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  1. Technology
March 25, 1996

EUROPE’S LAST COMPUTER MOGUL (PART II)

By CBR Staff Writer

By Computer Business Review, a sister publication

Yesterday, in part I, we looked at Olivetti’s new market strategy steered by Carlo De Benedetti. Today, in part II, we examine the Systems and Services division and the consistent growth of the Olivetti’s office products division. Despite its separate status, the fortunes of the PC business are still intertwined with those of the main Olivetti group – the Systems and Services Division. The division still sells a significant but undisclosed quantity of PC kit which some analysts reckon could add as much as 10% to the PC company’s revenues. Although it has been profitable and growing, the division has now narrowed its focus to three lucrative customer markets: banking, which provides half of its sales; public sector/utilities, which produces 35% of revenues, and retail, with 10%. For these markets, it provides a broad portfolio of services, including network integration, systems integration, multivendor services, network management, desktop management, software support and training. The division brought in revenues of L5,600 ($3.6 billion) in 1995 and provided 53% of Olivetti’s total business. With a headcount of 17,300 and all the other business operations as separate entities, the Systems and Services Division has largely become Olivetti SpA. Olivetti claims it is the market leader in desktop and multivendor services in Europe, with an 8.4% share in desktop services and a 6% share in multivendor services, according to Dataquest. Market research group Input puts Olivetti close to, but behind, Digital Equipment and ICL Sorbus in the $5.8 billion multivendor services market with a 7.4% market share, worth $430 million. The Software and Services Division grew at 10% in 1995, behind the overall market rate of 16%, but on par with its peers, says Input.

By Kenny MacIver

As a gauge of Olivetti’s potential in this sector, the total market is expected to reach about $12 billion. For many years services like maintenance have been outsourced, but it is only relatively recently that newer sets of services have been bundled together to provide a managed portfolio at the desktop and people like Olivetti have done a lot to push that, says Paul Connolly, a research analyst at Input. As IT managers have realized the true lifecycle cost of ownership of desktop equipment, software, administration and support, Olivetti has found some strong business growth. But margins can be thin. In straightforward desktop maintenance, margins are very low – it’s a cutthroat sort of business, say Connolly. What Olivetti is trying to do, therefore, is develop higher value business off the back of maintenance – value-added services such as software services and network management. While Olivetti’s services division may in the past have pushed sales of the company’s own computers, the reorganization of the company has made that a less compelling notion. Connolly suggests that Olivetti no longer encourages the division to act as a channel for Olivetti kit. Now they put together the best kit for the job. They ship whatever it takes.

Office on Nasdaq

While services may be the core business, the more workaday business of supplying office products has provided consistent growth and profits for Olivetti. Lexikon brings together products such as inkjet printers and fax machines, photocopiers, cash registers, typewriters, calculators and office supplies. In fact, Lexikon claims to be the leading European manufacturer of bubble- jet printers and fax equipment, something that has been heavily aided by a technology joint-venture company, Olivetti Canon Industriale. Lexikon grew by 11% in 1995 to L2500 billion ($1.6 billion), retaining a stable headcount of about 7,300. Despite the relatively low-tech nature of its business, it may be highly useful in Olivetti’s plans for funding its telecoms ambitions. Having spun off the business from the main group, Olivetti is now shaping up Lexikon for an independent stock market listing, much inspired by the flotation of IBM’s

office products offshoot Lexmark. Like Lexmark, Olivetti favors taking advantage of the greater liquidity and lower hostility of the NASDAQ market rather than seeking a listing alongside the parent company on the Milan stock exchange. A flotation date for the end of 1997 has been considered, by which time Lexikon will have two years of independent results under its belt. Such a flotation could provide a large, useful cash injection. We will consider the possibility of using the listing of a minority stake in Lexikon for financing those areas of the Olivetti Group where investments are higher at the moment, says Passera. There is no hint of divesting itself of Lexikon. In fact, Olivetti has invested heavily in a L500 billion plant producing inkjet technology for faxes and printers, one of Lexikon’s most important product lines alongside photocopiers and supplies. In many ways, Lexikon is the original Olivetti. It even still sells mechanical typewriters. At the other end of the technology spectrum is what several analysts regard as Olivetti’s jewel in the crown. In March 1994, Omnitel Pronto Italia, 41%-owned by Olivetti, won a bitterly-fought battle to set up and run Italy’s first private GSM mobile telephone service.

