Outsider trading

Davide Serra used to play semi-professional volleyball in Italy’s Serie A2, or second division. He is tall and slim and was a setter – the player whose task, like a quarterback’s in American football, is to dictate the shape of the game, and whose talent is not brute force but vision.

Serra was born in Genoa but has lived in Britain for the past 12 years. In London, he plays setter in the financial world, as a hedge-fund manager. Together with Eric Halet, his French business partner, he runs Algebris Investments from an office near Savile Row. The fund has so far invested about $2.5bn, mostly in the shares of financial companies.

Now 37, Serra used to be an equity analyst for Morgan Stanley, specialising in banks, and was top-ranked among his peers in surveys by Extel and Institutional Investor. But at Algebris, he has rather bigger ambitions. In fact, he is engaged in something no one has tried before: an attempt to carry off a campaign of foreign shareholder activism against one of Italy’s most revered companies. His efforts to force changes in the management of Assicurazioni Generali, an insurer founded in 1831, have turned a spotlight on what is almost certainly the strangest and most convoluted business culture of any of the large western economies. Serra might not succeed in changing Generali, but his could be the first tremor of a convulsion that finally brings change to corporate Italy.

Italian corporate life is a melodrama writ large and played out flamboyantly by a troupe of characters from business, politics, the judiciary and the media. What would be everyday events in the lives of companies and executives in other countries are in Italy the seeds from which countless conspiracy theories spring up and spread. What you believe depends on your agenda; some say business is run by shadowy figures from the freemasons or Opus Dei, others probably fear Venusians in disguise. This is a world where Silvio Berlusconi, the billionaire media magnate campaigning for a third turn as prime minister in elections next month, routinely complains that there are plotters everywhere trying to bring him down.

“It’s easier in Italy to create fog by ignoring the specific issue and talking about something bigger, broader,” says Serra. “No one had the guts to point out what was wrong with Generali until it was pointed out by us in an Anglo-Saxon way. Being Italian, I took a chance – I decided the time was nearly ready for the situation to crack.”

Not all outside investors are as bold as Serra. The conspiracy theories are a deterrent, and foreigners assume they have no chance of influencing Italian companies because so many of them are controlled by just a handful of shareholders. Protecting turf and power has often been as important a motive in Italy as increasing the value of the company.

Italian business people frequently rail against what they claim are campaigns of disinformation fed to journalists by politicians and other foes, including lawyers and magistrates. Italy often seems stuck in the 16th century, its business leaders as fixated on power and plotting as Niccolo Machiavelli. But the question remains of whether a new cadre of Machiavellis really is plotting night and day, or whether corporate Italy is simply paranoid.

The company that Serra’s fund has targeted has a certain mystique of its own. Generali is Italy’s largest insurer, the third largest in Europe. Its headquarters are in Trieste, far from the centres of power in Italy, Rome and Milan. It sits on the border with Slovenia in the far north-eastern corner of the country, where Europe’s endlessly shifting borders have meant that Generali has been an Austrian company for almost as long as it has been Italian.

People had for years been accusing Generali of being conservative and risk-averse, held back by a perverse hierarchy. It has not one but two chief executives as well as a non-executive chairman, who acts like a hands-on member of the management team. Serra and Halet believed the business had good prospects, but they also thought it needed a better management set-up.

Towards the end of 2006, Serra started considering a move on Generali. In the coming months, as some financial companies were struggling to contain losses racked up in US mortgages and exotic derivatives, Generali found that its fabled conservatism was a winning attribute.

It helped persuade Serra. “We thought it would be a good investment. It’s a very defensive place to put money because it doesn’t have any toxic investments [in US mortgages, for example] of its own,” he says. “We also thought it had the potential to increase profits to €5bn a year by 2010, and €3.8bn in 2008, from under €3bn now.”

During the summer of 2007 Serra bought four million Generali shares, equivalent to 0.3 per cent of the company and then worth about €150m. He also bought eight million options, which could later allow him to increase Algebris’ holding to 1 per cent. It was not his intention to sit and wait for beneficial changes that might drive up the value of his investment. Instead he planned to agitate for change himself. But before he started making noise, he gently canvassed opinion in Italy and elsewhere. “We met the company, we met other shareholders,” he says. “We met competitors in Italy and abroad. You do the work; you assess the situation; you decide what to do. I wanted to understand if our analysis of the prospects for the company was correct.”

Analysing Generali is far from straightforward. The insurer has some important shareholders including powerful Italian and French financiers and the Bank of Italy. Its largest shareholder, with 16 per cent, is Mediobanca, the Milan investment bank founded in 1946.

It was Mediobanca that for decades orchestrated the web of cross-shareholdings at the top of corporate Italy that enabled the country’s elite to share out control of the leading companies among friends and contacts. This system formed controlling blocs that made it hard for “undesirables” to infiltrate. These cross-shareholdings were organised in the so-called salotto buono, or favoured drawing room, the door to which was closed to foreigners and other unwanted guests. It is said that visitors used to steal Mediobanca’s ashtrays just to prove they had been inside.

. . .

