From Computer Business Review, a sister publication
Can Carlo De Benedetti make Italian systems vendor Olivetti great again? When Carlo De Benedetti declared in January that Olivetti was Italy’s only truly public company, he was once again taking a pot shot at some of his fellow Italian industrialists. The maverick financier, who besides Olivetti has controlling interests in banks, publishing houses and manufacturing companies, points proudly to the fact that 70% of Olivetti’s equity is held by institutional investors – mostly in the UK and the US. This stands the company apart from the vast majority of large Italian corporations which are still closely-held by individuals and their dynasties. Putting a positive spin on that dispersal of stock was inspired marketing; but it glossed over a less enviable aspect of Olivetti’s financial record. True, the company is widely held – but not by choice. Instead, over the past five years it has repeatedly gone back to the stock market to raise ever-larger sums of cash, a run of offerings that has progressively diluted investors’ holdings. The latest of these cash calls stunned even hard-boiled analysts with its audacity. In December, loss-racked Olivetti asked investors for a breath- taking L2,257 billion ($1.4 billion) – the largest ever re- capitalization of any company in Europe. Executives were relieved when the issue was fully subscribed. With that money in the bank, De Benedetti has only a couple of quarters to show he can perform the kind of corporate magic that has saved Olivetti from the scrap heap on two previous occasions.
By Kenny MacIver
When he acquired Olivetti in 1978, De Benedetti set about transforming the loss-making mechanical typewriter maker into a computer hardware giant that went on to become Europe’s largest PC vendor during much of the 1980s. Later in the decade, as its hardware business faded, Olivetti shifted its aim yet again to target the booming market for computer services. Now, De Benedetti is 18 months into a fourth corporate reincarnation that some analysts suggest carries outstanding potential – but great risk – for the company. He is pushing Olivetti into telecommunications, pouncing on the huge opportunities offered by the liberalization of the Italian state-controlled telephone system and strengthening his hand in anticipation of freer telecommunications regimes elsewhere in Europe towards the close of the decade. That may sound like straightforward diversification but De Benedetti argues it is much more far- reaching. His vision is to re-position Olivetti to take advantage of the convergence of the computers and communications industries. For the last 15 years the computer industry has been fueled by a dramatic reduction in the cost of microprocessors. The next wave will be fueled by a dramatic reduction in the cost of telecommunications, says Marco De Benedetti, the Olivetti chairman’s son, and the chief executive of the company’s Telemedia subsidiary which is spearheading much of its push into convergence technologies. We are probably the company that is most aggressive and most determined to take on this challenge of transforming ourselves from a pure IT company into a telecommunications and computer company. To ride that wave Olivetti has got to have cash – and plenty of it. Not only must it quickly build up the infrastructure that will support its new telecommunications interests, it must also pay dearly to strengthen its core computer business and bring it back to an era of profitability. In preparation, Olivetti’s sprawling structure has been simplified. There is an on-going program to divest non- strategic subsidiaries and product activities. Even so, with revenues of L9,830 billion ($6.3 billion) Olivetti is Europe’s second largest computer company behind Siemens-Nixdorf, and the world number 11.
Olivetti annual revenues
The five core businesses Olivetti has decided to home in on are by no means cured of all their ills. Losses in its PC unit are proving difficult to stem, and coul
d force a decision to pull out of computer hardware manufacturing once and for all. Growth in its systems and services business is slow given its market position. And while its Lexikon office equipment subsidiary may be doing well, its array of faxes, photocopiers and typewriters are not going to form the strategic core of the future.
Content from our partners
Olivetti annual profits/losses
The key question is whether Olivetti’s current business can quickly be made strong enough to underwrite De Benedetti’s vision for the late 1990s. Some financial analysts have their doubts. Here is a company where a big percentage of its business is coming from loss-making PCs, says one. It has a couple of fairly OK businesses. Systems and services is making a small contribution to profit but is not growing fast. It has a well-run but unglamorous office company. Then there are the ‘jewels in the crown’ the telecommunications businesses. But these are going to be cash outflow businesses for the next two years – earnings: zippo.
