The turmoil started on 11 September this year, when Europes fifth biggest telecommunications company Telecom Italia announced it intended to split its fixed line and mobile phone segments into separate businesses. This was a sharp U-turn in the companys industrial strategy and provoked speculation that the management was preparing to sell off Telecom Italia Mobile (TIM), the last Italian-owned mobile company. The ensuing furore caused company president Marco Tronchetti Provera to quit, the unions to strike and prosecutors to open an investigation into possible corporate crimes. It put the government under pressure too.

The confusion was largely due to the fact that only two years ago much fanfare was given to plans to integrate TIM into the rest of Telecom Italia. Similar convergence strategies have been embarked on in other countries, as in the case of France Telecom. In the communications world, convergence is generally seen as the best way for former state monopolies to stay competitive in a fast-changing, high-tech market. The idea is that bringing operations together enables them to combine telephone, internet and multimedia services and deliver them when and where customers want. Telecom Italia seemed to be ideally placed as its business already consists of fixed line and wireless phone segments, television channels (La7 and MTV Italy, which have a strong presence in digital terrestrial television) and broadband internet access (Alice).

So why the U-turn? Many analysts believe the plan to spin off TIM was dictated by financial, rather than industrial, concerns. Telecom Italia (which was privatised in 1997) and its parent company Pirelli are weighed down by massive debts amounting to around 43 billion. The debts are mainly due to the fact that Tronchetti Provera who remains the president of Pirelli and owns shares in holding companies which in turn have shares in Telecom (see box) paid over the odds to gain a controlling stake in Telecom in 2001. Since then Telecoms share price has dropped considerably. This is thought to have put Tronchetti Provera in a pickle, especially as key investors in Olimpia, his unlisted company that owns the biggest shareholding in Telecom, were bailing out and he did not have the money to reimburse them. So selling TIM, which could have fetched as much as 35 billion, would have got him out of a tight spot. Furthermore, combining the innovative, lean TIM with the companys much less dynamic fixed line branch, which still has the lingering aroma of a state ministry, was not proving easy. Tronchetti Provera seemed to have lost patience and decided to focus on making Telecom Italia more media and internet-orientated instead.

As a result the company bought internet-access business AOL Germany, which has some 2.4 million customers, for 675 million in September. But industry experts are worried the price paid was inflated. They also have doubts about the whole strategy of moving into the fiercely competitive internet access market, where profit margins are forecast to fall despite growing demand.

In any event, if Tronchetti Provera was planning to sell TIM, his plans soon hit trouble. The government and Telecom Italias 85,000 workers feared the sale would lead to job losses and TIM falling into foreign hands. Tronchetti Provera resigned as Telecom president after premier Romano Prodi publicly chastised him for not telling the government about his plans, although he claims Prodi was lying about not being informed. A major political row then flared up after it emerged that a close aide to Prodi, Angelo Rovati, had drawn up a plan featuring an operation to bring the landline unit of Telecom Italia under state control. Prodi said he knew nothing of the study, whose author was forced to resign, and denied any intention to intervene in the companys affairs. But suspicions were strong that the government wanted to resort to Italian politicians bad old habits of meddling in the market. Telecom Italias workers showed their frustration at the whole mess by staging a strike at the beginning of October.

More controversy was stirred when prosecutors in Milan started an investigation into the strategy switch to determine whether market rules were broken. Telecom Italia failed to fulfill its obligation to inform stockmarket watchdog Consob (commissione nazionale per le societ e la borsa) about the move. No one has been charged as a result of the probe, which is separate from another headline-making investigation into illegal wiretaps at Telecom Italia.

Telecom Italias widely respected new president, Guido Rossi, initially indicated that the restructuring plan to separate TIM from the main company and focus on media and internet access was still in place, although he was clear that there were no plans to sell off TIM. However, in October Telecom Italia also announced that it would be pursuing a convergence strategy. In a statement, the group stated that integration between fixed telephony, mobile telephony, broadband internet and media content remains its strategic goal. How the group will reconcile the two plans remains to be seen.

Who owns Telecom?

Olimpia 17.99 per cent

Banks, institutions and private individuals 82.01 per cent

Who owns Olimpia?

Pirelli 80 per cent

The Benetton Group 20 per cent

Who owns Pirelli?

Camfin 25.5 per cent (in which Tronchetti Provera has a 52 per cent stake)

Banks, institutions and private individuals 74.5 per cent