On October 24, Serra launched his attack. The offensive began with a letter sent to the Generali board and management and made public the same day. Antoine Bernheim, Generali’s 83-year-old chairman, did not find himself portrayed in a flattering light. Citing figures from Fortune magazine, Algebris said he was the fifth-highest-paid executive in Europe in 2006 with a total package worth $14.2m. And, the letter implied, he was not worth it.

“The current corporate governance and top management remuneration structures are not appropriate for an international institution like Generali, and represent a burden to long-term value creation for shareholders, employees and other stakeholders,” the letter said. Algebris was careful to emphasise that it was a long-term investor, probably mindful that hedge funds are often accused of looking out for short-term gain at the expense of a company’s long-term health.

The letter went on to call for a proper non-executive chairman, a single chief executive officer instead of the current double-act, and a different model of reporting responsibilities. It also objected to the recent appointment of Raffaele Agrusti, the first chief financial officer in Generali’s 176-year history. Algebris thought he was an accountant with a poor command of English.

Immediately, Italians started to sniff the familiar scent of conspiracy. Some newspapers suggested that Algebris was a stalking horse – part of a complotto italiano, guided by unseen hands, with the undeclared backing of large Italian banks connected to big shareholders in Generali. Serra rejects accusations like these out of hand. Italians, he says, “don’t understand a business like ours. Our only objective is to make money because we run a fund and we have to make returns for our investors”.

And yet even as the talk of plots and conspiracies was washing around Generali, some people in the Italian establishment spoke up against the obsession with plotting. In November, Cesare Geronzi, chairman of the supervisory board at Mediobanca, told the business newspaper Il Sole 24 Ore that he saw “a certain immaturity in the country. I read trivia and lies, an avoidance of the real issues while [people are] wrapped up in what is happening backstage, in personalities, in secret meetings”.

Of course, as the largest shareholder in Generali, Mediobanca could have the most to gain from a hedge fund’s attempt to boost the insurer’s share price. La Repubblica, one of Italy’s main daily newspapers, has reported extensively on the criminal investigations into Geronzi that have arisen from his decades as a powerful banker. “The hand of Geronzi behind the offensive of Algebris,” declared one headline. Geronzi maintains he has done nothing wrong in any of the cases against him and is appealing against a suspended jail sentence he received in 2006. (He is alleged to have improperly helped a company stave off bankruptcy.)

Generali’s managers responded to the Algebris letter by saying they were open to discussions with shareholders. Giovanni Perissinotto, one of the insurer’s two chief executives (the other is Sergio Balbinot), has already acknowledged that its unusual corporate governance needs to be explained. And Generali has explicitly demonstrated that it understands the need for a shake-up: last year it installed several new directors, promoted Agrusti to chief financial officer and announced more ambitious profit targets.

The focus on Generali’s governance was not a surprise, Perissinotto told me soon after the Algebris letter. But he added: “If you talk about results then you can judge whether the governance works.” Generali – according to Generali – is doing just fine.

None of Generali’s influential shareholders has backed Algebris’ calls for reform, but at least one part of the hedge fund’s plan is working. Up to 8 per cent of Generali’s shares were traded in the immediate wake of its letter, pushing the price to a six-year high. Algebris needs the backing of investors holding 2.5 per cent or more of Generali’s equity in order to put motions to its annual meeting next month – it could, for example, ask for board members to be removed or for shareholders not to approve the accounts.

But the conspiracy theorists, intent on seeing a more complicated interplay of dark forces, are ever present. In November, Generali chairman Bernheim, who is French but has been playing Italian power games for decades, became the first businessman to be awarded the Grand Cross of the Legion d’Honneur, France’s highest accolade. Soon after, he gave an interview to Le Monde accusing Algebris of having hidden friends. “I am convinced that Algebris is not acting alone,” he told the newspaper. “The fund is without doubt backed by Italians who have certain ambitions concerning the company.” Algebris has stated publicly that it is acting entirely on its own initiative, but Bernheim is singing a tune much more appealing to Italian ears. The Generali battle has turned into a textbook case of Italian business confusion.

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Ronald Spogli, the US ambassador to Italy, based in Rome, holds strong views on Italian business culture. “The obvious is never a good enough answer,” he says. “There is always a search for a hidden explanation.” The Italian word for this search – dietrologia – expresses succinctly to Italians what it takes the rest of us several sentences to describe. It could be translated as “behind-ology” and goes beyond intrigue to encapsulate an obsession. Italians are keen students of dietrology.

There is, of course, plenty to give succour to the conspiracy theorists. Almost 26 years ago Roberto Calvi, chairman of Banco Ambrosiano – also known as “God’s banker” – was found hanging under Blackfriars Bridge in London, in a still-unsolved case involving the Vatican, secret societies and politics. More recently, Antonio Fazio, the governor of the Bank of Italy, quit amid a banking-takeover scandal at the end of 2005. He says he has done nothing wrong. Such events may add to the conviction of those who see Italy as riddled with wrongdoing, but the country hardly has a monopoly on criminality. There are, in any case, rational explanations for the plotting and paranoia in Italy, arising from fundamental differences between Italy’s business culture and that of other countries.