Fraud allegations
On top of this, De Benedetti has his own personal business problems. Hanging over his head is a six-year jail sentence, for his role in the irregularities surrounding the collapse of the Banco Ambrosiano in the 1980s. Few believe the businessman will end up behind bars but fighting his appeal will do little for Olivetti’s image. And in another case filed in January this year, De Benedetti was ordered to stand trial, along with several other business figures, for a series of alleged frauds related to Olivetti’s dividend pay-out between 1988-1992. But there are also questions about his control over Olivetti. Since the recent cash call, outsiders and analysts have been thinking the unthinkable – that De Benedetti could be forced out of his guiding role. Institutional investors are impatient with the slow drift towards profitability and inconsistent financial forecasts. And, as a result of the dilution of his controlling interest in Olivetti, and the dissolution of a De Benedetti-supporting shareholders’ syndicate, the Olivetti chairman has seen his stake in the company dip to 15%. While that is not going to happen this year, it will become a distinct possibility if De Benedetti fails to deliver on his promise of a full turnaround for the company and on his vision for Olivetti as a convergence technologies company. With the stakes growing ever higher, the sense of urgency within Olivetti has been acute over the last six months. Under managing director Corrado Passera, a former McKinsey management consultant who has been De Benedetti’s right hand man for over a decade, the company has re-focused on fewer business segments – pulling out of laser printers, for instance, and halting its own production line of notebook computers. Its PC activities have been spun off as an autonomous subsidiary, as has Olivetti Lexikon, its office products unit. The Systems and Services Division has been told to focus solely on three industry segments – banking, retail and public/utilities. Olivetti Telemedia, meanwhile, has been given the role of defining much of Olivetti’s next-generation products and services. It has forged major deals and provided seed capital for some ambitious projects – but it too is losing money. Outside the main corporate structure, Omnitel Pronto Italia, the Olivetti-controlled consortium, has just inaugurated its mobile phone and data service, two years after winning the license to operate Italy’s first private mobile telephone network. As a result of the accelerated changes, more job reductions than anticipated were pushed through in 1995, plunging Olivetti deeper than expected into the red. Net losses for the year, when confirmed, will come in at a fathomous L1.6 trillion ($1.0 billion), around 10% more than expected. On the plus side, the company did manage an operating profit of L120 billion ($76.8 million), its first positive result since 1990. Restructuring charges from headcount reduction and asset write-offs totaled L1,050 billion ($672 million), L150 billion ($96 mill
ion) worse than anticipated. 5,000 jobs were eliminated, bringing headcount to 30,200. Another 1,000 jobs are to go in the first half of this year. Some of these will come from the L400 million ($256 million) of non-strategic business units – still to be publicly identified – that Olivetti intends to dispose of over the next 18 months, says Corrado Ariaudo, administration director. Preliminary results for Olivetti show that revenue growth was also shy of estimates of just four months ago. Almost all of the shortfall is being blamed on the struggling personal computers business.
