Investors, clients and ratings agencies will be watching Finmeccanica closely this week to get an idea of where Alessandro Pansa (pictured), the company's third CEO in 15 months, will take the embattled Italian defense giant following the arrest and resignation of former CEO Giuseppe Orsi. (Finmeccanica)
ROME and NEW DELHI — Investors, clients and ratings agencies will be watching Finmeccanica closely this week to get an idea of where Alessandro Pansa — the company’s third CEO in 15 months — will take the embattled Italian defense giant following the arrest and resignation of former CEO Giuseppe Orsi.
Pansa, who had been chief operating officer and now has both jobs, takes over a company struggling with a restructuring plan and shrinking core markets in Europe and America. Adding to his troubles: Orsi’s arrest prompted India last week to move toward canceling a nearly 560 million euro ($750 million) contract for 12 AgustaWestland helicopters, a move prompted by Orsi’s arrest in connection with alleged bribes to win the deal.
Pansa is not expected to make any changes in the company until after an April 15 shareholders’ meeting, when a new chairman could be selected to work with him, said one Italian defense industry expert who declined to be named. After that, Pansa has got his work cut out for him.
“He must cut the firm’s debt, but not with asset sales, which appear unfeasible in Italy,” the expert said. “An alternative would be to sell stakes in units to Italy’s strategic fund. He should also give more responsibility for sales to the units since his experience is more linked to finance, but he should go and see customers to check on their relationship with Finmeccanica.”
Orsi, who denies wrongdoing, was arrested Feb. 12 on suspicion of paying bribes to win the helicopter contract with India when he was head of Finmeccanica unit AgustaWestland. Also last week, current AgustaWestland CEO Bruno Spagnolini was placed under house arrest.
Finmeccanica confirmed Feb. 15 that Orsi — who at press time was in a Busto Arsizio jail — had officially resigned.
The shakeup comes two months after Orsi’s predecessor, Pierfrancesco Guarguaglini, was cleared in another corruption investigation that forced his resignation in December 2011.
Pansa, born in the northern region of Lombardy and a graduate of Milan’s Bocconi University and New York University, worked for Italian banks before joining Finmeccanica in 2001 as chief financial officer for Guarguaglini, later becoming chief operating officer under Orsi.
“Alessandro is a sociable type and rather professorial, as CFOs can be,” said one financial analyst. “But he is a finance guy, not an industry guy.”
Pansa has reportedly clashed with Orsi, who in turn expressed doubts over the company’s purchase of DRS in 2009, an operation backed by Pansa.
Orsi’s decision to take large write-downs on poorly performing units and to cut debt last year implied criticism of Pansa’s handling of the finances under Guarguaglini.
“Pansa was around when a lot of things happened at Finmeccanica which have been criticized,” said a second financial analyst who declined to be named. “Whoever decided on his appointment decided not to take that into account.”
Before his arrest, Orsi had been pushing to restructure Finmeccanica and had promised to sell off assets worth 1 billion euros by the end of 2012. But that hinged on the sale of Finmeccanica’s stake in civil unit Ansaldo Energia, which was held back by unions and Italian politicians and now looks unlikely to take place before elections this month.
“Orsi could not profit from this year just gone, in which political power was frozen, to carry out sell-offs,” said an Italian analyst who declined to be named. “You can only do these things when political power is unable to react. Finmeccanica cannot sustain all the assets it has in a market which requires greater scale in core businesses.”
A third financial analyst said, “I think Pansa will be able to keep hold of Ansaldo Energia, but he will need to sell something.”
Pansa has not been touched by any of the scandals in which Finmeccanica has found itself and has a reputation for knowing the company back to front.
But the first analyst said Pansa’s track record was mixed.
“Mistakes were made, such as telling analysts that cuts in the Eurofighter would have no impact, just before the firm was forced to restructure Alenia Aermacchi. Buying DRS at a high price in order to become a U.S. prime didn’t work, and the restructuring of rail unit Ansaldo Breda was never undertaken aggressively,” he said. “The market feels he was not completely on the level with it about the state of the firm.”
