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Small companies are the backbone of Italy’s economy. Now those tiny enterprises face succession woes and foreign competition – making them perfect U.S. targets. The death of Fiat S.p.A. magnate Gianni Agnelli in January signaled the end of an era, not only for his company, but for his native Italy. Agnelli was the icon for the so-called Italian postwar economic miracle. He was the most celebrated member of a group of industrialists, leading both large and small companies, who made Italy the chic, stylish country visitors encounter today. Many of these small and midsize enterprises (SMEs), the backbone of the country’s economy, were founded by the postwar generation of the 1950s and 1960s. That generation of patriarchs is retiring, and, as a result, many of these businesses are exploring whether to put themselves up for sale, seek foreign investment or, at the least, bring in outside managers. This generational change also comes at a time when the country has passed a number of business reforms, which have made Italy a more hospitable place for foreign investment. While the reforms have made a big difference in U.S. companies’ willingness to invest in Italy, American in-house lawyers and other executives warn that bridging these cultural differences can often be the toughest part of the deal. Thousands Of Specialists Italian business may be best known for Fiat, Benetton Group S.p.A., Olivetti S.p.A., and other giants in the fashion, auto, and telecom industries. But Italy is also a land of tens of thousands of smaller, lesser-known companies with between ten and 500 employees, according to the Italian Ministry of Industry. ISTAT, the Italian statistical agency, reports that 58 percent of Italy’s labor force works in companies with 50 or fewer workers. Those enterprises manufacture everything from high-fashion items to electric motors to robotics. While many of those are small, artisanal shops, some SMEs “possess a high degree of technological expertise,” says Guido Testa, a Milan-based lawyer with the firm Vita Samory, Fabbrini e Associati. But many of those companies are now at a crossroads. A 1999 report by University of Naples economics professors Guido Capaldo and Mario Raffa examines the inward-looking culture of Italian family businesses in particular. The authors cited the companies’ reluctance to seek outside financial help as a bar to expansion and a future threat to their viability. Paolo Volpin, a professor at the London Business School and a fellow at the European Corporate Governance Institute, says, “These companies � especially those who manufacture commodities and not high-style, made-in-Italy luxury goods � are under more pressure than ever to change.” Much of that pressure comes from abroad. In eastern Europe and Asia, original equipment manufacturers (OEMs) are proving they can produce many of the same goods for less. That competition, along with the generational turnover, has made these smaller Italian enterprises more willing to seek outside investment or merger partners. American companies have been receptive. In January, Penn Engineering & Manufacturing Corp. of Danboro, Pennsylvania, announced the acquisition for $9.9 million of the 90-employee Italian electric motor maker M.A.E. S.p.A. of Offanengo, in Lombardy. The small American biotech company Versicor, Inc., acquired the 100-employee Italian company Biosearch Italia S.p.A. in March. (After the $260 million deal between the two antifungal drug specialists, the new company changed its name to Vicuron Pharmaceuticals.) In May the American financial publisher D&B, Inc., acquired controlling interests for $8 million in three privately held Italian real estate data companies: 100 percent interests each in Italservice Bologna S.r.l. and Datanet S.r.l. and a 51 percent interest in RDS S.r.l. There’s been “a real generational shift, and a major shift in business mentality,” says Susan King, a solo practitioner based in Varese, Italy, who left her five-year stint as an in-house lawyer for Whirlpool Corp. in Italy in 2001. “Ambitions are being reshaped and enlarged, and the ideas of what constitutes good management, and what it takes for a company to be successful, are rapidly being redefined, updated, and Americanized.” For years, however, U.S. companies were wary about investing in Italian businesses of any size. Direct investment by U.S. companies has historically been low in Italy, hovering around $2 billion a year, in contrast to $20 billion annually in France and about $60 billion in the United Kingdom, according to the Milan-based American Chamber of Commerce in Italy. American businesses were put off by the country’s stifling bureaucracy, baffling regulations, and byzantine licensing requirements. But Italy, partly as required by its membership in the European Union and partly on its own, has started to make life easier for the private sector, which, in turn, has helped make the country more appealing to outside investors. The government in the past decade has sold off most of the large state enterprises in such sectors as energy and telecommunications. And the center-right administration of Silvio Berlusconi has pushed through further changes, such as a law