Società Finanziaria Telefonica Per Azioni

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Società Finanziaria Telefonica Per Azioni

Via Bertola 28
I-10122 Torino
Italy
(11) 55951
Fax: (6) 8589434

State-Owned Company
Incorporated: 1933
Employees: 125,958
Sales: L19.96 trillion (US$17.39 billion)
Stock Exchanges: Milan London Munich Frankfurt Düsseldorf

In 1991 telecommunications underwent a renaissance in Italy, in which the state-owned holding company Società Finanziaria Telefonica per Azioni (STET) has a key role to play. STET is partially privatized, but the state controls its operations. A major modernization program has been combined with a greater awareness of the international telecommunications scene.

Società Finanziaria Telefonica per Azioni, itself a part of the Instituto per 1a Riccostruzione Industriale, operates through its various telecommunications companies. The most important of these is Società Italiana per L’Esercizio delle Telecomunicazioni p.A. (SIP), the main domestic telephone operator. Others include the international operator Italcable and the satellite communications operator Telespazio. Telecommunications equipment manufacturing is undertaken by Italtel, while cable wiring, engineering, and installation services are provided by Société Internationale pour les Résaux de Télécommunications et les Installations (Sirti). Two other subsidiaries—SGS-Thomson and Selenia-Elsag—have recently been transferred to another IRI holding company, Finmeccanica. Despite its importance, STET does not have a total monopoly in Italy. Azienda di Stato per i Servizi Telefonici (ASST), a department of the Ministry of Posts and Telecommunications, is responsible for domestic intercity and some continental trunk communications, though not for switching—calls which pass through an exchange. Attempts to merge SIP and Italcable with ASST have foundered because of political opposition.

The history of STET is strongly tied to that of Gruppo IRI. This state holding company, Europe’s second largest company in terms of turnover in 1989, was created as a result of the nationalization of three of the largest commercial banks in 1933 and the acquisition of their equity portfolios. IRI then decided to create a series of finanziaria, or semiautonomous financial holding companies, to manage all its interests in specific industrial sectors that were a byproduct of the nationalizations. STET was the first of these and was created in 1933 to operate IRI’s telephone interests. In 1925 five private companies had been given concessions to operate local telephone services, while ASST was established to run the trunk inter-urban and international services. Three of these concessionary companies, STIPEL, TELVE and TIMO, became part of IRI in 1933. The other two concessionary companies were TETI and SET, and for the moment they remained independent.

World War II devastated large parts of Italian industry. The telephone facilities, however, came out of the war relatively unscathed. Only 15% of the telephone exchanges and 17% of the interurban telephone network were destroyed. In addition Società Italiana Telecommunicazioni Siemens (SIT-Siemens) and the Italian subsidiaries of some other foreign telecommunications equipment manufacturers were taken over by the TETI group after the war as a result of a reparations agreement. This group was nationalized by IRI in 1957 together with the SET group. Control was transferred to STET the following year, thus enabling telecommunications in Italy to expand considerably. All nontrunk telephone operations were now under IRI’s control, simplifying the introduction of subscriber trunk dialing when it was introduced. The acquisition of TETI also allowed STET’s telecommunications equipment manufacturing activities to develop.

In 1961 STET established a satellite telecommunications system company, Telespazio, as a joint venture with Italcable and with RAI, the state radio and television monopoly. In the following year it was granted an exclusive concession to operate commercial satellite services. IRI’s various assets included businesses in the electrical power sector that were sold to the newly nationalized electricity industry in 1964, providing additional funds for STET to develop its telecommunications activities. At the same time, the five concessionary companies were merged into SIP, previously a hydroelectric company formed by STIPEL and RAI.

Servici Cablographici Radiotelegrafici e Radioelettrici (Italcable), one of STET’s partners in Telespazio, was acquired in 1965. An agreement with the Ministry of Postal Services and Telecommunications three years later extended Italcable’s scope. Until then, intercontinental telecommunications links had been its sole function. Its responsibilities were now expanded to include telephone, telegram, telex, and data transmission services to all foreign countries except those physically bordering Italy and Albania, Greece and Egypt. ASST’s domestic role was modified, restricting it to calls between specified central exchanges, and the rest of the domestic network was handled by SIP. STET was also given responsibility for IRI’s electronics interests. The electronics activities that were in Finmeccanica were reorganized and placed within STET in 1970. STET had already taken over Raytheon’s subsidiary the previous year. It then established a joint venture with Siemens and SIT-Siemens, named Siemens Data, to distribute computers in the Italian market. A ten-year plan introduced in 1970 emphasized the potential that extensive research in the electronics and computer industry could have on its telecommunications activities. IRI was in the forefront of the desire to integrate computers and communications.

