Don't Call Us

Top executives at spanish phone giant Telefnica are traveling to Barcelona this week for a special series of courses taught by professors from Harvard University and the Spanish business school IESE. The topic is strikingly appropriate: managing change. Juan Villalonga, who has engineered endless changes since taking over as Telefnica chairman in 1996, started the training sessions about a year ago. He can't have anticipated that the biggest change his executives may face is his own departure.

A board meeting set for July 26 is seen as a possible make-or-break date for Villalonga, 47, the brash ex-investment banker who is credited with turning a former state monopoly into a global powerhouse. Questions are being raised about his personal wealth, why the company has such high management turnover, how bad his relations are with the current government and for that matter how he handles his love life. What some see as a lack of discretion and diplomacy in the areas of money, sex and politics could overshadow what he has achieved for the company's bottom line.

By most accounts, Villalonga has done plenty. He has increased Telefnica's stock value roughly sixfold since he took the helm in 1996, and made himself a millionaire in the process. But now some core shareholders are pressuring him to resign. A stock market investigation is under way into allegations that he broke insider trading rules. Telefnica has denied any wrongdoing by its chairman and rejects reports that his departure is imminent.

Few expect Villalonga to last out the year, however, and names of possible successors are being bandied about in Madrid. Among them is that of his former underling Fernando Abril, who was finance director of Telefnica and chairman of its subsidiary TPI Pginas Amarillas, the Spanish yellow pages, until he resigned early this year. As cfo, Abril worked closely with Villalonga, but the two quarreled and Abril's position became untenable, according to people close to the company. Abril is now working on Internet projects with Juan Perea, the highly regarded former head of Telefnica Internet unit Terra, whom Villalonga fired.

Villalonga's present situation may be related to what some see as cavalier treatment of the people who helped him get where he is: former school chum Prime Minister Jose Maria Aznar, Concepcin Tallada, his wife of 20 years, and a slew of top managers like Abril and Perea who are no longer with the company. They are names on a long list of what company insiders refer to as "Villalonga's burn unit."

But burning can backfire. One of the ousted managers apparently raised the insider trading allegations to El Mundo, a Madrid-based daily with close ties to the government. A series of stories run by the paper in June prompted an ongoing investigation by the Spanish securities commission. "Villalonga has probably made management history" by getting rid of so many of his top executives, says Victor de la Serna, El Mundo's deputy managing editor. "When so many people leave disgruntled there is an increasing number of sources."

Villalonga's reputation as a colorful character dates to his days at the IESE, says Pedro Nueno, one of Villalonga's former professors there who is teaching the current classes for Telefnica management. "He is very creative and very Americanized he loves the American way of doing things." After working for a commercial bank, Villalonga moved on to international management consultancy McKinsey and then to Bankers Trust in Spain. He was chosen for the job as chairman of Telefnica when his school friend Aznar's center-right government came into power in 1996.

Under Villalonga's tenure the company has become far more global. It now has more clients for fixed telephone, mobile and pay TV services in Latin America than it does in Spain, according to Boston-based telecom consultancy Yankee Group. With his background in finance, Villalonga quickly realized that the company could create more value for shareholders by breaking it up in parts than by keeping everything under one roof, says Juan Roure, another IESE professor. Telefnica was the first phone company in Europe to spin off its Internet business. It has since extended Terra's reach through a $12.5 billion purchase of U.S. Internet portal Lycos. It is snapping up content one of the latest examples being the $5 billion purchase of the Dutch media company Endemol, creator of the popular Big Brother TV series. It has just completed a $13.4 billion buyout of its affiliates in Peru, Argentina and Brazil and restructured the group along product lines rather than geography.

Villalonga's approach has not always gone down well in his native Spain. "Villalonga has tried to be the Latin version of [U.S. telecoms tycoon] Bernie Ebbers, and to some extent he has succeeded," says enterpreneur Martin Varsavsky, founder of Jazztel, a Spanish telecommunications and Internet company that competes with Telefnica. "But I'd rather bet on the man who built an empire through wit and ingenuity than on the man who built one through political connections. Bernie is a street fighter; Juan is a prep school boy calling on his old friends."

Those friends, though, have all but disappeared since the run-up to Aznar's reelection in March. That is when Villalonga's plan to reward senior executives and himself with millions of dollars worth of stock options was made public, embarrassing Aznar. The Prime Minister asked Villalonga to renounce the options. Villalonga who stood to gain $16 million refused, a decision which is said to have destroyed their friendship.

Relations with Aznar were further strained by the break-up of Villalonga's marriage. Villalonga began a widely reported affair with Mexican beauty queen Adriana Abascal in 1998 and moved to Miami to live with her last year, leaving his wife and teenage children behind. Villalonga and Abascal became fixtures of the Miami party circuit, hanging out with Spanish-speaking jetsetters like singers Gloria Estefan and Julio Iglesias. Villalonga flies between Miami and Madrid in a jet owned by Telefnica, and he has irritated many in the company by making noises about moving the headquarters to Florida.

Villalonga's new life also irritated Aznar's wife, Ana Botella, a close friend of Villalonga's estranged wife, Concepcin Tallada. Tallada was among the guests at the PM's palace to celebrate Aznar's re-election. Villalonga was not.

Many Villalonga watchers believe he began acting as if the support of the government and some of his key shareholders was unimportant. That perception was hardly helpful when it came to the proposed merger with Dutch phone company KPN. The Spanish government's golden share gives it the power to block major deals and it threatened to do just that.

But the deal fell through anyway as core shareholders, including key members of the board, opposed merger plans. Villalonga was in Miami waiting for Abascal to give birth to their daughter when a skeptical Telefnica board met to consider the merger. Villalonga took part in that crucial board meeting via video conference from Florida, wearing a pink polo shirt. He was unable to marshal enough board support to conclude the deal.

His weakened position leaves Telefnica without a clear-cut strategy in Europe. Financial analysts say there is strong industrial logic for the KPN merger, but it will be difficult to resurrect the deal without the government's support.

While Villalonga was still digesting the failure of the KPN deal, the stock trading allegations surfaced in El Mundo last month. The newspaper claimed that Villalonga used inside information about merger talks with Worldcom and MCI to buy Telefnica shares and then sell them at a profit. Telefnica denies the allegations and has canceled its advertising in the newspaper. Villalonga's office declined repeated requests for an interview.

It is not clear when the securities commission will issue its findings. A negative report would not necessarily subject Villalonga to sanctions, but many believe it would nevertheless hasten his departure from the company. Some believe he will have to step down regardless of the commission's findings. Says one Madrid-based financial analyst: "The pressure is getting stronger and stronger for him to leave."

Villalonga's successful management has set Telefnica on the right course, but some financial analysts say that in turn means he is no longer indispensable. If he does go, Villalonga may be replaced by both a chairman and a chief executive officer. This set-up would introduce more checks and balances in the way the company is operated. In any case, Telefnica executives would do well to pay attention in class this week. More change, it seems, is on the cards.

With reporting by Jane Walker/Madrid