Pirelli & C. S.p.A.
Pirelli & C. S.p.A.
Via Gaetano Negri 10
Telephone: (02) 85351
Fax: (02) 8535-4426
Web site: http://www.pirelli.com
Incorporated: 1872 as Pirelli & C.
Sales: EUR 7.11 billion ($8.96 billion) (2004)
Stock Exchanges: Milan
Ticker Symbol: PC
NAIC: 326211 Tire Manufacturing (Except Retreading)
One of the largest companies in Italy, Pirelli & C. S.p.A. is among the world's leading tire manufacturers, producing and distributing tires for cars, motorcycles, and farm and industrial vehicles. The world leader in tires for high-performance cars, Pirelli produces tires in 22 factories located in Argentina, Brazil, Egypt, Germany, Italy, Spain, Turkey, the United States, the United Kingdom, and Venezuela. Its marketing network covers 120 countries around the world, with about 14 percent of tire sales stemming from the home market, 45 percent from the rest of Europe, 7 percent from North America, 20 percent from South America, and the remaining 14 percent from Africa and the Asia-Pacific region. Among other operations, Pirelli is involved in real estate management, optical research relating to photonics-based telecommunications, and the development of alternative fuels from waste products, and it also holds a 57.7 percent stake in Olimpia S.p.A., which in turn is the leading shareholder of Telecom Italia S.p.A., one of Europe's largest telecommunications companies.
Late 19th-Century Origins
The company's founder, Giovanni Battista Pirelli, a 24-year-old engineering graduate from the Milano Politecnico, formed the company Pirelli & C. with an initial share capital of ITL 215,000. Pirelli had astutely realized that rubber was to become one of the most important commodities in the rapidly industrializing Italy. Less than a year after its inception in 1872, Pirelli's company built its first factory in Milan. There were 45 people employed in the small, 1,000-square-meter building as demand for the company's rubber sheets, belts, slabs, and vulcanized products increased. The rapid growth in the popularity of the motor car, which was now seen as more than a fashionable plaything for the rich, led to contracts to supply pneumatic tubes and transmission belts.
From its earliest years Pirelli demonstrated a willingness to diversify its product range and to produce overseas in order to satisfy its desire for ambitious, yet controlled, expansion. The company began the manufacture of insulated telegraph cables in 1879 and within seven years had developed the technology to produce underwater telegraph cables. In 1890 pneumatic bicycle tires rolled off the production line and were followed in 1901 by the company's first car tires.
Pirelli established a trend that many Italian companies were to follow when it began to expand abroad as early as 1902. The new cable and electrical lead factory set up near Barcelona in Spain was followed by a similar venture in Britain in 1914, and by 1920 factories had also been set up in Brazil, Greece, Argentina, Turkey, and Germany. Product diversification at home was encouraged by the firm's long-term commitment to investing in research and development. Giovanni brought his two sons into the business and they helped to run the new motorcycle tire production plant built at Bicocca in 1908. Forever at the forefront of new technology, the company began to produce rubberized fabrics as early as 1909.
Two major factors were to account for Pirelli's growth in the years immediately preceding World War I. First, between 1900 and 1914, Italy saw increased social reforms and political stability, which created more favorable conditions for trade and industry. Pirelli, which derived much of its demand from newly established ventures, was well placed to benefit from these changes by producing fluid control devices, transmission belts, and fuel distribution machinery. Second, the invention of the internal combustion engine in 1910 made the mass production of cars economically viable. The so-called rubber boom of 1911 marked the acceptance of the material as a worldwide commodity and ensured the continued success of the company.
Interwar and World War II Era
New factories were opened in Spain in 1917 and Argentina in 1919, but the first major event to affect the company after the end of the war was a change in its organizational structure, implemented in 1920. Pirelli & C., the original company founded by Giovanni Pirelli, changed its status and became an investment rather than a production company. Società Italiana Pirelli, later to become Pirelli S.p.A., was incorporated to act as a holding company to control the group's varied industrial operations based in Italy. Compagnie Internationale Pirelli S.A., incorporated in Brussels, was set up to manage the group's rapidly increasing overseas operations. Pirelli & C. S.a.p.A. was taken public in 1922; Pirelli S.p.A. was listed four years later.
In 1924 Luigi Emanueli, an employee of the company, developed the first commercially viable oil-filled cable. The world's first crossply tire, the Superflex Stella Bianca, was successfully launched in 1927 and within two years a new cable production unit was opened in Brazil and a new tire factory was opened at Burton-on-Trent in England. Initiatives were also made in India and Malaysia to guarantee the supply of natural rubber to Milan and Pirelli's overseas subsidiaries.
This was a period when Pirelli's products, fitted to the Ferraris and Alfa Romeos of Nuvolari and Ascari, became synonymous with success in international Grand Prix racing. Nevertheless, the rise of Mussolini's fascists and Italy's increasingly disastrous foreign policy in the mid-1930s led to a further period of economic and political turbulence. To counteract the impending threat of international boycotts, Compagnie Internationale Pirelli S.A. was transferred into Pirelli Holdings S.A., a holding company incorporated in neutral Switzerland, in 1937.
Postwar Rebuilding and Expansion
World War II left Italy politically and economically crippled. A weak leadership was unable to cope with the severe poverty, rampant inflation, and high unemployment that affected the whole country. Nonetheless, Alcide de Gasperi, the Christian Democrat leader, was able to bring both inflation and the budget deficit under some degree of control, and by 1948 a large-scale public investment program was instigated.
Italian industry had been situated in the north of the country for a number of reasons. Milan, Turin, and Genoa became business centers because of the availability of both capital and raw materials—steel for machinery and railways, coal for power—and again Pirelli, which derived much of its success from the success of others, was well placed to take advantage of the new boom in the north. Pirelli responded to this opportunity by producing the first fabric-belted tire, the Cinturato CF67, introduced in 1948, which revolutionized the tire industry.