State ownership of SIP appears to have been detrimental to Italy’s telephone services. Not only was there considerable fragmentation with SIP, Italcable, and ASST all operating independently, but there was also serious neglect of the telephone network during the 1970s, resulting in a significant decline in the quality of service. Rates were kept down to help fight inflation, and investment was curtailed. Rate increases from 1980 improved SIP’s finances and laid the groundwork for the other changes that were to come.

STET and its constituent companies were transformed in the 1980s, especially after Romano Prodi became president of IRI in 1982. One element of his policies was the partial privatization of selected state-owned enterprises to raise funds, although maintaining state control over these operations was regarded as essential. There were changes in the ownership structure of STET and several of its companies, of which Sirti was the first. Once IRI had obtained the return of Pirelli’s 30% holding in 1985, in exchange for holdings in STET and in SIP, more than 40% of Sirti’s shares were privatized. IRI then reduced the state’s holding in SIP from 85% in 1985 to 65% in early 1986 to 51% in 1991. IRI reduced its holding in STET from the 88% it held in 1985. IRI in the early 1990s owned 69% of the ordinary shares and 52% of the savings, or nonvoting shares. There were plans to reduce the state holding to as low as 30% of the savings shares, although these plans appear unlikely to be implemented.

These changes were followed by a major modernization program, as STET sought to overcome years of neglect of the telephone network and to upgrade its quality. The Itapac packet switching network, handling data in the form of units that are routed individually through the network, was introduced in 1986. SIP then introduced its five-year Piano Europa modernization program, with a budget of more than L36,000 billion, part of which came from the privatization of SIP. The installation of new digital public switching systems and telephone lines was aimed at a rapid increase in the number of telephone subscribers, from 33% of the population in 1987 to 42% by the end of 1992. The ability to achieve this was heavily dependent on the extent to which Italtel, as SIT-Siemens had been renamed, could develop adequate equipment. It traditionally supplied about 60% of SIP’s requirements.

Italtel, too, was transformed under Marisa Bellisario, who took over as managing director and chief executive officer in 1981. She reduced the work force by more than 35% between 1980 and 1985, replacing almost half the management, and increased its research spending to a level of 11 % of turnover. She was eager to obtain foreign technology, especially digital switching equipment. To this end she entered into a joint development project with GTE Corporation of the United States and the Fiat Group’s Telettra subsidiary in 1982. The outcome was the Linea UT public switching system, first installed in Italy in 1984 and since then becoming the dominant system. GTE’s interest in continuing the cooperation disappeared in 1986 when it sold 80% of its manufacturing operations in Italy, Belgium, and Taiwan to Siemens. This presented STET with a dilemma. Developing a new telephone switching system required enormous resources. At the same time, an increase in domestic competition was expected as the European Commission’s measures to liberalize telecommunications markets intensified. By the early 1990s this had only a limited impact. Noncentralized parts of Europe’s telecommunications equipment markets have been opened to competition. The ability of telecommunications operators to use type approval as a way of eliminating competition in the supply of telephones and facsimile equipment was reduced, and mobile telephone services were being liberalized. The result of these twin pressures was a considerable restructuring in the European telecommunications equipment sector. Italtel was too small to finance these enormous research and development costs and to compete internationally. The company made less than 10% of its sales overseas, and its exports were concentrated in the peripheral markets of East Africa, Latin America, and the Middle East.

Italtel had long recognized its need for a major foreign tie-up to provide new technology and access to foreign markets. In order to strengthen its domestic base prior to any foreign link, it proposed merging its activities with those of Fiat’s Telettra into a company to be called Telit. After two years of discussions and negotiations, Fiat broke off the talks in 1987, claiming political interference. The problem was the unwillingness of either side to give up management control over a joint venture. IRI had announced that Marisa Bellisario would be managing director of Telit two months after Gianni Agnelli and Cesare Romiti of Fiat had apparently agreed with STET’s chairman that the director-general of STET, Salvatore Randi, would take that position. Randi had previously worked for Telettra, while Bellisario’s close connections with the Socialist party were inimical to a Fiat involvement. In any case, this initial emphasis on establishing Telit may have been misplaced. Telettra, which was about half Italtel’s size, was much weaker than Italtel in all areas apart from the transmission sector. The two companies combined would not have made much of an impact internationally, even though half of Telettra’s sales were overseas. There were sporadic attempts to reactivate the discussions, especially after Bellisario’s sudden death in August 1988. These talks came to nothing, and in June 1989 Italtel chose American Telephone and Telegraph (AT&T) as its international partner in preference to Alcatel, L.M. Ericsson of Sweden, or Siemens, the other applicants. Italtel took a 20% share in the Dutch-based AT&T Network International, and AT&T took a similar share in Italtel, contributing US$150 million to the company. This was followed soon afterwards by major changes in the ownership structure of AT&T Network International. Philips withdrew, and Telefonica of Spain took a 6% share. AT&T and Italtel set up an export marketing joint venture to promote sales of Italtel equipment to Greece, Portugal, and Spain, among other countries, and Italtel agreed to market AT&T’s System 75 and Definity private switching systems and other products in Italy. STET still coveted Telettra, wanting to buy it and merge it with Italtel. Instead Fiat established closer links with the French Compagnie Générale d’Electricité (CGE) in October 1990. Part of this agreement involved an asset swap, with Telettra going to CGE’s subsidiary Alcatel.

