Power player?

Gabriele galateri di genola taps a black loafer nervously under the table as he leans forward in an ocher leather chair in Harry's Bar at the Duchi d'Aosta, Trieste's most elegant hotel. It is not quite 8:00 a.m. on April 25, and in less than an hour, he will make his public debut as chairman of Mediobanca, the powerful Italian investment bank. Shareholders of Assicurazioni Generali, Mediobanca's biggest holding, will vote on his nomination to the insurer's board at its annual meeting.

"I'm not nervous, but I am hungry," confides Galateri, as he rises to visit the buffet line. Returning with a croissant and a strawberry yogurt, he greets Theo Waigel, the former German Finance minister who is a candidate for Generali's advisory board. Next Galateri fields a call from Giovanni Bazoli, chairman of Banca Intesa and one of the barons of Italian banking. Galateri excuses himself and takes his cell phone outside to discuss last-minute preparations for the Generali meeting. Intesa is the insurer's primary insurance partner and one of its larger shareholders.

Then, after gulping down his breakfast, the tall, 56-year-old aristocrat dons sunglasses and strides across the Piazza Unita d'Italia, swerving between sanitation workers in green fluorescent jerseys. Before stepping off the curb into the maelstrom of traffic, he pauses to get his bearings, scanning the waterfront for Generali's neoclassical headquarters.

"Now, where is this place?" he asks.

Galateri may not know Generali's precise location -- the entrance is, appropriately for a Mediobanca property, on via Machiavelli -- but the insurer's importance is not lost on the new bank chairman. Mediobanca's 14 percent stake in Generali accounts for half of the bank's E 6.8 billion ($8.4 billion) market value. Moreover, a bitter struggle for control of Generali is what propelled Galateri into his job just two weeks earlier.

Galateri has taken control of Mediobanca at a particularly crucial moment. The bank is beset by rivals, many of which -- in the internecine ways of Italy -- are its shareholders and in a position to thwart its actions. Ironically, bank founder Enrico Cuccia crafted this web of personal connections and cross-shareholdings to outmaneuver and frustrate his competitors. Today it weakens Galateri's hand. He will need all the wisdom, and gray hair, he acquired in his nearly two decades as a top financial adviser to Fiat's powerful Agnelli family to navigate the increasingly treacherous byways of Italian finance.

The Generali meeting, at least, goes according to plan. The shareholders approve Galateri's nomination as well as the entry of representatives from the banks like Intesa and UniCredito that recently acquired stakes in the insurer. And Galateri's public debut passes without any sign of the conflicts that put him in the chairman's seat at Mediobanca in the first place.

Mediobanca is a singular institution. Rarely do banks of any sort wield such influence in any other country. Only Rothschild's grip on Britain's stock market at the turn of the 18th century and J.P. Morgan's dominance of American finance in the early 20th century approximate Mediobanca's sway over corporate Italy in the postwar period. The man who shrewdly exercised this power, Cuccia, founded Mediobanca shortly after World War II and presided over it for a half century until his death at 92 in 2000. While the Sicilian financier lived, nothing happened on Milan's Piazza Affari -- Italy's Wall Street -- without his say-so.

When Cuccia died all that changed. Almost immediately, the companies in Cuccia's galaxy became targets. Mediobanca itself became the subject of an ownership struggle. Today about one third of the company is in public hands. About 57 percent is held in a shareholders' pact that includes, among others, financiers like France's Vincent Bolloré, with 5 percent (French allies own another 5 percent); Italian industrialists, who own about 21.9 percent; and two of the country's biggest banks, Capitalia and UniCredito Italiano, which own 8.6 percent and 7.8 percent, respectively.

Within months of Cuccia's death, global securities firms swooped in to steal away clients. UniCredito and Capitalia weren't above wooing clients themselves. Even some of Mediobanca's longtime allies turned on it: Fiat launched a hostile E 5.8 billion bid for one of the bank's prized possessions, the Montedison chemicals and energy conglomerate.

During these turbulent years Cuccia's handpicked successor, Vincenzo Maranghi, battled for the firm's independence with his big shareholders, particularly the Italian banks. But his resistance to modernizing Mediobanca won him few friends. To forge allies, he welcomed Bolloré, whose accumulation of Mediobanca stock nearly won his group control of Generali. Finally, last April, the bank's shareholders reached an uneasy truce. The price was Maranghi's head. His two primary duties -- overseeing Mediobanca's holdings and managing the investment bank -- were given to veterans of the bank, Renato Pagliaro and Alberto Nagel, respectively. To supervise them, Mediobanca's board unanimously named Galateri chairman.