Cash drain
The drain on profits from the PC business has been acute, a situation that has prompted De Benedetti to commit to backing out of the sector if Olivetti PCs cannot break even by the end of 1996. The PC business is the problem child for Olivetti, says Paolo Puppoli, a PC analyst with Dataquest. It’s bringing the whole company down. It produced revenues of L2,150 billion ($1.4 billion) in 1995 up 11%, giving it a 20% share of the company’s revenue pie. Some analysts argue another 10% can be added to that, due to sales through the Systems and Services Division. Last year, Olivetti shipped 750,000 PCs, giving it a respectable fourth place in the European market behind Compaq, IBM and Apple. But its share is steadily being eroded. Its 5.6% share was 6.1% a year ago. Of equal concern is its weak participation in the PC server market – only 3% of units shipped in 1995 were servers. Without the economies of scale of a larger PC player or a partnership, Olivetti will struggle to return to profitable and stay there, says Nimrod Schwarzmann, an analyst at stock broker James Capel. The key issue is that they cannot compete with the Compaqs and IBMs of the PC sector. Olivetti cannot afford to be running a loss-making business in a price attrition industry if it hasn’t got the economies of scale. Managing director Corrado Passera contests that volume is the key to viability. There are PC companies that are smaller than Olivetti that are profitable and those bigger than Olivetti that are not profitable. The surgery to the PC has been extensive and long overdue, according to Puppoli. Making the PC business a neat unit has allowed Olivetti to clearly identify problem areas, he says, singling out problems with the company’ logistics and its sales strategy. To bring fresh ideas to the PC operations, Olivetti has installed a completely new management team drawn from the senior ranks of several major PC makers while cutting overall staffing levels from 4,800 to 1,800. Some of their early decisions have been to halt the manufacturing of non-profitable lines, notably notebook computers, which are now being made to an Olivetti specification in Taiwan. Measures have also been taken in manufacturing, component sourcing and market awareness to sharpen its ability to quickly respond to changes in market demand, a long-standing criticism of the company. Historically it has always been very late to the market when faced with new requirements, says one analyst. When 486 machines were proliferating, Olivetti was still selling 386s, he adds. Now they are certainly taking steps to change that. A less cumbersome channels approach has also started to make a difference. Olivetti’s complex network of PC dealers, which required an army of Olivetti handholders, has been replaced by a single, pan-European distributor – Ingram Micro. These changes give PC sales chief Berhard Auer the confidence to predict break-even results in 1996. Some outsiders agree: They should be able to end the losses, says Puppoli of Dataquest. But it is conditional on one more bold decision, he says. It has got to focus on business PCs and back out of the home market. The company is almost profitable in the business segment, and has a line of products that are very competitive. But I don’t think they should be in the home market at all. In particular, he foresees a disaster in the making for the company’s latest foray into the home market – Envision, a screenles
s PC that looks like a video recorder and is specially designed for hooking up to the Internet using a TV set as a display. Olivetti doesn’t have the right distributors for the home market. Something like Envision can only be sold through brown goods chains next to TVs and fridges, says Puppoli. It’s a product going nowhere. While Olivetti is making headway, many analysts believe that the PC company will still not make a profit for fiscal 1996 – at best it will be back in the black during the closing months of the year. But that will be enough to sustain its place within the Olivetti group at least for 1997. If it fails, Olivetti will sell the PC unit – something that its subsidiary status will make easier. The move would not be entirely negative. Aside from relieving the drain on profits, the disposal of the PC unit would provide cash to fuel Olivetti’s build up of its telecommunications infrastructure. At the time of its cash call in December, Olivetti made a rash promise to investors that it has since begun to regret. As Corrado Passera outlines: We made a commitment to eliminate the PC problem. That means turning it around. And we said until the end of 1996 was a long enough period to show that Olivetti Personal Computers could stop being a cash drain on the rest of the group. If it continues to do so, Olivetti will be forced to honor its commitment, he says. Simply closing the PC operation down is not a realistic option, say analysts. Olivetti does not have the financial strength to bear the huge closure costs, they point out, which could run to half a billion dollars in write-downs and lay-off costs. A more favorably received option among observers is for Olivetti to forge some kind of joint equity partnership with another major PC supplier by the end of 1996 – perhaps in the mold of Groupe Bull’s relationship with NEC and Packard Bell. Passera does not appear too enthusiastic for such a move, although he is not ruling it out: We don’t exclude any alternative, but the only alternative we are working on is to turn the company around. Tomorrow, we take a look at the intertwined fortunes of the PC business and the main Systems and Services division of the Olivetti group and the consistent growth of the office products business.
