Custom Search

An Italian Takeover Battle

Hostile takeovers were almost unheard of in ItalyБІАААд that is, until 1999 when Olivetti made a takeover bid for Telecom Italia. What made this bid even more remarkable was the fact that Telecom was seven times the size of Olivetti.

The recently privatized Telecom was Italy`s principal fixed-line telecommunications firm. Its performance, however, had been lackluster and Olivetti saw plenty of room for improved efficiency. Therefore, in November 1998 Olivetti set about appointing advisers for a possible bid. These consisted of the Italian investment bank Mediobanca and three American firms, Chase Manhattan, Lehman Brothers, and Donaldson, Lufkin & Jenrette (DLJ).

Everybody agreed that Olivetti would have to offer mainly cash to Telecom shareholders rather than Olivetti`s shares. The company would need to borrow this cash, and to pay it back it would have no choice but to run a tight ship and keep costs under control. Chase, therefore, set about signing up a syndicate of 25 major banks that would be prepared to lend 22.5 billion euros, equivalent to nearly $24 billion.

Olivetti made its takeover bid for Telecom in February 1999. The bid was worth over 50 billion euros and the cash would come from a mixture of the syndicated bank loan, an issue of bonds, and an issue of shares. Investors` initial response to the offer was lukewarm. Some doubted whether a minnow like Olivetti could successfully swallow a whale like Telecom. Although the offer price was more than a third higher than Telecom`s market price before the bid, many investors regarded it as too low.

Telecom began to prepare its defenses. It too appointed three advisersБІАААд Banca IMI, J. P. Morgan, and Credit Suisse First Boston (CSFB). They ran through a number of possible measures that the company could take. One possibility was for Telecom to turn the tables by making a bid for Olivetti. Another idea was that Telecom should buy the remaining shares of TIM, a company in which it already had a holding. This would make Telecom a still larger bite for Olivetti to swallow. A third possibility was for Telecom to borrow a large amount of cash and use it to buy back some of its shares. Investors would then know that Telecom had every incentive to cut costs and generate the extra cash to pay off this debt. Another potential defense was for Telecom to look for a БІАААм white knightБІАААн that would make a more congenial partner.

In the business plan that it sent to shareholders, Telecom stated that it was proposing to acquire the remainder of TIM shares and also to buy back some of its shares. Soon afterwards it announced that it had found a white knight in the form of a German company, Deutsche Telekom, and would shortly submit the proposal to shareholders. Investors were not convinced that a takeover with Deutsche Telekom would make sense, and The Wall Street Journal likened the prospect to two elephants mating. There was a further potential problem with such a merger. The German government retained a large holding in Deutsche Telekom and would therefore be the dominant shareholder in a merged firm.

The Italian government retained the right to veto any merger involving Telecom Italia. It was unlikely to object to Olivetti as a merger partner, but it might be unhappy to see the country`s principal telecommunications company largely controlled by another government. So although Deutsche Telekom`s offer was more generous than Olivetti`s, investors were far from certain that it would be allowed to proceed.

In March Olivetti upped its bid for Telecom by 15 percent. The new bid was worth 58 billion euros and offered Telecom investors a profit of over 50 percent on the January stock price. In May 1999 Telecom Italia`s shareholders began to respond to Olivetti`s bid. At first there was only a trickle of acceptances, but by the time the offer closed 3 weeks later, the trickle had become a flood and it was clear that Olivetti had won.