It must be a terrible thing for a business to face “reopening headwinds”. This is how a Wall Street analyst characterizes the disappointing quarter and outlook presented by Zoom Video Communications’ management on Tuesday’s earnings call. While the Pandemic may have accelerated the rate of digital adoption, it is no less true that a large customer base coupled with other incumbency advantages in combination with deep pockets remains a great advantage when new markets open up. Microsoft Teams is not free, but it is included in the office license, and is also conveniently displayed on the Outlook task bar. We wish Zoom enthusiasts all the best in their David against Goliath struggle. In any case, should history repeat itself; this still fast growing company will receive a tempting offer to merge with a bigger company soon. In this kind of effervescent environment, smart people are actively on the outlook to acquire assets, revenues or customers and place them under their gargantuan market capitalizations. Just as the fourth wave takes off in Europe, WFH (work from home) stocks are finishing a round of earnings that suggests that sometimes, the classics are more informative about the future than youthful enthusiasm for shiny new things.
Yet, just as soon as market participants started writing off WFH as a thing of the past, we went to bed on Thanksgiving day with the news that a new mutation of the virus had been identified in Southern Africa. The WHO quickly moved to classify the newly named Omicron variant as a variant of concern just as it did previously with the Alpha, Beta, Gamma, and Delta variants. Journalists did not miss another chance to stoke mass hysteria by pointing out the obvious as they did at the time of the appearance of all the other variants of concern. Fear took over greed in financial markets in yesterday’s abridged session. For those unfamiliar with Black Friday sessions, we will just point out that this is the date that a famed top-tier Wall Street investment bank chose to mark its fiscal year-end for decades. Rumour had it that their traders took advantage of the illiquidity on Black Fridays of yonder to mark down some positions to build up some P&L reserves for the following year. Thus, markets on Monday may be a different story. In any case, we may not know for 100 days or so whether the available vaccines are effective against the Omicron variant. Perhaps this second wonderful market year may not have a stellar finish after all. (By the way, does anybody know the reason for the 11-letter jump from Delta to Omicron?)
WFH stocks are not the only theme buffeted in recent weeks amidst the whims of nervous investors; Covid beneficiaries have also suffered, as well as SPACS, reopening plays, payment companies and other recent Go Go stocks, not to speak of Chinese tech stocks, which are the current whipping boy on Wall Street. It is fitting that in the middle of this stealth carnage, as the FAAMGs continue their upward march propelling all the indices to new all-time highs, for KKR to announce an unsolicited tender offer for Telecom Italia. To remark that this headline triggered a long spell of nostalgia would be an understatement. The headline was a digital madeleine that brought back memories of a much simpler proto-Internet time full of unmet promise and unwarranted optimism. The Italian government has made it clear that it has three priorities in analysing a potential offer for TI. These are protecting employment, protecting technology and protecting the network. Little has changed in nearly a quarter of a century since Telecom Italia was allegedly quietly approached by Deutsche Telecom. The Italian Government still has veto powers and shareholders’ rights are of no concern in the discussions that will take place over the next few days.
Interestingly, Dr Mario Draghi, the current Italian Prime Minister, already played a relevant role in the partial takeover choreographed in the late 1990s to keep Telecom Italia under Italian control. We met Dr Draghi in April 1999 at a conference near Como where he was the dinner guest speaker. Back then, Dr Draghi was the Director General of the Italian Treasury. His address, versed on a new Law, popularly known as the Draghi Law, which he claimed would forever improve and modernize Italy’s infamous corporate governance. Many people believed that the Draghi Law would take care of minority shareholder rights in a way that would prevent a repetition of the recent partial takeover of Telecom Italia by a cascade of levered Chinese boxes on top of which sat Tecnost-Olivetti as a controlling shareholder (through Bell an aptly named SPV). The head of Tecnost-Olivetti, Roberto Colaninno had already tried to swindle Telecom Italia shareholders by offering an exchange of telecom Italia Mobile shares for Tecnost shares. Colaninno was a very shady character acting as a front man for Carlo de Benedetti after the latter’s fall from grace. The plan was for Carlo’s son Marco to run an asset stripping exercise of one largest companies in Europe with €9billion in annual cash flow and just €9 billion in debt. Colannino was in essence a strawman; nevertheless, he received widespread support for his eventually successful blocking manoeuvre that thwarted an unannounced Deutsche Telekom takeover attempt on Telecom Italia. The subsequent history of Telecom Italia is a case study on how to defile shareholders’ rights while destroying value.
Olivetti’s financial targets were not achieved in spite of some sales of assets and layer upon layer of debt. By 2003, the banks in the syndicate were getting impatient with their exposure to telecoms and possibly suggested the merger of Olivetti and Telecom Italia. The merger terms were a terrible deal for Telecom Italia minority shareholders as they were asked to buy Olivetti’s Telecom Italia stake at a premium to market prices. The terms were in fact so prejudicial to Telecom Italia shareholders, in spite of the Draghi Law, that one of the investment banks that provided a fairness opinion changed its policy for accepting such engagements as its Prime Brokerage department was put in the penalty box by many of its large customers because of this fiasco. In 2005, Telecom Italia merged, also in beneficial terms for Tecnost-Olivetti, with its mobile subsidiary Telecom Italia Mobile in order to eliminate the “leakage” of minority interest and gain access to 100% of the group operating cash flow. In spite of all these transaction, the deterioration of the business and the huge debt pile amassed to persevere on a self-defeating dividend policy have yielded a total shareholder return of -79% (including dividends) for the period going from that patriotic intervention of the spring of 1999 to the Friday before the KKR announcement. So much for benefits of the Draghi Law.
For the lucky few who bought Telecom Italia shares recently, this bid is a dream come true. If they were to study carefully the history of the governance of this company, they would be well advised to take some profits just in case politicians once again scuttle a beneficial deal because of national security concerns. For others, this is further proof that the long-suffering telecom industry is due for a revival. In any case, this offer has already triggered a knee jerk reaction from the Spanish Government to extend a legally dubious blanket protection on Telefonica from an unsolicited bid. It would be preferable if Telefonica shareholders tried to protect themselves from their current board of directors and management. More specifically from two large shareholders with board representation which persist on demanding an unaffordable dividend policy that a dutiful and pliant management funds with dilutive asset disposals when piling on more debt was no longer an option. Thus Telefonica’s total return since April 1999 is -6.5%. While this may seem to be a marvellous outcome when compared to France Telecom (-55%), Telecom Italia (-79%), or Portugal Telecom (-100%), it is less compelling when one observes that Deutsche Telecom returned 9.6% or Hellenic Telecom returned 38% for that same period These are the long term returns for some of Europe’s largest companies in revenues and total assets. Banks, another large European industry, has probably fared worse. This is as well the Europe claims to be a world leader in adherence to ESG principles. “Se vogliamo che tutto rimanga com’e, bisogna che tutto cambi.” remains as true today as ever before. Caveat emptor.