PRACTICE EXAM TEXT

Growing by shrinking
It took more than three years, but on February 24th Finmeccanica, Italys
state-controlled aerospace and defence group, said it had found a buyer
for its rail businesses. Hitachi, a Japanese conglomerate, will pay 773m
($876m) for Finmeccanicas 40% stake in Ansaldo STS, a railway-signalling
company listed on Milans stock exchange, and 36m for AnsaldoBreda, a
trainmaker (and lossmaker) fully owned by Finmeccanica.
The deal will make Hitachi the fourth-biggest company in the railequipment business worldwide, behind Bombardier of Canada, Siemens of
Germany and Alstom of France. For Finmeccanica it marks an important
step in the industrial plan it announced in January, following the
appointment last year of a new chief executive, Mauro Moretti.
Saddled with debt and reeling from a series of corruption scandals, the
Italian industrial giant has been seeking to get out of activities it now sees
as non-core, to cut its debts and improve its cashflow. It is Europes thirdbiggest military supplier (after BAE Systems of Britain and Airbus of
France). Half its profits come from AgustaWestland, a world leader in
helicopters, but the group is also into defence electronics, missiles and
civil-aircraft parts. At the plans unveiling last month, Mr Moretti said
Finmeccanica was spread too thin and was wasting money where it could
not win: of the 18 business areas in which it operates, it is among the
leaders in only four.
Mr Morettis mantra is to do more with less: he wants to sell a smaller
range of products to more customers. Recent cuts in Western countries
defence budgets are prompting Finmeccanica, like its peers, to focus on
technologies that have civil as well as military uses, and on places where
defence spending is growing, such as Africa, Asia, the Middle East and
Brazil.
The sale of its railway assets will reduce Finmeccanicas debt by 600m,
to 3.4 billion, by the end of the year. More disposals are likely to follow,
including FATA Group, which designs and builds such things as metalsprocessing plants, and parts of DRS Technologies, an American defenceelectronics firm.
Gian Piero Cutillo, Finmeccanicas chief financial officer, says its remaining
non-core businesses account for less than 1% of its 14 billion a year in
sales. There is speculation it may also exit a joint venture in missiles with
BAE and Airbus. But in some areas it wants to expand: it is seeking to buy
a majority stake in Avio Spazio, an aerospace firm in which it has 14%.

Mr Morettis biggest challenge is transforming Finmeccanica from a loose

bunch of semi-independent businesses into a coherent whole, as Airbus
has done. His predecessors tried to do this, but he is acting a lot faster
than they did. He has already shed about 50 executives as he centralises
the management of all units at the headquarters in Rome. He aims to
save 150m over five years, by rationalising supply chains and research
and development activities among the various units.
Bolshy unions and weak Italian governments have long stymied attempts
to revamp Finmeccanica and turn it into a truly world-class firm. But Mr
Moretti has already succeeded in reviving Ferrovie dello Stato, the stateowned railway, taking it from loss to profit. And he has strong backing
from a new, reformist administration. CGIL, Italys biggest union, is
demanding meetings with the government about the sale of the rail
business, and talking about blocking it. But there is ground for optimism
that the countrys political climate has changed sufficiently for the
companys new boss to be able to push through a thorough, and muchneeded, restructuring.