A longtime lieutenant to the Agnelli family, Galateri is no stranger to the corridors of business and financial power in Italy. Yet in many ways he seemed an odd candidate to replace master manipulator and schemer Cuccia. Though Galateri's educational pedigree is excellent (Columbia Business School, the University of Rome), his brief stint as CEO of Fiat ended ignominiously. And though he had spent nearly two decades managing investments -- as CEO of the Agnellis' two listed investment companies, Istituto Finanziario Industriale and IFIL -- Galateri had no experience as an investment banker. His training as a financial engineer had been of no use at Fiat, whose entrenched industrial problems needed the skills of an operational manager.

Some speculate that the Mediobanca board chose Galateri because he was not a power in his own right and would stand aside as the bank's biggest shareholders divvied up the spoils. Galateri's supporters, however, believe that his lack of business and political baggage makes him the only candidate capable of shielding the bank from its grasping shareholders.

"Even if he does not have the direct experience, Gabriele has certainly got the potential to take on Mediobanca's challenges," contends Paolo Scaroni, CEO of power company Enel. A classmate of Galateri's at Columbia Business School in 1971, Scaroni helped him get his first job as a financial executive in the late 1970s, at French glassmaker Saint-Gobain. "Most importantly," Scaroni says, "Gabriele has got the will to do what it takes."

Perhaps in Cuccia's day the will of one man was enough to determine Mediobanca's fate. Now many contending forces want a say in what becomes of the bank.

"There are two extreme scenarios for Mediobanca," suggests UBS's Furio Francini, who earlier this year became one of the first analysts at a bulge-bracket investment bank to publish research on the stock. "The first is that it will be ripped to pieces: These guys will strip it all out, get cash off the balance sheet and turn it into a weak boutique. The other scenario, in which Mediobanca continues to play a role at the very center of the Italian financial system, would imply that everyone is very adult and mature. With its governance still not entirely sorted out, it's not clear which direction Mediobanca is headed in."

Galateri is convinced that Mediobanca can continue to play a vital, if less omnipotent, role in Italy's business despite intensifying competition from domestic and foreign banks. In his vision Mediobanca would relinquish the Cuccia-era role of ultimate power broker and refashion itself into a contemporary investment bank, dispensing top-notch advice as well as an increasingly diversified and sophisticated set of products and services for Italian clients.

"It is still a bit early to judge where Mediobanca is going under Galateri," says Guido Roberto Vitale, a former Lazard partner who now runs a corporate finance boutique in Milan. "But it is clear that he is helping its evolution to a more client-friendly era."

This transition won't be easy. Mediobanca faces fierce competition, not least from its own shareholders. But it still has a long roster of friends. Last December besieged Parmalat turned to Mediobanca to sort out its soured domestic finances. And under Galateri, Mediobanca is showing pep: In the fiscal first quarter ended in September -- the first full quarter chaired by Galateri -- fee income rose 27 percent year over year, to E 69 million. Galateri wants to expand into other areas of the financial services market, from leasing and factoring to private banking. The bank is even toying with the idea of branching into areas of asset management such as private equity. The most noticeable evidence of Galateri's plan to shift Mediobanca away from its power-broker past is his willingness to take a more active trading approach with the group's collection of smaller investments.

Whether these measures will allow Galateri and Mediobanca's 300 bankers to mint money is still slightly dependent on the desires of its shareholders, particularly the two big banks that exert considerable influence on Mediobanca's board and its executive committee.

Galateri is determined to avoid Maranghi's mistakes. Though he has not yet faced a major test of his allegiances, he insists that he will not be a patsy for UniCredito, Capitalia, Bolloré or other board members who might like to see the firm weakened as a rival or dismantled for their benefit.

Galateri has made great strides in changing Mediobanca. It is more open and transparent. One sign of that openness: Galateri's agreeing to an interview with Institutional Investor. Cuccia and Maranghi never spoke to the press. And for the first time, Mediobanca executives are meeting regularly with shareholders and prospective investors.

"I don't feel that I owe anything to anyone -- I feel totally independent," says Galateri. "Make no mistake, if there is a battle that needs to be fought, I will step up and I will fight for all of the shareholders of this company."

AS HE ARRIVES FOR WORK AT 8:00 A.M. AT MEDIOBAN- ca's 17th-century palazzo, tucked behind Milan's La Scala opera house, Galateri passes an office that is kept locked but for an occasional dusting by a maid. The office was Enrico Cuccia's.