Italtel had been developing its business links with the Soviet Union and Eastern Europe independently of its new relationship with AT&T. A distribution and technical agreement with a Polish telecommunications company was announced in November 1990. Much more significant was the announcement in the same month of the formation of a new company, Telezaria, to produce its Linea UT digital exchange in the Soviet Union. It will hold 40% of the company; the remainder will be held by the Soviet telecommunications company Krasnaja Zarja. The choice of AT&T should strengthen the group considerably, though AT&T has so far been notably unsuccessful in European equipment markets, with overseas equipment sales in 1987 estimated at only US$300 million. In the early 1990s Telezaria was aiming to supply a quarter of the Soviet Union’s requirements for telephone lines, with sales expected to be more than US$3 billion during the next 20 years, 15% from exports. This may make it as important to Italtel as the AT&T link was.

Changes had also been taking place in the electronics sector. In 1987 SGS merged its semiconductor activities with Thomson Microelectronics of France. Both companies had been undergoing major changes, internationalizing their activities extensively. In 1980, 80% of SGS’s production was in Italy and France. At the time of the merger only about 5% of production was in these countries, with the main production sites in Malta, Malaysia, and Singapore. Thomson had acquired Mostek’s assets from United Technologies in 1985, and it had other production facilities in Morocco, Singapore, and Malaysia. At the time of the merger of the semiconductor operations of these state-owned groups, the French and Italian governments agreed to provide funding for half of SGS-Thomson’s research costs and for the continuing losses of the group. The joint venture was based in Italy, with English the business language of the group. Following the merger, SGS-Thomson’s 23 plants were rationalized. In 1989 the British semiconductor producer Inmos was acquired from Thorn-EMI, which itself took a 10% share in SGS-Thomson. Marketing of Inmos’s products has been integrated with that of SGS-Thomson’s products. In 1990 SGS-Thomson set up a joint venture with the Hong Kong-based Astec to address microelectronics applications for power conversion equipment. The opportunity for SGS-Thomson to develop further will require expansion of the group. It wants to enter the digital random access memory sector, difficult though this will be, but cannot afford to do so independently. As political priorities give preference to a European solution, rather than the choice of a Japanese partner, and with both Siemens and Philips seemingly uninterested, the options for SGS-Thomson are limited.

Most of STET’s other operations are within Italy. This is largely a reflection of the fragmentation of the group’s activities and the limited scope of each part. SIP’s role, for example, is strictly domestic, but this emphasis is beginning to change slowly. Initially STET was interested in taking part in the lucrative mobile telephone licenses that were being offered in some European countries, was a member of a consortium that in 1989 was unsuccessful in obtaining a license for Germany, and withdrew at the same time from another consortium for the United Kingdom. In the following year, the consortium of which STET was a member acquired the northern operations of the privatized Argentinian telephone company Empresa Nacional de Telecomunicaciones (ENTel). STET has slightly less than one-third of the holding company Nortel, which will own 60% of the northern operating company Telecom Argentina. STET is thought to have taken part in the consortium because of Italian governmental pressure to support the Argentinian government’s privatization program. The aim of the program was to exchange the Argentinian government’s enormous debts for shares in selected state-owned corporations, with foreign banks playing a key role in the consortia formed. The international links of Italcable are also developing. It is active in an international consortium building a Mediterranean and transatlantic optical fiber cable that uses special glass fibers to transmit laser light pulses giving on and off signals of digital information. It has also been expanding its North American operations. In 1986 it acquired 20% of Voice Mail International, a company involved in recorded voice communications services in the United States, and in 1991 it acquired a similar share in the long-distance telecommunications operator LCI Communications, entering into a research and development collaboration with the company.

With IRI once again under firm political control, Romano Prodi having stepped down as president in 1989, the policies of the 1980s may not be continued. The electronics activities have been transferred to Finmeccanica to enable STET to concentrate on telecommunications. The proposal to transfer ASST to STET foundered because of the need for parliamentary approval, something that was not, as of the early 1990s, forthcoming. The possibility of integrating the disparate parts of Italy’s telephone network will have to wait.

Principal Subsidiaries

Società Italiana per L’Esercizio delle Telecomunicazioni p.A. (51%); Italtel (80%); Société Internationale pour les Résaux de Télécommunications et les Installations; (60%); Servizi Cablographici Radiotelegrafici e Radioelettrici (54%); Telespazio.