Telecom Italia S.P.A. Business Information, Profile, and History

Company Perspectives:

With its new, dynamic culture, Telecom Italia is poised to compete with top telecommunications companies in Italy and worldwide. Telecom Italia is a group on the move—innovative and ready to embrace globalization, technological advance, and all the challenges of the New Economy, dynamic and ready to meet the demands of an ever-changing market, global and present in every part of the communications industry.

History of Telecom Italia S.P.A.

Telecom Italia S.p.A. is a leader in fixed-line and wireless telecommunication services in Italy. As a holding company with majority ownership in numerous subsidiaries, it provides domestic and international fixed-line and wireless telecommunication operations as well as Internet, information technology and satellite communication services. Its international operations include fixed-line and wireless communications in Latin America and the Mediterranean region. It is the majority owner of Telecom Italia Mobile (TIM), Italy's leading provider of wireless communications. Telecom Italia is the former government telephone monopoly, which was privatized in 1997 and controlled by Olivetti in 1999 in a hostile takeover. Telecom Italia faces increasing competition in both domestic and international markets.

Origins in Government Monopoly

As telephones were introduced in Italy during the last two decades of the 19th century, private companies and entrepreneurs mainly financed the development of local networks. In 1881, 37 telephone franchises had been granted to private businesses; ten years later, more than 11,000 subscribers were served by 56 telephone franchises. After initial interest, investment and development waned, and at the turn of the century, Italy had one of the lowest telephone densities in Europe—one telephone per 2,243 inhabitants, compared with one per 690 people in France, one per 214 in England, and one per 70 in Sweden.

Early investment and development of the telephone network was largely deterred by an 1892 law requiring telephone installations to be transferred to the state upon termination of the franchise term. State involvement broadened when two of the largest private franchises relinquished their installations in 1907. Eventually, the government acquired the main networks of the most dynamic, economically prosperous regions of the country (mainly in the North), which offered greater potential for development. The government promoted its growing role as an opportunity to modernize the national telephone network and better support demand for new services, but government management fell short of expectations.

With the onset of World War I, there were scant resources to invest in a telephone network. In 1923, the Mussolini government decided to grant new franchises rather than group existing licensees together. This prevented the entire telephone system from being in the hands of one company or a foreign power. It also offered attractive political opportunities to the government—allowing it to create tighter controls, broaden its web of industrial connections, and save itself from possible competition should any one of the franchises become a powerful market force.

During the Depression, demand for telephone service was virtually non-existent and most telephone companies struggled to survive. In 1933, the government established a number of public entities to assist the failing companies, one of which was the Societa Italiana L Esercizio Telecom (STET). STET ultimately fell under control of the Institute for Industrial Reconstruction (IRI), a large public company that dominated the Italian economy. Smaller telephone companies within the larger IRI family often forged alliances and were absorbed into STET, further bolstering government control over the network.

Much of Italy's telephone network survived World War II, but its technology was hopelessly outdated. During post-war financial and structural recovery, Italy gained access to technologies that had been developed in the United States and England in the previous decade and rapidly improved its local and long-distance networks.

In the 1960s, demand for local and long-distance services was strong; expansion of a telecommunications network paralleled the greater development seen throughout Italy in the "the Miracle Years." STET's activities expanded to satellite and data communications. However, the number and complexity of STET's holdings—the telephone companies and franchises that provided the services—resulted in highly fragmented and inefficient service coordination.

By the 1970s, STET had solidified as an expansive monopoly with vast holdings in telephone and telecommunications research, production, parts purchasing, installation, product servicing and network management. Telephone density continued to grow, but an economic recession made technological upgrades and newer services became unaffordable.

The transition from mechanical to electronic equipment gained pace in the 1980s. The STET monopoly maintained support on nationalistic grounds, but telephone services and network development suffered from the effects of bureaucracy, high taxes, and widespread corruption. The difficulties in obtaining fixed-line services ultimately led to great success in the wireless market.

1987–98: Market Privatization

For decades, the European Union Council (EC) had been working on plans to remove continent-wide trade barriers. The EC's Green Paper in 1987 sparked the transformation of the European telecommunications industry. Faced with privatization by January 1, 1998, government-run telephone monopolies prepared for competition in an open market.

STET was originally scheduled for reorganization by 1994, including IRI and its greater holdings. By then, IRI had become Italy's biggest state holding company and the seventh largest conglomerate in the world. The government was slow to implement EC directives and privatization plans were repeatedly delayed, while public offerings were planned in Spain, Portugal, Denmark and the Netherlands.

In August 1994, Telecom Italia S.p.A. was formed by the merger of five state-run companies—SIP (domestic phone operations), Iritel (domestic long-distance services), Italcable (inter-continental long-distance services), Telespazio (satellite communications), and SIRM (maritime communications). Telecom Italia had more than 25 million subscribers and a 96.3 percent market share of residential fixed-line services, making it the sixth largest telecom company in the world. The company's shares were listed on the New York Stock Exchange in July 1995.