From the start the Mediobanca founder defined his mission as protecting private industry from the politics of Rome. Cuccia created a network of interlocking shareholdings with Mediobanca in the middle. He corralled his allies into voting pacts that made them impervious to takeovers while assuring them of access to capital. Mediobanca worked closely with Italy's biggest banks, from which it drew low-cost funds.

For years this setup worked wonderfully. When Fiat needed bailing out in the 1970s, Mediobanca brought Libya in as an investor. When tire maker Pirelli's liquidity problems scuttled its bid for Germany's Continental, Mediobanca arranged a 2 trillion lira rescue, allowing Pirelli to recover. (The deal ultimately fell through because of Pirelli's financial problems.) And in 1991 Mediobanca pulled the Ferruzzi Finanziaria empire from the clutches of bankruptcy by forcing lenders to take deep losses and swap their debt for equity. In every instance Cuccia played the roles of architect, engineer and, above all, protector.

Yet he was caught off guard by the rapid globalization of capital markets in the 1990s. That became dramatically clear in August 1995. While most of Italy was on holiday, Mediobanca announced a deal it called SuperGemina -- the three-way merger of Gemina, Snia BPD and Ferruzzi. All three were miniconglomerates, with interests ranging from chemicals and publishing to insurance and textiles.

The deal would have handed a chunk of Italian industry to Mediobanca and a few key allies. But to ensure control, Cuccia skewed the transaction against minority shareholders. For the first time, international investors allied with Italian ones to publicly chastise Mediobanca. The deal collapsed when Gemina's internal auditors refused to sign its accounts -- inspiring prosecutors to launch an investigation into possible fraud at its Rizzoli publishing arm.

The episode marked Cuccia's first big failure, and it sprang from his misreading of the new dynamics of the capital markets. The impending birth of the euro brought international investors into the Italian market. With them came the sweeping shareholder value movement, which lifted shares of companies that paid heed to their investors and punished those that did not.

Undaunted, Cuccia continued to try to bend the changed rules to his will. First, he attempted to acquire the national telephone monopoly that later became Telecom Italia from the government on the cheap. The Treasury Ministry's most-senior civil servant at the time, then­Director General Mario Draghi -- now a top executive at Goldman, Sachs & Co. -- rebuffed him. In 1997 Cuccia tried to engineer a merger of the Marzotto textiles group with Holding di Partecipazioni Industriali, a holding company created from Gemina's fashion and publishing assets. Again investors felt shortchanged by the deal -- and puzzled by its industrial logic. They succeeded in pressuring the Marzotto family to abandon the merger.

"Cuccia did things any which way he wanted, even if they were clearly not the right things to do," says Count Paolo Marzotto, one of the heirs to the textile and fashion business bearing his name. "This was one of the main problems of the old Mediobanca. The people there acted like they had a monopoly on brilliance -- and they didn't."

With each failure, Cuccia's authority ebbed. Nowhere was this felt more palpably than within the firm. Investment bankers found Cuccia's power games an impediment to winning new mandates in the flourishing deal climate of the bull market. U.S. and European firms like Lehman Brothers, Credit Suisse First Boston and Goldman Sachs came gunning for Mediobanca's business. To get it, they hired some of the firm's most promising bankers.

The first to leave, in 1997, was Gerardo Braggiotti, the highly regarded head of investment banking. His departure stung. He wanted Mediobanca to expand into the secondary markets, where big U.S. investment banks were flexing their muscle. Failing to persuade Cuccia, he opted to take a position as a senior partner at Lazard Frères. Lazard also lacked secondary markets expertise, but Braggiotti felt that it wouldn't be hampered in winning new business, as Mediobanca was, by conflicts of interest stemming from a big portfolio of corporate holdings.

Braggiotti's departure proved doubly injurious: It ended a decades-old gentlemen's noncompete agreement between Lazard and Mediobanca. Lazard has since become a top adviser to Italian companies and a key partner of former Mediobanca shareholder Banca Intesa. Braggiotti's successor, Matteo Arpe, tussled with Cuccia's successor, Maranghi, over the bank's future and left in 2000 for Lehman Brothers. He is now Capitalia's chief executive ( Institutional Investor , January 2003).

