Executive summary:

The recent acquisition of Parmalat — one of the biggest Italian listed companies — by the French dairy group Lactalis, caused a huge debate in the financial and political communities in Italy.

Lactalis’ bid was initially met with stiff Italian resistance, including encouragement of potential local “white knights,” issuance of an emergency decree to allow Parmalat to postpone its General Meeting, and debate about possibly issuing a decree granting the government new powers to block foreign bids for companies deemed strategic. But in the end, Italy decided to abandon the fight, and Lactalis managed to complete its takeover bid.

After the “thunderstorm,” the Italian government’s emphasis shifted from introducing protectionist measures to a more far-reaching goal of stimulating the Italian market for domestic mergers and acquisitions, so as to counter foreign competition. As a first step, the Ministry of Economy promoted the establishment of a new fund to invest in companies of “significant national interest”, which has been broadly defined. The initial investor in the fund is the Italian government’s Cassa Depositi e Prestiti, but the fund is also open to banks, insurance companies, and other institutional investors. It is expected that, in the near future, participation in the fund will be opened to foreign private investors as well.

The political fear of losing “national champions” to the advantage of “foreigners” is commonplace almost everywhere in the world, however, in Italy it has its own peculiar origins and reasons.

Italy’s economic base consists primarily of small and medium sized enterprises which contribute to most of the country’s national exports and GDP. Traditionally, Italy has fewer large industrial or financial groups, most of which are family owned or controlled, in comparison to other developed economies such as France, Germany, and the UK.  Over the years, this peculiar structure of the Italian economy has contributed to making Italian industrial and financial groups comparatively less dynamic than their foreign counterparts when pursuing mergers and acquisitions. In general, in the Italian business environment, “friendly” transactions tend to be more common than competitive bids where several potential buyers compete for the same target. This is partially due to the fact that, traditionally, only a few Italian companies listed on the stock exchange are actually “public companies”. Also, Italian entrepreneurs often see few incentives in embarking on M&As, as family-run businesses — even when they grow to a meaningful size — can encounter significant difficulties in managing the challenges of external acquisitions.

While our purpose here is not to discuss the effect of the peculiarities of Italian capitalism on the economy as a whole, it is fair to say that, as the Italian M&A market has increasingly opened up to foreign investors over the last couple of decades, Italian companies have been faced with the challenge of foreign competitors which, overall, have been more aggressive and dynamic.

The recent acquisition by the French dairy group Lactalis of Parmalat — one of the biggest Italian listed companies in terms of market capitalization — caused a huge debate in the financial and political communities. Parmalat was turned around after going bankrupt in 2003, thanks to the efforts of a management team that was particularly effective in restructuring the company and making it profitable again. However, that same management was considered too conservative by many, in pursuing a strategy of growth. In fact, when Lactalis moved to acquire a large stake in the company, Parmalat was sitting on a significant amount of cash, while evaluating a few possible business combinations.

Soon after Lactalis increased its stake to around 29%, a group of Italian investors, mainly led by domestic banks, tried to find a “white knight” to launch a bid to prevent Lactalis from controlling the company. Despite significant initial political support, the Italian “white knight” never materialized, mainly because of difficulties in finding a strong industrial partner interested in joining the group. Eventually, Lactalis decided to launch a tender offer, and acquired full control of Parmalat. Notwithstanding the fact that Parmalat’s Board of Directors considered the offer price insufficient, the offer succeeded owing to a lack of concrete alternatives. Lactalis’ bid spurred a significant debate in the media and in the Italian political arena as it revitalized the numerous and vociferous advocates calling for stronger protection for Italian “national champions” from foreign takeovers.

Initially, the Italian government tried to place certain hurdles for the French takeover, and actually adopted an emergency decree to allow the postponement of Parmalat’s General Meeting for a couple of months, in an attempt to gain time to allow a group of Italian companies to launch a bid before Lactalis could appoint a new Board. As any prospect of an Italian “white knight” faded away, the government also considered the possibility of issuing a decree granting it new powers to block foreign bids on companies deemed strategic. This may well have halted the French bid. The new decree was supposed to be modelled on French law No. 2005-1739 of 30 December 2005, which created an authorisation procedure for foreign investments in certain sectors of activities that could have affected public policy, public security, or national defence. This attempt was, however, soon abandoned by the Italian government, fearing the risk that these new rules could have proved to be inconsistent with EU rules on free movement of capital. Thus, after a summit between Berlusconi and Sarkozy, the Italian government decided to drop the fight against the French “invader”, at least this time.

As the thunderstorm on Parmalat ended, with the French group finally taking over Parmalat, from a political standpoint, the problem of protecting Italian “national champions” from foreign attacks remained far from resolved. However, the government policy to curb this political pressure seems to have shifted from introducing restrictive measures aimed at deterring foreigners from taking over Italian companies, to the more far-reaching goal of stimulating the market for domestic mergers and acquisitions, so as to counter foreign competition.

The latter goal is clearly more far reaching and harder to achieve in the short term. In theory, this policy is obviously more desirable and consistent with Italian obligations under European law, however, it carries two significant risks. On one hand, it may not be considered sufficient to satisfy the immediate requests of those factions within the government that believe that the country is undergoing a “looting” of its strategic assets. On the other, its implementation requires strong government commitment to pursue significant changes to the structure of Italian capitalism and, at least, a bit of time.

For the time being, however, the government seems to have chosen an intermediate solution, which should be able to deliver some immediate results and represents a step forward in fostering the domestic M&A market. The idea was borrowed from France, as this next-door neighbour is not only perceived as the most significant “threat” to domestic ownership of Italian companies, but is also considered to be a front runner when it comes to protecting its own national strategic interests from “foreign attack”. The core of this approach is the creation of a fund focused on investing in companies of “significant national interest”, which have been broadly defined by the Ministry of Economy to include companies operating in strategic sectors, such as defense, security, infrastructure, public services, transportation, energy, telecommunications, finance, and high tech, as well as companies that, regardless of their business, exceed certain thresholds in terms of revenue and number of employees. While the broadness of the above definition will not limit a fund’s target choice very much, there is the more significant limitation that will come from the fact that only the buying of minority stakes in companies that are economically and financially sound will be allowed, as European rules on state aid limit the State’s ability to invest in distressed companies.

Similarly to its French predecessor, the Italian fund has been established by enlarging the scope of activity of an entity known as “Cassa Depositi e Prestiti”, a special entity controlled by the Ministry of Economy which lends savings collected through the postal services to public entities and finance infrastructures.

Therefore, as the initial investor of the fund is the Cassa Depositi e Prestiti, which is expected to inject approximately 1 billion euro (and in the aggregate up to 4 billion euro), the fund will be off the state’s balance sheets, as its funding does not actually come from public debt. Also, it is expected that, in the near future, participation in the fund will be opened to foreign private investors as well, in an effort to encourage foreign investment in Italian companies, while keeping them in domestic hands.

Critics argue that the fund may turn out to be an instrument for politicians to exert influence on Italian businesses, somehow recreating under the cover of a new and more acceptable form, the old system of state intervention in the economy — a sort of new IRI — the Istituto per la Ricostruzione Industriale — that over the years represented the State’s long hand in business sectors ranging from the transportation to the confectionery industry.

Even though the fund has yet to start operating, the significant background circumstances relating to the newly appointed Managing Director, Mr. Maurizio Tamagnini, are noteworthy. Mr. Tamagnini headed one of the largest international investment banks in Italy, and his appointment may be regarded as a significant step towards insulating the fund from political pressure, and may even give an indication of the fund’s investment style and strategy for the very near future.