City & Business: Old guard or new, it's guts that count

I had lunch last week with one of the City's most experienced corporate advisers. I was looking forward to his analysis of how the European economy is being reshaped. I was looking forward to his views on the the intensifying interest of Wall Street on the region.

"What's your mental map of how Europe's restructuring?" I asked.

"The secret is not to have a mental map," he replied.

The wisdom of this approach hit home yesterday with the news that Olivetti has won its hostile bid for Telecom Italia. The former typewriter company that nearly went bankrupt several years ago trying to turn itself into a computer company now controls the board and cash flow of one of the largest telephone companies in the world.

Europe is supposed to be discarding its old ways. The ancien regime doing back-room deals to pull the strings of European corporates is supposed to be dying. Under pressure from globalisation and the euro, Europe is supposed to be embracing the concept of rational markets - a grid of continent-wide industries whose destinies are shaped by institutional investors imposing the disciplines of the markets.

Instead, the Olivetti/Telecom Italia story has proved a hybrid - half old-fashioned back-room dealing and half the new game as played by global investors.

Upstart Olivetti was backed by old-guard Mediobanca, the secretive Milan investment house. Mediobanca's honorary - and still active - chairman is the Sicilian Enrico Cuccia, Italy's 91-year-old master spinner.

Aligning themselves with Mediobanca were three second-tierish US banks - Lehman, Donaldson, Lufkin & Jenrette, and Chase. Meanwhile, old-guard Telecom Italia was backed by San Paolo IMI, Lazard, and JP Morgan.

One of its early supporters was Unicredito Italiano. Unicredito's chief is another Sicilian, the 42-year-old "gold-en boy" of Ital- ian banking, Alessandro Profumo, who is challenging Cuccia for power. Leading the defence team was Credit Suisse First Boston whose parent, Credit Suisse, was also at Telecom Italia shareholder.

UK and US institutional investors were involved. They owned roughly 30 per cent of Telecom Italia. Three months ago one of them, Edinburgh-based Standard Life Investments, mounted a quiet campaign to stop Olivetti. The argument of the institutional investors was that the debt Olivetti would have to take on to win Telecom Italia would work against equity investors like themselves.

But then Telecom Italia's defence against Olivetti faltered. Chief executive Franco Bernabe panicked. He jumped into the arms of Deutsche Telecom as a white knight. This brought politicians in Rome and Bonn into the game. National honour became part of the stew. The reputations of elected officials became part of the stew. The international institutional investing community - theoretically charged with "imposing market discipline" on the takeover battle - backed off from assuming any leadership.

So which side won? The new Europe or the old? If he were to break nine decades of omerta, Cuccia could argue that he, as an apostle of new Europe, has won alongside his clients at Olivetti. The losers in the Telecom Italia camp, looking at Cuccia's central role in the affair - and his role as a prince of the ancien regime - could argue that old Europe won.

Dogmatists take note: talk about the restructuring of Europe, if you like. It's a fantastic story. But spare us abstractions about the market.

What we are witnessing here is a bare-knuckled battle for corporate power. It's being dominated by personalities. Why did Olivetti win? "Because Telecom Italia lacked courage," said one banker in that camp.

Brainless

Spare us also brainless journalism. On Thursday we saw one prime example. Barclays announced it was cutting 6,000 jobs, or a 10th of its workforce. The media offered barely a word of credit to chief executive Sir Peter Middleton for re-ducing costs to boost the bank's competitive position. Since the departure of Martin Taylor and non-ar-rival of Mike O'Neill, Sir Peter has been a "caretaker". Barclays is therefore "rudderless".

What the press focused on was a fantasy - an imminent bid for Barclays by Royal Bank of Scotland. The bid makes no strategic sense. The merged banks would be bigger, but not big enough to compete in the premier league of world banks. Costs could be taken out. But now Sir Peter has pre-empted that move.

In grudging him and Barclays its well-timed move, the press missed the story. The story is that that RBS is a great bank, well managed, and highly profitable.

But it is a bank with a problem. It is hemmed into a tiny home market. Reporters talking up an imminent deal between it and Barclays are simply helping the RBS management solve that problem by getting a bandwagon going.

Terrible results

You'll see another prime example of brainless journalism on Tuesday. At 7.30am, British Airways releases its fiscal 1999 results. They're going to be terrible. Last week, even BA's house broker said so. Merrill Lynch cut its pre-tax profit forecast 26 per cent.

"We've always said this past year was going to be a tough one, and it has been," a BA spokesman said.

Watch: BA's results will prompt speculation about BA chief executive Bob Ayling. There's a certain justice here. But the kicking of Ayling is likely to be unilluminating.

BA's predicament is actually enthralling. After its privatisation, Lord King and other Thatcher acolytes took it into the stratosphere by focusing on marketing and customer service. The Thatcherites also played the politics of the global aviation business well. They lined up with US airframe maker Boeing and engine maker GE of America.

When Ayling took over in 1996, he was brave. He looked ahead and saw a shakeout in the air-carrier business coming at a time when others saw only continued expansion.

Ayling thus took on the unions here and in the US. He cut capacity. He bet on building financial strength at the expense of going for the last pound in the last puff of expansion.

He has been proven right here. The Asian financial crisis has been a nightmare for global air carriers. Everyone's chasing American and European business - particularly the North Atlantic routes. There's fierce price- cutting.

But Ayling also gambled on BA's alliance with American Airlines. This has crumbled. Whatever the free market theorists say, the main reason it's crumbled is because Washington declined to factor it into "open skies" talks with Britain.

Just when BA needed Washington's help most, the government was pressing BA to tilt away from Boeing and GE toward Airbus and Rolls-Royce as part of its pro-European initiative.

revMaybe Ayling should be slammed. But not because of a poor corporate strategy. But because he's too close to the Government, and has allowed his friends in Downing Street to influence his choices.

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