As Cuccia's brightest stars left, the Treasury's asset sales helped to create new forces in the Italian stock market, like energy giant Eni and power monopoly Enel, which were not in thrall to Mediobanca. To attract the interest of U.S. and British institutional investors, Draghi kept the power and energy companies out of Cuccia's realm of influence and made sure they followed the best practices of international corporate governance.

ITALY'S BANKS, IN WHICH THE STATE WAS ALSO selling its last holdings, were swept up in these changes, none more so than UniCredito, whose CEO, Alessandro Profumo, became Italy's most admired banker while in his early 40s. Through cost-cutting mergers at home and investments in fast-growing Eastern European banks, Profumo transformed the former state bank into the country's most valuable one. By following the rules of the international capital markets, Profumo was rewarded with a growing market value, allowing him to ignore Mediobanca.

By the time of Cuccia's death, his firm was already weakened. Big clients like Fiat drifted away from the firm, acquiring assets abroad, where Mediobanca could not add much value as an adviser. Maranghi brought in Bolloré as a counterweight to Capitalia and UniCredito, which were increasingly flexing their muscles in the capital markets. He sought alliances wherever possible, notably backing Salvatore Ligresti's insurance company SAI in a controversial takeover of rival Fondiaria that angered Italy's stock market regulator, the Commissione Nazionale per le Societa e la Borsa, or Consob. Ligresti succeeded, but Consob later delivered a stinging rebuke, ruling that Mediobanca, SAI and SAI's parent company, Premafin, had acted in concert when they forced through the deal. The regulator said that SAI, Mediobanca and Premafin should not have been allowed to vote their combined 44 percent stakes in Fondiaria at the company's annual meeting that approved the transaction.

Maranghi's biggest mistake, however, was a stab at a rapprochement with Fiat in June 2002, when he decided to spend $875 million to buy a 34 percent stake in the company's luxury-auto business, Ferrari. That valued the sports-car business at nearly twice what UniCredito and Deutsche Bank expected it would fetch in a public offering that they were planning to underwrite. UniCredito boss Profumo was miffed at losing the underwriting business. But what ticked him off most was Maranghi's profligacy with money that Profumo believed rightly belonged to Mediobanca shareholders like his bank.

After taking into account Maranghi's other machinations, such as his repeated changes of Generali's management, Profumo decided that Maranghi needed to go. He plotted a coup, using as his justification the excesses of the Ferrari transaction and the perception that Generali had become too vulnerable to a foreign hostile takeover. That risk had been made clear by Maranghi's weakened position and the 10 percent stake in Mediobanca amassed by Bolloré and his allies.

In early 2003 Profumo convinced other banks, including Intesa and Capitalia, to acquire stakes in Generali. The Bank of Italy already held 5 percent of the insurer's capital and had been angered by Mediobanca's removal of the company's CEO and chairman twice in three years. Profumo, who had sparred with central bank governor Antonio Fazio in 1998 when UniCredito launched an unsuccessful hostile takeover of crosstown rival Banca Commerciale Italiana (now part of Intesa), relished this chance to curry favor with Fazio. By banding together, the UniCredito-led group held enough votes to effectively counter, and neutralize, Mediobanca's 14 percent stake in Generali.

Profumo now characterizes the overthrow of Maranghi as an attempt to free Italian capitalism from unnecessary intrigue and turn Mediobanca into a normal investment bank focused on shareholder return rather than power plays. He says that under the new structure with Galateri, senior executives are now free "to manage the value of the company. This is a huge improvement."

But the coup plotters also imposed a series of operating restrictions on the investment bank. In October the company's shareholders approved a change in the bank's statutes that subjects all investments over E 500 million to the approval of two thirds of the Mediobanca board. In the past a simple majority sufficed. The new statutes prevent the bank's capital from being squandered, but they also handicap the bank, restricting it from bringing all of its weight to bear on important clients that rivals on its board might want for themselves.

"Mediobanca, unfortunately, is not only an investment bank," Profumo told Institutional Investor recently, referring to its holdings in Generali and RCS MediaGroup, publisher of the Corriere della Sera newspaper. "We are playing an important role there in not having these two important elements of the Italian economy destabilized."

Hence the Mediobanca that Galateri inherited was compromised. That Profumo was able to oust Maranghi and later help change the investment bank's statutes to limit its ability to invest its own capital highlights the rapid decline in Mediobanca's power in the years following Cuccia's death. Under Cuccia it would have been unthinkable for Mediobanca to give shareholders, particularly ones that in recent years had become primary competitors, the kind of leverage over the bank's future that the board's new voting structure clearly suggests.

