Executive summary - Udo Bullmann

In October 1998, although the company still actually benefited from a monopoly position and high cash flow, it wasvalued at a multiple of only 1.9 times its net worth, compared with a figure of 3 for Deutsche Telekom (DT) andmore than 4 for France Télécom (FT) and British Telecom (BT). The P/E ratio 6 was 19, compared with 22 for BTand 28 for FT and DT. Franco Bernabè took the helm at the Telecom Italia Group in January 1999; he was a managerwhom the market appeared to favour, given his previous success with restructuring ENI. However, internationalinvestors criticised the Group's financial structure, which carried too little debt by comparison with what could beregarded as the optimum level. The Group's low level of debt, together with its high and stable cash flow (from TIM,especially), were the factors which opened up the possibility of a stock market raid, using high financial leverage.This situation thus made Telecom Italia a potential target. Towards the end of November 1998 it attracted theattention of Roberto Colaninno, the Managing Director of Olivetti; in February 1999, following a series of rumoursof a possible stock market raid, he launched a hostile takeover bid.2.2 Debt structure, alteration of company capital management fees required by LBOThe operation envisaged the involvement of a new company (Tecnost), to be used as vehicle to take on the debtsgenerated by the operation, which would then be transferred to Telecom Italia through a future merger, which thennever took place.In theory the acquisition should have been followed by the merger between Tecnost and Telecom Italia, resulting inthe latter shouldering the debt used to acquire it. According to the analyses carried out by the advisers the debt takenon by 'new Telecom' was supposed to be € 38 billion (€ 5.5 inherited from the pre-acquisition situation, and €32.5 bnfrom the bank loans and bonds constituting the Tecnost 'dowry'). Net borrowings are now close to € 40 000 m.2.3 Management policies and shareholder activismBernabè deployed a range of counter-measures to fight off the takeover bid. The first was a public exchange shareoffer between Telecom Italia ordinary shares and TIM ordinary and savings shares. The official aim was to carry outa merger by incorporation, so as to speed up implementation of the strategy of integrating fixed-line and mobiletelephony, the primary objective of Bernabè's strategic plan. The actual aim was to make Telecom Italia too big amouthful to swallow. If TIM had been incorporated into Telecom Italia this would actually have produced a biggercompany than its predecessor, with more capitalisation, which would then be more difficult to bid for.Colaninno resumed the attack by increasing the offer price (from € 10 per share to € 11.50), and the shareholders'meeting convened by Bernabè for the purpose of rejecting the bid, since it failed to achieve the quorum of 30% of thecapital being represented there, broke up having come to nothing. The Government, which did not support thedefence being deployed by Bernabè, consequently supported Colaninno's operation. The Treasury Ministry wasactually the biggest shareholder and, as such, nominated two members of the Board of Directors. The key point wasthat Government approval was needed for shareholdings of more than 3%; that approval was one of a series of'special rights' which are usually referred to as golden shares. The final defensive measure attempted by Bernabè,namely a merger between Telecom Italia and Deutsche Telekom, was simply dismissed by the market. Theoperation, which was, in fact, a leveraged buy-out of Telecom Italia by Olivetti, was successfully completed andbecame the biggest takeover ever carried out in Europe, and is still one of the biggest in the world in terms of value.However, the price paid has been a high one, namely net borrowings of nearly €40 000 m.2.4 Effects on job creation, labour forceTelecom Italia remains one of the biggest businesses in Italy in terms of both the size of its workforce and itsturnover. However, where jobs are concerned, whereas Telecom Italia Group employed 124 000 people in 1997, by31 December 2005 the workforce had shrunk to 86 531. More than 84% of the Group's workforce is employed inItaly.6 Price/earnings ratio: derives from the ratio between the stock market capitalisation and net profit. Indicates the levelat which the market values earnings.