Telecom Italia essentially operated as a monopoly. Nowhere was this more evident than in the mobile services market, where the company had been providing wireless services without any competition or a formal license. The company was accused of anti-competitive behavior and withholding wireless licenses from new entrants. Antitrust authorities intervened and succeeded in granting a second GSM (global system for mobile communications) license to Omnitel Pronto Italia. Omnitel was owned by Olivetti and was its first foray into telecommunications. It quickly became Telecom Italia's most formidable competitor in the wireless market.

In July 1995, the company spun off its thriving mobile communications arm to form Telecom Italia Mobile (TIM). With limited competition, it held more than 90 percent of Italy's wireless subscriber market. The next step toward privatization came in 1997, when the company merged with STET (retaining the Telecom Italia name) and the Italian government sold nine percent of its stock to an investor group comprised of Italian insurers and banks.

What followed amounted to the biggest privatization move in modern Italian history. In October 1997, the government sold an additional 34 percent of its Telecom Italia stake for nearly $12 billion, trumpeting the privatization as the largest in Europe and the second largest in the world. Investors worldwide snapped up the shares.

After privatization, the company faced daunting challenges—to address increased competition, an employee headcount bursting at the seams, and a failure to sustain strategic partnerships with AT&T and Cable & Wireless. Telecom Italia also contended with a series of bitter management upheavals with political overtones.

Chairman Guido Rossi resigned only one month after privatization, and the company proceeded without a chairman for two months until it tapped Gian Mario Rossignolo for the role in early 1998. Rossignolo's approach prompted the resignation of the chief executive officer, Tommaso Tommasi di Vignano, and created a thick atmosphere of resentment that played a hand in Rossignolo's downfall only a few months later. When Rossignolo showed union leaders worst-case profit projections to support an argument for labor concessions, the projections were leaked to the press and share prices plunged. In his attempt to allay investor fears, Rossignolo explained that the projections were only used to wring out labor concessions. The board demanded his resignation and for the second time in less than one year, Telecom Italia found itself without a leader.

1999: Takeover Transforms European Corporate Landscape

Franco Bernabe was appointed to the role of chairman. Bernabe had so successfully masterminded the turnaround of ENI, the Italian oil giant, that his story was a Harvard Business School case study. He began to work on an international plan and, in an effort to initiate a strategic partnership, approached Deutsche Telekom in early 1999.

Despite the turmoil since its privatization in 1997, the company had a high cash flow and was virtually debt-free. That, combined with management instability, made it an attractive prospect for a takeover, and Roberto Colaninno, chief executive officer of Olivetti, recognized the opportunity. Colaninno had previously rescued Olivetti, selling its aging computer business and boldly introducing its telecom player, Omnitel Pronto Italia, to the burgeoning wireless market. Omnitel had quickly become a viable competitor in the fixed-line and wireless markets. To raise money and stave off anti-trust controversy in a takeover bid, Olivetti planned to sell its interest in Omnitel and Infostrada to Mannesmann AG (Vodafone).

In February 1999, Olivetti announced its daring takeover bid. As a hostile bid initiated by a company one-fifth the size of Italy's largest telecom provider, it seemed preposterous. A battle for investor support and shareholder allegiance ensued, becoming highly public and contentious. Bernabe's idea of a strategic alliance with Deutsche Telekom escalated into a desperate attempt to secure a white-knight merger partner and fend off Olivetti.

The prospective merger with Deutsche Telekom was poorly received. The German government, which owned 72 percent of Deutsche Telekom, and investors objected to the idea of the main telecommunications provider falling into the hands of a company controlled by a foreign government. Investors also were concerned that a merger might produce a company without the agility to compete in a fast-paced industry.

Olivetti outmaneuvered the opposition, convincing shareholders to support its takeover bid. On May 21, 1999 Olivetti acquired majority ownership—51.02 percent—of Telecom Italia for $65 billion in cash and securities. The takeover was heralded as a transformation of the European corporate landscape. As Europe's largest hostile takeover and the first financed by the Euro dollar, it came at the moment when all of Europe seemed eager to test its flourishing markets. That tiny Olivetti could successfully orchestrate the hostile takeover of the former state-run monopoly was shocking, drawing comparisons to both David and Goliath and the sensational Wall Street battles of the 1980s. European companies immediately recognized their vulnerability, and accepted the concept of a shareholder voice, which had been ignored in favor of the established, inside management. The deal set off a wave of merger activity in the telecom industry and other European markets.

Global Competition in the New Millennium

Roberto Colaninno succeeded as chairman in June 1999. His management was Telecom's fourth since its privatization in 1997. He pledged to restore direction and purpose to the company, and set to work on many of the domestic and international issues that plagued the company and his predecessors. Competition was still limited as a result of the government's failure to cultivate it, but expected to increase significantly, particularly in the wireless sector. The company needed to address widely dispersed holdings and bloated staffing levels, as well as establish an international presence. The takeover had saddled the company and its majority owner, Olivetti, with massive debt. A plan to transfer the company's most valuable asset, Telecom Italia Mobile, to Tecnost, a shell company that Olivetti used to finance the hostile takeover, was met with shareholder disapproval and quickly aborted.