Orsi’s arrest has had wide-ranging repercussions in India. The Indian Defence Ministry on Feb. 15 said it had “initiated action for cancellation of contract for procurement of 12 AW101 helicopters for the use of VVIPs.” AgustaWestland, it said, had signed an integrity pact allowing cancellation should it be found that the company used agents, commissions or bribes to win the deal.
The Indian MoD had already put on hold further payments to the company on Feb. 13. The new notice, in which the MoD asked AgustaWestland why the AW101 contract should not be canceled, must be responded to in seven days.
This is the first step toward canceling the helicopter deal, an MoD source said.
“India will make efforts to ensure there is no corruption involved in defense procurement. That is the reason every overseas company doing business here has to sign an integrity pact,” the official said.
The AgustaWestland probe is likely to become a political issue in the run-up to India’s general elections in mid-2014 if the opposition attempts to link the Italian company to Italian-born Sonia Gandhi, the president of the Congress Party, defense analyst Nitin Mehta said.
“As the ruling Congress Party will not like to risk being involved in any defense scandal ahead of the general elections, the more prudent step, which the government could be tempted to take, is to blacklist the Italian company,” said Mahindra Singh, retired Indian Army major general and defense analyst.
Waiting for a definite outcome of the Italian investigation could take months or years. Orsi has not been charged, but Italian magistrates are allowed to hold suspects in custody while investigations continue. He will be able to appeal against his incarceration before the probe wraps up and before magistrates decide whether to ask a court for charges to be made.
In the meantime, ratings agency Fitch put Finmeccanica’s rating under review for a possible downgrade last week while Italian Prime Minister Mario Monti — who has stayed on the sidelines during the investigation of Orsi — revealed he had wanted to drop Orsi much sooner.
“Now Orsi is in a well-defined situation,” he said Feb. 13. “Earlier, there were not sufficient elements” to make a decision; “now there are.”
Politically, Finmeccanica remains a hot potato. Pierluigi Bersani, the head of the center-left Democratic Party, which leads the polls ahead of Italy’s elections on Feb. 24-25, said he would have fired Orsi sooner.
And former Prime Minister Silvio Berlusconi, who was in power in 2010 and is campaigning again, suggested on Italian TV on Feb. 14 that the India case had been overblown. “Kickbacks are a phenomenon that exist, and it is useless to ignore their necessity,” he said.
“India is outside the Western sphere, and it is not up to us to judge India,” he said. “This is absurd moralism.”
But a day later, Berlusconi appeared to backtrack, saying that bribery must always be punished.
Despite troubles in Italy, U.S. sources expressed confidence in Finmeccanica’s U.S. subsidiary DRS Technologies, which is operated as a wholly independent company and led by former Deputy Defense Secretary Bill Lynn.
But experts in Washington said the U.S. government is likely to inquire whether Finmeccanica or any of its other units operating in the U.S. outside the security agreement that allowed the DRS purchase — like AgustaWestland — violated any U.S. laws or regulations, chief among them the Foreign Corrupt Practices and the False Statements acts.
Britain’s BAE Systems in 2010 agreed to pay a $400 million fine to the U.S. Justice Department to settle charges that it made false statements.
“The question is whether there is any nexus between Finmeccanica’s alleged conduct and the United States sufficient to warrant the exercise of U.S. jurisdiction under applicable laws,” said Jeffrey Bialos, a former DoD industrial policy chief who is now a senior partner at Sutherland Asbill Brennan law firm in Washington.
“For example, if, as in the case of BAE, a foreign firm involved in illicit payments abroad has made any false statements to the U.S. government or paid commissions that were not disclosed on U.S. export license applications, it could warrant investigation,” Bialos said. “Additionally, to meet its obligations under the 1997 OECD Anti-Bribery Convention, Italy itself enacted its own anti-bribery statute, under which Orsi is being charged.”
A DRS spokesman said: “DRS Technologies operates under a Department of Defense administered proxy agreement which guarantees the complete autonomy and independent governance of all aspects of its business operations, including its ethics and compliance programs. DRS has long been recognized for its strong commitment to compliance, including its industry-leading industrial security program.”