"Cuccia and Maranghi were mythical creations from a different age -- everyone feared them," says Salvatore Bragantini, a former Consob commissioner who frequently tangled with Mediobanca. "Galateri, by contrast, is a normal guy, like you or me -- nobody fears him."

THERE IS NO DOUBT THAT GALATERI IS CUT FROM a different cloth than his predecessors. For most of his career, the heir to the title of Count of Genola and Suniglia excelled at doing exactly what he was told. Loyalty is, after all, part of his breeding. His father was a military man, rising eventually to the post of NATO commander of ground allied forces in southern Europe. Another ancestor, the Savoy military commander Gabriele Giuseppe Maria Galateri, was one of Czar Alexander's trusted lieutenants during the Napoleonic wars.

It was Galateri's sense of duty to the Agnelli family, after nearly two decades as their chief investment officer, that led him to accept the late Giovanni Agnelli's invitation to become Fiat's chief executive in early 2002. He did not want the job, and he knew perfectly well that he lacked the necessary background in industry. It turned out to be a terrible six months for Galateri. Fiat's problems could not be solved by the kind of financial engineering that Galateri practiced at the Agnelli group. The company needed an industrial expert capable of crushing costs and hammering out new models. Galateri resigned when his longtime mentor, Umberto Agnelli -- Giovanni's brother and head of the family's investments outside the car sector -- decided to bring in an executive with greater industrial experience and replaced him with Pirelli veteran Giuseppe Morchio.

The challenge at Mediobanca demands political skill rather than operating know-how. Though characteristically diplomatic, Galateri does not gloss over the difficulties of having to deal with a board that includes two of his biggest rivals as well as some of his most important customers. He insists that over time the bank will rectify these governance problems -- chiefly by jettisoning the bankers from Capitalia and UniCredito from its board. On this point he has made some headway by facilitating -- if not forcing -- the departure of UniCredito boss Profumo from the executive committee, though he still sits on the board. The impact, however, was dulled by the recent addition of Capitalia's Arpe to the committee.

For his part, Profumo says he doesn't want to interfere in Mediobanca's business but intends to focus instead on the growth of UniCredito's own investment banking business. That, he says, is why he stepped down from Mediobanca's executive committee after Maranghi's departure. "I want to maintain a very clear separation between the investment banking activity of Mediobanca and our own investment banking activity," he insists.

Bigger battles are looming. Mediobanca has about E 1 billion of excess capital on its balance sheet. How it will use this is a continuing source of tension. In August it emerged that Bolloré and other shareholders were considering ways to distribute the cash through an extraordinary dividend. Galateri denies that any such plan was discussed. But it's easy to see why such a move would appeal to Bolloré and the other French investors, like insurer Groupama, that followed his lead.

A quick cash return in the form of a dividend would help Bolloré make up any losses on his investment. Though the prices he paid for his shares have not been disclosed, he built the bulk of his stake when the stock was trading at higher levels than today. A cash dividend might also appeal to UniCredito and Capitalia. Not only would it give them capital, it would deplete their main rival in the corporate finance market of some of its ammunition to do deals.

For the moment, the people working for Galateri say they are confident that he's up to the task. They make no bones about what they perceive his role to be: insulating the firm's bankers and billions of euros of capital and investments from the conflicting desires of its powerful board members. And some Mediobanca insiders say Galateri has already been effective at handling this challenge, letting them get on with the task of doing deals and making money. Mediobanca has nabbed some very high-profile mandates, notably the restructuring of Parmalat, which Enrico Bondi, an ally of the firm, will oversee. But while profits and revenues are on the rise from the depths of the bear market, Mediobanca still lags its peak performance under Maranghi. Indeed, as of mid-December the firm ranked just fifth on Italian mergers, according to Dealogic. Under Maranghi the firm came in first and second in the rankings in 2001 and 2002, respectively.

Alberto Nagel, who supervises investment banking at Mediobanca, says that having Galateri in the chairman's seat has helped him win new business. During Maranghi's reign many Mediobanca bankers felt constrained from seeking out new business from companies that were fierce rivals of some of the Mediobanca chief's most important clients. Insurance companies in particular steered clear because of Maranghi's tight links with Ligresti, who owned insurer SAI. Once Galateri signed on, Mediobanca was in a better position to work with other insurers, culminating in a mandate to advise and finance Unipol's Assicurazioni E 1.5 billion purchase in June of Winterthur Group's Italian unit.