Like Generali, almost all Italian companies have dominant shareholders. The country is full of small, family-run enterprises – Italy’s 6.1 million companies hugely outnumber the UK’s 2.4 million. Moreover, only 300 Italian companies are listed on the Milan stock exchange compared with 3,300 on the London Stock Exchange, so the vast majority face little pressure to please outside shareholders.

It is an introspective environment that need not subscribe to the market-based tenets of investors in New York or London. Plotting in this context is really an unfairly dirty word for efforts to retain power, for motivations that go beyond a fixation on quarterly earnings growth. Yet a lack of transparency has deterred foreign investment. “I believe this country has suffered meaningfully from a lack of foreign investment,” says Spogli. “It’s not the money per se, it’s the know-how that goes with it.” To improve homegrown venture capital, Spogli is championing a programme to send 20 aspiring Italian business people to the US to see how investments are evaluated. He is also part of a scheme that sends Italian doctoral researchers to Silicon Valley to see how ideas can be turned into enterprises.

There is also change at large companies, which partly explains Serra’s boldness. The salotto buono is less important than it used to be and the tangle of cross-shareholdings is being slowly unpicked. Fiat has sold its shares in Mediobanca. The bank UniCredit was ordered by regulators to sell its stake in Generali. Hermes, the large UK investment manager, has also started pushing for change at Italmobiliare, which controls a large cement company and is part of the salotto buono. Italmobiliare’s dominant shareholders, like Generali’s, could see off an attack with little difficulty.

These webs of corporate power inevitably generate dietrologia, as does the involvement of politicians in business. Paolo Gentiloni, communications minister in the coalition government that collapsed at the end of January, points out that it was not long ago that politicians and business managers were the same people. “There was a period in Italy when politics decided a large amount because industry, newspapers and banks were state-owned. The history is of an enormous public sector, but that finished in the 1990s.”

AT&T, the US telecoms company, blamed political interference for its failed bid to buy an important stake in Telecom Italia last year. But Gentiloni suggests a different view, playing on the hopeless fragmentation of the Italian political spectrum. “Do you have the impression that politics was involved in the Telecom Italia affair because it actually was, or because you had 23 political parties all discussing the issues? Italian politics is so inefficient. It can look powerful and influential. I assure you it is not.”

Nonetheless there is a widely held view in Italy that Generali will not be allowed to fall into foreign hands. Some of Bernheim’s first meetings after Algebris sent its letter last October were held in Rome with the Bank of Italy and the Treasury.

. . .

In December, Generali’s board said it had decided no change was needed to its corporate governance. Its performance was better than its peers – proof, it claimed, that the Trieste system worked. Algebris has not risen to this apparent rebuff though it did welcome the support it later received from Franklin Templeton, a US fund which owns Generali shares. Sometimes change happens very quietly in Italy, so that reputations – or bella figura – can be preserved. Several people have told me that the scrutiny of management coming from Generali’s board has grown substantially in recent months.

Generali’s shares are 8 per cent lower than they were at the start of June last year, when Serra started investing – not bad, considering how other financial companies have fared recently. Shares in Germany’s Allianz and France’s Axa, Generali’s principal rivals, have both fallen by about 33 per cent over the same period. Still, Serra would have done better putting his money under the mattress, but that’s not what his clients pay him to do. Now Algebris must wait to see who else signs up for its campaign before deciding what to do at the shareholder meeting next month.

Bernheim surprised observers when he accused some of his own board of organising a plot against him. In front of workers at a Christmas party, he said there was “a plot organised by Italian shareholders, some of whom are on the board, who have used Algebris like a battering ram to take command of the company. I will strive to protect the company from this Mafia attack”. This indelicate tirade came just days after the board had backed him.

Serra understands. “It’s something that goes beyond their brain,” he says. “But it’ll change. More and more people will do this – there will be other foreign shareholders with no link to Italy so it won’t be possible to make plot allegations. At that point, all this Machiavellian design will collapse.”

Adrian Michaels is the FT’s Milan correspondent

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Agitators for change: what the activists want

Today’s shareholder activism is a legal activity closely related to “greenmail” – a notorious practice of the 1980s and 1990s. In greenmailing, corporate raiders bought shares in companies and threatened hostile takeovers until they were paid large sums by their victims to go away. Carl Icahn, T. Boone Pickens and other fearless luminaries of US finance made their names with such tactics.

The lexicon of finance is now a kinder place. Yesterday’s raiders are today’s activists. They do not need to own enough shares to threaten a takeover on their own. They buy a few and hope that by agitating for change loudly enough, they will gain the support of other shareholders and ultimately the company’s management.

Typically the activists want parts of a business sold or closed down, so that the company can concentrate on its most profitable activities. The goal is to increase the value of activists’ shareholdings, not to take over the company. But sometimes the company does not survive. ABN Amro, the Dutch bank, was bought by a consortium of banks last year and is being broken up after a campaign started by The Children’s Investment Fund. That activist fund happens to be a minority partner in Algebris, and they share premises.