managing director of Italy’s leading industrial company.

At this stage, he became noted for making waves inside the Milan-centred Italian business and financial elite. He was nicknamed l’ingegnere, the engineer, pushing his way to fame and fortune alongside l’avocato, the lawyer, Giovanni Agnelli, president of Fiat.

He argued with the Agnelli clan and left Fiat. In 1978, one of De Benedetti’s family holding companies, Cir, bought a stake in Olivetti, a typewriter and office machine company which De Benedetti took control of and pushed into the computer business during the early 1980s. Olivetti remains his baby. Running the company gives him a position of leadership in Italian industry.

Over the years, he has become more and more closely tied to the Italian establishment he once appeared to threaten. He is a shareholder in Milan merchant bank, Mediobanca, which in turn owns shares in Olivetti.

In 1982 he was appointed deputy chairman of Banco Ambrosiano, leaving after two months, apparently unable to work with Roberto Calvi. The short episode has troubled him ever since. De Benedetti has been convicted over the collapse of the bank and sentenced to four and a half years imprisonment. He is using an extensive Italian appeal system to contest the sentence. Talk in Milan says his aim is simply to avoid serving jail time.

De Benedetti pursued international ambitions in Spain and France. He built up the French holding company Cerus which in the late 1980s attempted to take over Société Général de Belgique, Belgium’s biggest company. It was a protracted, distracting and unsuccessful effort.

As troubling for De Benedetti, Olivetti has struggled to make a success in the competitive personal computer business in Italy, recording losses in each of the past five years.

Is Lehman to blame?

Lehman Brothers has taken a lot of flak for its role in the Olivetti affair. It acts as something of a house bank to De Benedetti companies including Cir and Olivetti. The relationship goes back some years. De Benedetti used to be a director of the old Shearson Lehman. As well as selling the Omnitel stake to Olivetti, entering into an equity swap to dispose of its Acorn shares and leading the rights issue, Lehman appears to act on behalf of the De Benedetti family in other ways. It interviewed Trevisan before his board appointment.

Some shareholders are bitter about Lehman’s role in the rights issue and in the company’s failure to warn of margin pressure at systems and services, the one Olivetti business actually making money. “You just don’t have business margins collapsing from 6% to 3% like that without any warning,” says one US fund manager. During presentations from Olivetti in November 1995, investors were shown charts projecting a steady margin (operating result as percentage of revenues) improvement at systems and services from 3.5% in 1994, to 5.5% in 1995, and to 6.9% in 1996. And at Lexicon returns on sales were projected to go from 4% in 1994 to 7.2% in 1995 and 9.5% in 1996. The eventual result for the first half of 1996 was far worse and neither Olivetti nor its bankers provided much warning. One fund manager complains: “Even as late as July and August, the company was talking about slight margin pressure which I would take to mean a fall of about 50bp, not the nearer 300bp we were eventually shown.”

Investors recall the attitude of Lehman analysts and sales staff to the Olivetti deal and contrast it with Morgan Stanley’s much more cautious presentations for Mediaset, the TV company spun off earlier this year from Silvio Berlusconi’s Fininvest. Various senior Fininvest figures were under investigation by Italian magistrates at the time. Morgan Stanley’s analysts were criticized in some quarters for too much talk about these risks and not enough about Mediaset’s prospects. Lehman Brothers was much more enthusiastic about Olivetti.

One US fund manager says: “If all this had happened in the US, we would consider going after them legally.” As it is, this fund manager’s revenge will take another form. “Lehman won’t get close to their normal level of commissions from us for at least a couple of years. Maybe not right away, but in the medium term this will hurt them.”

But other investors are more charitable. “Lehman was probably misled just like we were,” suggests one. Lehman, it is assumed, has suffered as an investor in Olivetti. It is thought to have reinvested the proceeds from the sale of its 8% holding in Omnitel in Olivetti shares. Although Lehman booked a gain on the Omnitel sale, Olivetti is now likely to sell that stake on again at a higher price and Olivetti’s own shares have halved in price. But it is not clear whether Lehman still owns those shares or sold them when ­ or before ­ the price collapsed. Lehman did not respond to interview requests.