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Half a million

Building a telecommunications infrastructure from the ground up has been seriously expensive and Omnitel has struggled to meet its obligation of covering 40% of Italy. Along with the other consortium members, Air Touch, Mannesmann and Bell Atlantic, Olivetti has built up a workforce of 1,600 employees and a fast growing subscriber base that reached 90,000 in early February. Italy only accounts for 30% of Olivetti’s IT sales, but the company’s ambitions in telecommunications focus almost exclusively on the Italian market. Both Omnitel and Infrostrada are Italian-focused. We want to establish our telecom operator credibility in Italy. We don’t have any plans for the time being to operate significantly outside of Italy says Passera. De Benedetti has predicted telecoms activities will generate over 50% of Olivetti’s business by the year 2000 and Olivetti believes Omnitel needs half a million subscribers to break into profit. At this point, signs of convergence between its telecommunications activities and Olivetti’s main product line are not obvious. For Corrado Passera, the expertise has to be built in telecommunications before there can be significant synergy with the computer side of the business. In order to deal with this convergence, you have to be good at both sides of the equation, he says. But are the synergies appearing or is Olivetti simply moving into more lucrative sectors where the battlelines are still undefined? In systems and services, Olivetti’s three main customer areas – banks, government and large retailers – are increasingly working on projects where IT and telecoms overlap, says Passera. For a number of banks, Olivetti is providing IT services but, by leveraging Telemedia’s skill-base, it is able to confidently take on a bank’s telecom services too. Acting like a venture-capital company, Telemedia backs multiple start-up companies in emerging markets with technology such as video- conferencing, online services and the Internet. Passera accepts that not all of Telemedia’s activities will blossom into important companies. We want to be present, at least with a token, in a number of areas before deciding on the ones that are the priority for us, he says. To a large extent, the markets leading from the convergence are still to be defined. Telemedia, which had 1,400 employees and revenues of L300 billion ($192 million) in 1995, is betting wide. It owns 67% of Infostrada, a business communications company in which Bell Atlantic owns the remaining equity; it has 51% of UK Online, an online services venture; and it owns the same proportion of cable TV network start-up Videostrada, along with US West; and it has a majority holding in Olivetti StarPress, a multimedia titles author and distributor. But Telemedia will be a cash outflow business for some t

ime to come, says one analyst. Nevertheless, Olivetti thinks it can bare those losses and report a return to net profitability in 1996. Analysts agree, with some reckoning its operating profit will hit L380 billion ($243 million) and net will come in at L160 billion ($102 million).Clearly there are some potentially exciting businesses within this group. But the fact of life is that to get to the end of the rainbow, you need money, you need to be financially strong and you need to be a leader technologically, says one analyst in London. Or, like Carlo De Benedetti, you have to instill confidence in people and show you almost always land on your feet. The trouble is, says the analyst, De Benedetti is getting very close to his ninth life.

The engineer

Consummate deal maker, financier, industrialist and incurable corporate gambler, Carlo De Benedetti, nicknamed Ingengere (The Engineer), may be most famous for his position at the top of Olivetti, but his business interests are wide. Born in Turin, he was educated in electrotechnical engineering and initially worked for his family’s firm, Compagnia Italiana Tubi Metallici Flessibili, before becoming chief executive of another family holding, Gilardini, an automobile components and chemical equipment company. In 1976 he acquired Compagnie Industriale Reunite (CIR), which has since become the nucleus of his industrial holdings. In 1978, he was appointed CEO of typewriter maker Olivetti and transformed it into a profitable vendor of PCs and data processing systems, slashing the workforce at a time when making sweeping redundancies was political dynamite in Italy. De Benedetti is one of a new breed of European business tycoons, unafraid of straight talk and fast action, says Alan Friedman, author of The Network of Italian Power. Benedetti in the late 80s was a guru, their Bill Gates. Someone who was going to bring an Italian technology company to the fore, says one stock market analyst. Today he is still chairman of CIR, and other significant companies including Sogefi, Pirelli, Valeo and L’Espresso publishing group. He says that one particular experience fueled his drive and willingness to stand up to the establishment. The son of a Jewish father and Catholic mother, he fled wartime Turin as the German army took control. In the race to get to Switzerland, two cousins were shot and their parents sent to a concentration camp. Over the past two decades, De Benedetti, now 61, has launched some extraordinary business deals. Without the approval of the Italy’s ‘old guard’ he has launched bids to buy Zanussi, bought Buitoni the pasta firm, and tried unsuccessfully to take control of Sociiti Ginirale de Belgique, Belgium’s biggest conglomerate. An outsider to the Salatto Buono, the group of businessmen and politicians that controls the Italian economy, he has waged a war against the establishment. De Benedetti is the first important, reform- minded Italian businessman to stand up to the [established business] regime, says Friedman. His only major flirtation with the established power networks was a 100-day stint at Fiat in 1976. But even there he rocked the boat by prescribing – much as he has done several times at Olivetti – a mixture of headcount reduction, recapitalization and investment in new products. He is not a political animal, like many other industrialists in Italy, says Paolo Puppoli, an analyst at Dataquest. He is 100% a business person; he just comes in and gets the job done rather than trying to get involved in running the country.

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