Given his experience managing the Agnellis' investments, Galateri's influence on Mediobanca's portfolio has been easy to spot. Shortly after his arrival the firm classified its investments into three categories. The first were holdings it planned to sell immediately, such as stakes in German insurer Allianz, Banca Intesa and clothing retailer Stefanel. These shares were transferred to the bank's treasury operations. The rest of its investments were classified either as those it plans to sell when the price is right or those deemed long-term strategic.

In some ways this division sounds more dramatic than it is. Most of the value of Mediobanca's portfolio is tied up in the two stakes it views as strategic, Generali and RCS MediaGroup, in which it holds a 10 percent stake.

Galateri's contribution to Mediobanca's day-to-day governance has been noteworthy. Insiders say that he has been instrumental in helping the two sides of the bank -- principal investments and corporate finance -- by managing potential conflicts and allowing them to function independently. For example, they cite the firm's decision to invest in Fiat's July rights issue even as the investment bank's analysts were recommending that clients steer clear. For Pagliaro, who oversees Mediobanca's holdings, ignoring his own firm's advice proved smart -- the stock added more than a third from the rights issue price, netting Mediobanca a paper profit of more than E 12 million in a few months.

Still, on the face of it, Galateri's plans for Mediobanca are as cautious as the way the firm treats Cuccia's office. Apart from making a few cosmetic touches here and there, he does not seem ready to overhaul the business model he inherited, that of an old-style merchant bank with most of its capital tied up in just a few key companies.

Some shareholders worry that without greater change, Mediobanca will be doomed. And even some officials within the bank privately suggest that a breakup would create more value. It might also allow the firm to buy its independence. In this scenario nonstrategic investments could be liquidated or spun off directly to shareholders. Important holdings, like those in Generali and RCS MediaGroup, could be sold to the highest bidders, fetching a premium.

Galateri shows no interest in such radical proposals. Indeed, at times he gives the impression of wanting to do little more than the chairman's equivalent of dusting the bank's antique furniture. "I do not think that this really has to be a revolution," he says. "The bank has been a very important player in the economic scenery in the past 50 years, and I think Cuccia and Maranghi interpreted the role of Mediobanca in a very positive and successful way. It was about helping Italian industry to restructure, consolidate and protect itself from too much interference from the government with a certain amount of creativity, imagination and courage."

Yet Galateri is still tussling with some of the problems inherent in Cuccia's model. He says that the firm's vast investment portfolio gives it many chances to win investment banking business. But he also admits that holding shares of a company can be a liability when pitching for deals: "While we get some business, one of my board members recently made the point that it's not in line with the current views in the marketplace about conflicts of interest. We can't work with Pirelli just because we are shareholders but rather because we are the best service providers."

Similarly, Galateri minimizes the competition with shareholder-rivals UniCredito and Capitalia. He has said that they are less focused on big deals and only compete with Mediobanca in doing corporate finance for smaller companies, a business deriving from their retail branch networks. Yet he also tells the story of how Capitalia and Morgan Stanley jointly beat Mediobanca on a real estate mandate because they were more aggressive in using their capital to win the business.

"At the end of the day, the fact that [UniCredito and Capitalia] are on the board is not the big problem," says Galateri. "It is that they have the capacity to make connections with companies and a lot of instruments to get business from them, chiefly derived from they fact that they are big lenders. I don't feel there are any cases where we have lost deals because they were on the board. Rather, we lost deals because they were more aggressive."

There is some circularity to this argument, however. As board members, UniCredito and Capitalia are in a position to play a key role in making Mediobanca less aggressive. Indeed, one result of the truce reached by Mediobanca's shareholders in April, before Galateri arrived, was a key change to the bank's statutes, effective from late October. The greater approval required from shareholders under the new restrictions has the potential to limit how Mediobanca can deploy its capital. It basically means that Capitalia and UniCredito have more power to vote against key decisions that might make the bank more competitive with their own banking operations.

Is this such a big deal? At the moment, probably not. But one of Mediobanca's weaknesses relative to its competitors is the smaller scale of its secondary markets businesses. As one London-based Italian banker at a U.S. securities firm says: "The first thing every CEO asks me is how is my stock and where is it going. If I can't answer him intelligently, I am toast. With no presence in the secondary markets to speak of, not really even in Milan, I don't see how Mediobanca can give very valuable insight."

