The atmosphere was that of The Third Man. Harry Lime and fellow spies sat squashed together around a coffee table in a smoky hotel room in Vienna. Some desperately secret business was afoot. Who were these guys? The CIA, setting up a supply line of heavy armaments for the Kosovo Liberation Army? The Russian mafia, negotiating their next drugs-for-money-laundered deal?
No, these guys were Mr Ron Sommer and Mr Franco Bernabe, the respective chief executives of Deutsche Telekom and Telecom Italia. The deal they were tentatively formulating in a document called a "Business Combination Agreement" was nothing less than the merger of their two phone companies, with the Germans offering $90.6 billion (€85.56 billion) for Telecom Italia, thus creating a company with a combined market value of approximately $170 billion and with more than 100 million customers worldwide.
The reason for the secrecy was simple enough. Given the political delicacy of merging Europe's largest phone company with its fourth largest, both Mr Sommer and Mr Bernabe were keen to play their cards close to their chest. Indeed, Mr Bernabe was so keen on playing things discreetly that when he had a meeting with Italian Prime Minister, Mr Massimo D'Alema, two weeks ago, he opted to reveal little other than offering a generic remark about Telecom Italia considering a "foreign" partner. In truth, if marketplace rumours are to be believed, Mr Bernabe has been working on the possibility of a merger with Deutsche Telekom for the last three months.
There is no mystery about Mr Bernabe's interest in Telekom. It dates from media leaks last January that Olivetti SpA was about to launch a hostile takeover bid for Telecom Italia. These rumours were confirmed by the end of February when Olivetti threw its cards on the table, to the tune of $60 billion, subsequently upgraded to $65 billion.
This was an audacious bid, not only the largest takeover deal in Italian history, but also one launched by a dynamic private sector firm against a former state monopoly that was six to seven times larger than itself, in terms of assets, revenue, turnover and employees (26,000 at Olivetti, 126,000 in Telecom Italia). It was also a bid that Mr Bernabe (and his inner circle) was determined to resist.
The Telecom Italia boss had two options: (1) he could put up the purchase price by revamping his own company, largely through a merger with its own mobile phone company (Telecom Italia Mobile) and thus become too expensive for Olivetti; or (2) he could go looking for a White Knight to create a new colossus that would fend off Olivetti.
Plan 1 definitively failed two weeks ago when Mr Bernabe did not raise the necessary quorum for a Saturday board meeting. At that stage, it was over to the White Knight or Plan 2, a course of action that had been hatching in hotel rooms across Europe, from Vienna to London.
At first glance, the merger of these two former state monopolies would appear to make little sense. In the brave new world of privatisation (the Italian state retains only a 3.4 per cent golden share option in Telecom Italia, while Deutsche Telekom is 72 per cent German state controlled) both companies have had relatively difficult times and both seem in need of cost cutting, especially of the painful "downsizing" variety.
Figures for the first half of 1998 would suggest that, of the two, it was the Italian company that performed the better. In that period, Telecom Italia profits soared 64 per cent to $1.3 billion on $12 billion worth of sales while, in the same period, Deutsche Telekom's profit rose 18 per cent to $1.06 billion on $18.7 billion of sales.
Expressed another way, this means that Telecom Italia's profit margin of 11 per cent was almost twice as high as that of Deutsche Telekom at 5.6 per cent.
The figures did not go unobserved in the marketplace with analyst Mr Corrado Berlenda of Euroconsult expressing the opinion of many when saying: "This would be a very bizarre combination, merging with a company that is even less efficient than Telecom Italia and then letting the German state run it."
Nor has that latter point escaped the attention of the Italian government. Although Prime Minister D'Alema and German Chancellor Gerhard Schroeder met on Monday, on the sidelines of a NATO summit in Washington, to confirm their "political interest" in the proposed merger, the Italian government is clearly worried that its recently privatised state monopoly (1997) will, de facto, be run by the German state since Deutsche Telekom would have a 56 per cent controlling share in the new company.
Furthermore, the German government's stated intention of divesting itself of its majority shareholding in Deutsche Telekom "when appropriate" hardly eases such worries, nothwithstanding the German rider that in the meantime it will not seek to influence the strategy of the new group.
Italian Finance Minister, Mr Vincenzo Visco, probably gave a more accurate, if less diplomatic indication of government thinking when telling Italy's leading financial paper, Il Sole/24 Ore last weekend: "It is neither acceptable nor conceivable that Telecom Italia be bought by a state-owned German firm."
In the meantime, the marketplace would seem to be coming to its own conclusions, with Olivetti shares showing a consistent rise for the last week and with Telecom Italia shares falling. Sensing the Italian government's lack of enthusiasm for the merger and unconvinced both by the timescale and the plans (or lack of) for the operation, many market analysts now believe that the Olivetti bid for Telecom (which opens today and closes on May 21st) will succeed.
On Tuesday, Franco Bernabe gathered his troops for a final, formal rejection of that Olivetti bid. Was that his last hurrah?
