In response to these pressures, Leopoldo Pirelli – grandson of the founder Giovanni Pirelli – sought to pursue a strategy of acquisitions in order to build the company. But all did not go according to plan. In 1988, Pirelli approached Japanese rubber conglomerate Bridgestone, with a view to acquiring their US division, Firestone Tyre & Rubber, which Bridgestone had only bought a few months earlier. Bridgestone didn’t want to sell, but Pirelli aggressively pursued the deal. In the end, the transaction fell through, with the endeavour that Pirelli had put into the dealing proving very costly.
Unrelenting, the following year, Pirelli turned its attentions to German rival tyre manufacturer Continental. But discussions between the then fourth and fifth largest tyre producers in the world was fraught with difficulties, including Continental’s public disclosure of details of supposedly private discussions between the two parties and Pirelli’s underhand acquisition of Continental stock by a third party investor group, in an attempt to take a greater shareholding in the group.
As a result of this, Continental pulled out of the merger altogether, leaving Pirelli an estimated $300m out of pocket as a result of the acquisition of Continental shares. Pirelli shareholders were not happy and the company posted a loss of 48 US cents per share in 1991, a dramatic reduction from the earnings gain of 11 cents per share seen the previous year.
As a result of this unsuccessful strategy, in 1992, the board had no option but to remove Leopoldo Pirelli from his post. His successor was Marco Tronchetti Provera the husband of his predecessor’s daughter. Provera had joined the group in 1986 as managing partner and had moved swiftly through the ranks, in 1988 being appointed CEO and general manager of the firm’s Swiss division, Société Internatioanle Pirelli, then in 1991 becoming CEO and general manager of finance and administration.
His appointment as CEO was regarded by many as an act of pure nepotism, especially as he had leap-frogged a couple of more senior and more-experienced board members on his way to the top. The long-standing ties between the wealthy Provera and Pirelli families were well recognised, and moreover, Provera was the former CEO’s son-in-law, married to Cecilia Pirelli.
But the family name was not all that Provera had in his armoury. Prior to joining Pirelli, Provera had worked in his family’s maritime transportation company and successfully launched a new division of the business. But as a fledgling businessman, upon his arrival as CEO of Pirelli, he was handed a company that was close to bankruptcy. In addition to the recession, the failed acquisitions had burdened Pirelli with a total debt of close to $2.5bn.
Restructuring: tyres and cables
Upon assuming the position as head of Pirelli, Tronchetti embarked upon a wholesale restructuring of the business, divesting some of the non-core assets that Pirelli had acquired over the previous two decades, including the conveyor belt division, the apparel-manufacturing arm, as well as a large chunk of its Milanese real estate portfolio.
Furthermore, he reduced the number of divisions from nine to just two: tyres and cables. Such divestiture raised more than $500m for the company, and also saw the head count fall from more than 53,000 from the time he took over, to 38,000 in 1994. These measures meant that, by 1994, Pirelli was able to halve its total debt to $1.25bn.
Pirelli’s fortunes continued to improve throughout the 1990s. Following a loss of 650bn Italian Lira (today €335m) in 1991, the company returned to profitability in 1994, posting an EBIT of €72bn Italian Lira (today €37m). By 1996 net income had risen to €225m and the company made its first dividend to its shareholders in five years.
On the tyre side of the business, one of the driving forces behind this was Provera’s understanding that Pirelli could not compete with the growing high-volume/low-price production model of the ascending Asian market. Provera, therefore, took the opposite route, instead focusing the company on high-performance/premium value tyres. Accordingly, by 1995, Pirelli had captured 12 percent of the European market, a market share only surpassed by Michelin.
But it was the cables division of Pirelli that Provera strengthened the most, developing the company into one of world’s the leading manufacturers of both power and fibre-optic cables, thanks to a series of acquisitions. Firstly, in 1998, Provera oversaw the $270m purchase of the power cables operations of Siemens, establishing Pirelli as the world’s leading manufacturer of energy cables. This was followed a year later by the the acquisition of the respective cables divisions of Australian firm Metal Manufacturers, Dutch company NKF and BICC General.
Most notably, Provera also sought to advance the company’s fibre-optic and telecommunications cables manufacturing capacity over that of power cables. Ploughing hundreds of millions of the company’s Euros into a project to develop a stand-alone fibre-optic network, Pirelli effectively created the infrastructure that would engender the development of the internet.
If anyone had queried the rationale behind Provera’s decision to focus the company on developing the cable business over its traditional tyre production, their questions would be answered at the turn of the 21st century. Firstly, in 2000, the company sold its core fibre-optic equipment business to Cisco Systems for a sum of approximately $2.2bn, and then divested its fibre-optics components division to Corning for $3.6bn.
Telecom Italia
Few could have predicted the following move. Having amassed a war chest of more than $5bn, in 2001 Pirelli made a bid for Telecom Italia – at the time the fourth-largest telecoms firm in Europe. The deal proved to be fairly complex. In 2009 Olivetti had taken a 55 percent shareholding in Telecom Italia as part of a highly-leveraged management buyout. In carrying out the transaction, Provera had taken advantage of his family ties to join forces with the Benetton family, at the same time bringing on board two of Italy’s largest banks, Bunco Intesa and Unicredito, together with the independent investment fund, Hopa, to structure a €7bn deal to take a 27 percent stake in Olivetti, thus taking control of Telecom Italia. To facilitate the transaction, Pirelli established a new holding company named Olimpia, with Pirelli holding a 60 percent stake in the new company.
Within a short time, Provera had turned around the fortunes of the debt-laden Telecom Italia. By divesting non-core assets and rolling out its mobile telecoms business throughout Europe and Latin America, by the end of 2002 Telecom Italia revealed profits of $1.7bn, on the back of losses of a similar magnitude the previous year. With the Telecom Italia acquisition, Pirelli now had five principal divisions: Tyres, Telecoms, Energy Cables, Telecoms Cables and Real Estate. But in 2005, following the €1.3bn sale of both the cables units to Goldman Sachs Private Equity, the group’s focus remained purely on Tyres, Telecoms and Real Estate.
Indeed, the tyre division, which had been put on the back burner since the mid-1990s, was proving to be an unexpected success. Thanks to Provera’s decision, taken in the mid-1990s, to operate solely in the high-performance segment, in 2004 the tyre business posted its best results in a decade, recording profits of €170m on a turnover of €3.25bn.
As always under Provera, change was not far over the horizon. In 2007, Pirelli sold Olimpia – and hence its entire shareholding in Telecom Italia – to a group of Italian banks and investors including Intesa, Mediobanca, Generali, Sintonia and Telefonica. In 2008, Provera then set about the task of restructuring the group’s real estate arm, the division which had bourn the brunt of the global economic crisis. True to his tried and tested formula, Provera made two-thirds of its staff redundant, sold off a collection of non-core assets, and implemented a rights issue to help reduce its debts. Further to this, in May 2010, Pirelli announced that it would divest its real estate division.
Provera’s captaincy of Pirelli has seen change after change after change. From restructuring the whole group upon his accession to the throne, he then bought and sold Telecom Italia within the space of five years. If his first instinct was to focus on cables, in today’s market he is looking to refocus the group on tyres once again. As he himself said in an interview with the Wall Street Journal in 2009: “You never stop restructuring. You keep looking for efficiencies in all areas of your business.”