Indeed, Mediobanca's local rivals are increasingly exploiting their capabilities in secondary debt, equity, foreign exchange and credit markets to win primary business. In the late 1990s Mediobanca consistently ranked among the top ten underwriters of debt in Italy; this year, through October, it ranked 19th behind all the big banks -- Intesa, Gruppo Sanpaolo IMI, Capitalia and UniCredito. In the more profitable equities business, where it has always dominated the Italian scene, Mediobanca tied for third while UniCredito pulled ahead of it, according to Dealogic. Mediobanca is still the largest domestic M&A adviser, ranking fifth overall behind Lazard, Goldman, Merrill Lynch & Co. and J.P. Morgan Chase & Co., but local rivals UniCredito, Capitalia and Intesa moved into the eighth, ninth and tenth places, the Dealogic data shows.

As these banks take further advantage of their big balance sheets and secondary market activities, they are likely to continue to gain ground on Mediobanca. A reasonable competitive response would be for the firm to consider investing in secondary market activities itself, perhaps by buying one of Milan's independent securities firms like Euromobiliare. But that would take the firm directly into competition with one of UniCredito's most profitable businesses. If the bank chose to use its position on Mediobanca's board to oppose such a move, would Galateri fight, and could he win that battle?

Galateri calls the changes to Mediobanca's voting statutes a necessary evil and one that ensures better governance than in the past. In any event, he points out, even though two thirds of the board must approve any use of capital greater than E 500 million, the executive committee now only needs a simple majority to move ahead on smaller deals.

Galateri interprets this provision to mean that the firm can proceed with plans to enhance its competitive position. Mediobanca will pay its bankers more and continue hiring and poaching from rivals, he says. It will also be able to allocate money for some new initiatives, focusing on areas like wealth management through its Banca Esperia brokerage and through private equity, where it may create an Italian buyout fund, possibly in cahoots with the Carlyle Group.

But Galateri makes it clear that neither he nor the company has the kind of carte blanche that made Cuccia the guiding force in Italian capitalism. "I don't want to make investments just because we have excess capital. We will try to put the money to work. But if shareholders can use it better than we can, then we will give it back."

Mediobanca's Galateri confronts Cuccia's ghost

For half a century Mediobanca lorded over Italy's capital markets under wily Sicilian founder Enrico Cuccia. His death four years ago threw the investment bank, and much of Italian finance, into chaos. Gabriele Galateri di Genola, the former Fiat chief executive and head of the Agnelli family's vast holdings, was brought in as chairman in April to try to put Mediobanca on an even keel. But his charge is not as simple as pitching for new corporate finance business among Italy's blue-chip companies. Mediobanca's biggest shareholders, UniCredito Italiano and Capitalia, are also its two main domestic competitors, and not everyone is convinced that they have the firm's best interests at heart. Galateri tells Institutional Investor Contributor Rob Cox how he will help Mediobanca prosper while protecting the interests of all shareholders.

What do you plan to do differently from your predecessors at Mediobanca?

Galateri: I do not think that this really has to be a revolution vis-à-vis the past. When I look back I see a bank that has been a very important player in the economic scenery in the past 50 years, and I think the heads of Mediobanca, Enrico Cuccia and Vincenzo Maranghi, interpreted the role of Mediobanca in a very positive and successful way.

It was about helping Italian industry to restructure, to consolidate, to protect itself from too much interference from the government with a certain amount of creativity, imagination and courage.

This is the key challenge -- not just to be an investment bank but also to be a leader in investments and equities and all the fields we are in, while investing in new propositions and new projects and helping the business community in important and innovative ways.

Are all of your many shareholders on board with this objective?

That we have a pact of shareholders accounting for more than 60 percent of the capital does not change the basic fact that we are listed and have a lot of shareholders. I don't see why the objectives of all the shareholders should not converge into one clear mission. The fact that each shareholder has maybe a particular agenda for himself for whatever reason -- one is foreign, one is industrial, another is a bank -- does not disturb me. The relationships have been clear. They are not easy, but if you want to feel you are in the real world, there must be a dialogue and discussion. My duty is to respond to all my shareholders -- all 100 percent --not just the ones in the shareholders' pact. And I must be able to give to one of the key shareholders the same answer I feel I have to give to one of the smaller ones who might question me about something at the annual meeting.

UniCredito Italiano and Capitalia have representatives on your board. How will you ensure that they don't use Mediobanca as a piggy bank?