In 2000, a successful restructuring program consolidated all international fixed and integrated (fixed-wireless) network operations under Telecom Italia, and international mobile network operations under Telecom Italia Mobile. Approximately 10,000 jobs were trimmed. The company sold nonessential assets in installations and manufacturing, insurance, property and leasing companies, including Italtel (telecom equipment) and Sirti (installations).

The company adopted an organization model to define its business units—Telecom Italia Wireline Services for fixed-line and data-traffic services, Telecom Italia Mobile (TIM) for mobile communications, Telespazio for satellite communications, Tin.it for Internet service (SEAT-Tin.it), I.T. Telecom for information technology services, and Telecom Italia Lab for research, innovation and development.

Despite cost-cutting measures that saved $2.5 billion, the company's debt levels continued to rise, primarily because of exorbitant costs in high-speed, "third-generation" (3G) licensing and infrastructure of mobile telephone systems. In 2000, Telecom Italia spent EUR 3.68 billion on acquisitions of mobile and fixed-line operations throughout South America. It was the first to acquire operating licenses to provide wireless services throughout Brazil.

Its Wireline unit invested $1.56 billion to upgrade the fixed-line network, which accounted for 62 percent of the company's estimated $27.1 billion is sales in 2000. The company had introduced high-speed ADSL (asymmetric digital subscriber line) technology in more than 152 cities in Italy, and planned to reach 600 cities and 80 percent of the population by the end of 2002. Through a partnership with Lucent Technologies, the company began building a 6,900-mile fiber-optic network across Europe. Its Internet service provider joined SEAT Pagine Gialle to form one of Europe's largest Internet firms, Telecom Italia Net.

Telecom Italia generated more than 94 percent of the annual sales and 90 percent of the cash flow at Olivetti. Both companies were suffering from enormous debt—Telecom Italia at EUR 19 billion, and Olivetti at EUR 18.5 billion.

In 2001, Colaninno introduced a complex shareholder proposal wherein Telecom Italia would buy back shares from Olivetti, reducing Olivetti's stakes in the company from 54 percent to 40 percent. Proceeds would enable Olivetti to reduce its debt load and give Telecom Italia greater financial flexibility to better forge strategic alliances. The proposal prompted threats of shareholder lawsuits and speculation that the company was being positioned for a merger in Colaninno's quest to position Olivetti as a diversified holding company with interests in lucrative New Economy technologies.

Italian anti-trust authorities fined the company EUR 59 million for abusing its dominant position in the ADSL broadband market, after 27 telecommunications companies filed complaints. The company contended with controversial board resignations and additional inquiries.

Telecom Italia remained Italy's dominant provider in fixed-line services, holding 89 percent of the total market and claiming approximately 20 million fixed-line subscribers with 27 million connections. Telecom Italia Mobile, its wireless unit, offered GSM and analog services and continued to lead the domestic market with 20 million connections. Infostrada, its main competitor in fixed-line and ISP markets, held 3.5 million and 4.1 million subscribers, respectively; Omnitel, its main wireless competitor, held 15 million subscribers. Although Telecom Italia also boasted 16 million foreign subscribers through its international operations, it did not have a significant wireless presence in other European markets.

Along with its key competitors, the company faced widespread market skepticism and the prospect of merger activity in a global industry shakeout. In addition to maintaining a leading position in fixed-line and wireless service markets, the company had ambitious plans to dominate the Italian information technology sector and augment its international presence in emerging growth businesses, the Internet, broadband services and data transmission. It acquired numerous holdings in South America including Argentina, Brazil, Bolivia, Chile, Peru, and Venezuela, along with Cuba. Its holdings in Europe and the Mediterranean region included France, the United Kingdom, Spain, Austria, the Czech Republic, Netherlands, Turkey, Greece, Israel, and Serbia.

Colaninno summarized his vision for the company in a June 2001 commencement speech at the University of Lecce: "What has been achieved with Telecom Italia will be remembered as a turning point in Italy's industrial history."

Principal Subsidiaries:Telecom Italia Wireline Services; Telecom Italia Mobile S.p.A.(60%); Telespazio S.p.A.; STET International Netherlands NV; Sodalia S.p.A.; Finsiel S.p.A.; SEAT Pagine Gialle S.p.A (60%); Telesoft S.p.A. (60%); Entel Chile (54.76%); Digitel (56.5%).

Principal Competitors:Omnitel Pronto Italia S.p.A.; Infostrada S.p.A.; France Telecom; Vodafone Group PLC; Deutsche Telekom AG; British Telecommunications plc.

Chronology

• Key Dates:
• 1933: A state-run holding company of telephone operators and service providers forms, known as STET.
• 1992: Restructuring of the Italian telecommunications sector gains approval.
• 1994: The merger of five main telephone and telecommunications providers forms Telecom Italia S.p.A.
• 1995: The mobile phone unit spins off, creating Telecom Italia Mobile S.p.A. (TIM).
• 1997: Company merges with STET and opens to investors in privatization, making it the largest telecommunications company in Europe and second largest in the world.
• 1999: Olivetti acquires a majority interest with a hostile takeover bid.
• 2000: Major restructuring of international operations is completed, eliminating STET.