that bolsters shareholders’ rights and streamlines litigation. Over the next few years the government also will phase in a long-awaited simplification of the country’s complicated tax code, making it possible, for example, for subsidiaries to consolidate taxes with their parent companies. That way, divisions with profits could offset losses in other parts of the company. Under the current system, says Massimo Agostini, who heads the tax department of Rome’s Gianni, Origoni, Grippo & Partners, each entity must file and pay separately. Dean Santucci, international tax director for New York�based Dover Corporation, which in 2001 acquired Vertex Pistons in Bologna, says of these changes: “Companies like us used to look at Italy with trepidation. But these reforms will pave the way for greater investment.” Taking The Time To be sure, U.S.�Italian deals aren’t new. The small biotech firms Versicor and Biosearch Italia, for example, were drug license partners, before their merger this spring. In 1996 Biosearch first licensed the manufacture of Dalbavancin, an antibiotic used to combat hospitalwide infections, to Versicor. After a few years of working together, the two decided that their strengths � Versicor’s trial and marketing prowess and Biosearch’s research capabilities � complemented each other, and they decided to merge. Biosearch was a model Italian takeover target: technically innovative and small, but without family baggage. According to industry analyst Eun Yang, of Needham & Co., the two companies were natural merger partners. “Versicor got entry into the European market, while Biosearch gained Versicor’s market expertise,” says Yang. But not all mergers are so straightforward. Italian owners often have a huge emotional stake in their businesses, so the acquisition process usually requires intense hand-holding and relationship-building. Company ownership, says Volpin, “is often bound up with the prestige of the family, which is very important to Italians.” Attorney Giuseppe Tomasetti, who shuttles between Studio Legale Tributario’s Milan office and New York, says, “I tell my clients [that acquiring an Italian company is] going to take three times as long as you expect, cost three times as much, but if it all works out, you’ll make three times as much as you planned.” One lawyer from a multinational corporation got a crash course in cultural differences, particularly when it comes to work habits. Last year Cendant Corp.’s European operation acquired Sigma, Alitalia�Linee Aeree Italiane S.p.A.’s travel services system. Marius Nasta, general counsel and senior vice-president of Cendant EMEA, as the European/Middle East/Asian arm is called, lived in Italy for six months while shepherding the deal and working with outside counsel Bonelli Erede Pappalardo. At a crucial point in the negotiations, Nasta says, he found himself the only lawyer from his side attending a Friday evening meeting. “Bonelli is still very Italian,” he says. “Our lawyers went home.” (Nasta hastens to add that his lawyers worked late into the night the rest of the week.) Left At The Altar At least Cendant’s deal was successful. Another U.S. company courted an Italian family firm but never got to the altar. In 1998 Huber Engineered Woods, which makes building supplies such as flooring, was looking to acquire a company with expertise in wood veneers. Executives for the Charlotte, North Carolina�based subsidiary of J.M. Huber Corporation thought they had found their match: an Italian wood products company in the hills north of Milan. The Italian company, which Huber’s in-house counsel Michael DiTano declined to name, is family-run and privately held, just like Huber. Buying the concern seemed straightforward enough. There were a handful of owners, all family members, and Huber executives sat down with them to work out the deal. There was only one problem, says DiTano: The five principal owners never all showed up at meetings at the same time, something DiTano likened to a “Three Stooges act.” Huber officials would meet with three of the owners and draft a memo of understanding with them. The owners present at that meeting would say, “We’ve got to show this to the others, but there shouldn’t be any problem.” But after more than three years of discussions, the merger never happened. The absent owners couldn’t agree on all of the terms, or else would say that those present at a given meeting didn’t have the authority to sell. DiTano suspects that the five principal owners couldn’t all agree on the details, but didn’t want to show their hand. To avoid such problems, the ex�Whirlpool counsel King has some key advice: Make sure you know who the true principals in a company are. She’s seen foreigners discussing an acquisition with someone purportedly in authority, only to find later that another relative owned a controlling share. Go to City Hall, she says, and check the records of ownership. But despite these frustrations and the extra effort, lawyers say that most deals get done. Cendant’s Nasta says that he teases his Italian colleagues. “I told them, ‘You guys wouldn’t survive in an Anglo-Saxon world.’ They laughed and told me, ‘We will, it’ll just take some time.’ “

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