I may be naive, but my view is that progressively those stakes will be reduced. I think that our banking shareholders, too, must in the future consider whether Mediobanca as an investment is compatible with their own strategies. In my opinion, they will see that our capabilities are very different from their own, particularly in regards to what they can do with the larger corporate groups in the country. We have no retail network, so we can't compete with them on many things. We are organized as a bank that has as its natural counterparts the big groups and big tickets -- we can't chase small businesses in the Veneto and Campagna regions like they can.

If you look at UBM [UniCredito's investment banking arm], they are not organized to go after the big deals. They are retail banks, and there are few situations where we will clash, so it doesn't disturb us too much that they have an interest in our capital.

However, we pay close attention to the fact that they have a role in the board and executive committee. They will have to move out of the executive committee. And to be fair, there are procedures we can use and do use that exclude the members that have a conflict of interest. For example, if there are sensitive deals that we are discussing.

At the end of the day, my problem is not the fact that they are on the board. My problem is, they have a lot of capacity to make connections with companies and a lot of instruments to get business from the companies, chiefly derived from the fact that they are the big lenders. I don't feel that there are any cases where we have lost deals because they were on the board. Rather, we lost deals because they were more aggressive than us. I went bidding for a deal as soon as I got here and found that another board member's bank was doing the same; it was a securitization that ultimately went to Capitalia and Morgan Stanley because they offered the client a more competitive price.

Can Mediobanca be made more competitive?

You have to consider the different businesses in which Mediobanca operates. First, it's an investment bank that does corporate finance and wholesale banking. Mediobanca has to try to lead by investing in people, making them more motivated, more professional, more knowledgeable. This is the usual story of any company that is essentially made up of human talent.

The people here are very capable; that's clear. Many of them have been trained and brought up here, while others have come from places like Lazard and Morgan Stanley. I go around doing what the former head of Citicorp showed me when I came to see him years ago when things were very formal here in Italy: John Reed greeted me in shirtsleeves at the elevator.

And then we have to keep in consideration that this is an animal that has other activities apart from investment banking, each of which may need a different system of rewards. Some of these other lines of business are more recent and others established. We just took control of Compagnie Monégasque de Banque. In private banking we have a great brand name and excellent alliances. I was in Bologna at a Banca Esperia branch recently and saw incredible enthusiasm from their clients; we have a lot we can do here to grow. Our financial services business is often forgotten -- that's leasing and factoring. These are small but growing at a very fast pace of 15 to 20 percent a year. Italy is very behind, but we feel there is a huge opportunity in this field to create value.

What changes will Mediobanca make to its equity portfolio?

We have identified in some of those businesses -- particularly Generali and RCS MediaGroup -- the capacity for Mediobanca to add value. I cannot see abandoning these until there is no more opportunity to develop them and the shareholding systems around them are sufficiently stable and clear. Realistically, that is a more long-term scenario.

As for other stakes, we see a potential creation of value in the less distant future. Just because some of them have lost money for shareholders does not mean they will do so in the future. If we have an investment and we see a potential for value creation, I want to be represented on the board -- if not directly, then by someone who really takes care of our interests and forces management to set coherent targets and reach them.

If this does not happen in a few years, they will become trading businesses. But I will give them a chance to perform, even if in some cases I see the need to change managers there. There are definitely some cases where if things remain as they are, the chances of creating value will be very small. We are now talking with other shareholders in some of these companies to see whether we can work together to make these changes.

We have to continue developing these shareholdings. But once achieved, there is no reason for us to stay there forever. While we get some business, one of my board members recently made the point that it is not in line with the current views in the marketplace about conflicts of interest. We can't work with Pirelli just because we are shareholders but rather because we are the best service providers.

What are your plans to grow outside Italy?

That will take time. We will have to look outside our borders. How do we do this without spending too much money? It is a very delicate issue. I don't think buying companies in our business is the way to move ahead. But we may consider opening offices in select cities where we can bring something to the table and assist our domestic clients as well.

Are you going to bolster your activities in the private equity arena?

Consider that most of the big banks have disposed of their private equity businesses. Also consider that we are advising and financing private equity funds, so there is the potential for us to be competing with ourselves. There was a project put on the table to do something with Carlyle Group, and we are still discussing this. The initial idea was to create a joint fund of E 2 billion with E 1 billion from us and 50-50 control with Carlyle. It was too big, in our opinion. We would become too much of a competitor to ourselves, so we are studying other, perhaps equally interesting, options.

Moreover, under our bylaws we can only buy up to 15 percent of a company; that is part of the country's banking laws. We still might do something in private equity, but it might happen in a different way -- with, say, a minority stake of a larger fund.