In the 1950s and 1960s Italy enjoyed the same kind of economic miracle experienced by many European countries as postwar depression gave way to years of growth and prosperity. An influx of new talent, often from comparatively humble backgrounds, suffused the established upper crust of Italian society and led to an improvement in the quality of management. Pirelli set new records for expansion overseas, opening a cable factory in Canada in 1953, a latex foam plant in France in 1957, and new tire plants in Greece and Turkey in 1960. The company purchased the German tire company Veith in 1963 and reinforced its position in both South America and Australasia when it opened cable manufacturing operations in Peru in 1968 and Australia in 1975. Pirelli was also involved in establishing several turnkey plants during the 1960s to provide tires for Eastern European companies.
Throughout this period of expansion Pirelli followed the strategy, common to most of the Italian multinationals, of eschewing joint ventures and the purchase of minority and majority shares in established companies. Instead, product ranges that had already proved successful in the Italian domestic market were transferred for production and sale overseas. In this way the company was able to retain complete control over its operations abroad while being able to overcome barriers preventing Italian exports.
Surviving Heightened Competition from Michelin and the 1970s Oil Shocks
In the late 1960s Pirelli's reputation for being at the forefront of innovation was usurped by Michelin when the latter introduced steel-belted radial tires. Michelin also entered the U.S. cable market seven years before Pirelli. Some commentators suggested that Pirelli's management was more concerned with producing glossy calendars than tires (the first Pirelli calendar having been produced in 1964). The company responded by embarking on a long-term research and development agreement with the British Dunlop group. This surprising move did not lead to a full merger, and neither party seemed to be too disappointed when the agreement was terminated in 1981.
A personal tragedy hit the firm in the early 1970s when Giovanni Pirelli, a direct descendant of the original founder, was killed in a car crash. This natural leader of the firm was replaced by his younger brother, Leopoldo, who was also severely injured in the accident. Leopoldo led the company through a period of protracted change.
The Pirelli Group has a long industrial tradition and is ranked among the world's leaders in every sector in which it operates. For more than a century, we have been developing into a fully-fledged multinational, firmly rooted in various national markets. Our competitive strength lies in technological capabilities and research, and in the quality and the professional expertise of our human resources.
The oil crises of the 1970s brought about a change in attitude towards the role of the motor car. Sales of new cars slumped as the price of gasoline soared, and as a consequence the worldwide demand for tires fell dramatically. Italy, far more dependent on imported sources of energy than most of its European partners, was particularly badly hit by the 1974 crisis, which saw the return of rampant inflation and a massive drop in the value of the lire. The second oil crisis of 1979 followed the withdrawal of the Communists from the "historic compromise" coalition government that had done so much to stabilize Italian political life. The Naples earthquake of November 1980 and the public exposure of P2, the secret Masonic lodge, six months later further damaged the morale of the country.
Reorganizing and a Program of Acquisitions in the 1980s
After the ending of the agreement with Dunlop, Pirelli benefited from the upturn in the European economy of the early 1980s. The Italian and Swiss parent companies were responsible for an extensive reorganization of the group in 1982, which saw an equalization of the shares each company held in the group's many and varied subsidiary companies. A new management company, Pirelli Société Générale S.A., was created in Basel to ensure that unified policies and centralized objectives were put in place in Pirelli companies throughout the world.
In 1986 Pirelli acquired the share capital of Metzeler Kautschuk GmbH, a German company with many interests in the rubber industry. The acquisition of Metzeler led to a 13 percent increase in consolidated turnover and reinforced Pirelli's position in the market for motorcycle tires and automobile components. Just as important, the move provided Pirelli with a well established distribution chain that dealt with manufacturing activities. This apparent change in strategy, favoring growth through acquisition at the expense of traditional organic growth, was also demonstrated in 1988 when the group acquired Armstrong Tire and Rubber Company, the sixth largest U.S. tire manufacturer. In the same year Pirelli bought Filergie S.A., a cable manufacturer with 13 plants in France and Portugal. Although the pace of technical development appeared to be slowing down and no further radically different tires were introduced, the company did benefit from the increased margins offered by a shift in demand in favor of low-profile and premium radial tires.
A further share restructuring was undertaken in 1988 when Pirelli S.p.A. acquired Société Internationale Pirelli S.A.'s holding in Pirelli Société Générale S.A., thereby accepting direct responsibility for the day-to-day management of the operating companies. In turn, these operating companies were restructured into self-contained divisions in order to facilitate faster responses to financial, production, and employment problems. The three divisions, Pirelli Tire, Pirelli Cavi, and Pirelli Prodotti Diversificati, were each given separate holding companies.
The worldwide tire industry was as badly hit by the recession of the late 1980s and early 1990s as any other manufacturing sector. Worldwide sales of tires stagnated, and producers were unable to pass on increases in the cost of raw materials, especially oil, to the final consumer. Car makers, suffering from reduced demand, cut their costs by forcing tire manufacturers to accept lower prices. A spate of ill-conceived takeovers in the early 1980s and an increasing market dominance by a decreasing number of companies led to pressure on margins in the struggle to gain market share. Excess capacity and oversupply exacerbated the situation.
Pirelli's reaction to these market forces was to engage in two major merger and acquisition exercises. First, the company became involved in an acrimonious battle with Bridgestone Corporation to take control of the U.S. company Firestone Tire & Rubber Company in 1988 and 1989. With the benefit of hindsight, Pirelli should be content to have lost the battle and thereby have avoided what proved to be a costly and largely unsuccessful acquisition for Bridgestone.
- Giovanni Battista Pirelli founds Pirelli & C. in Milan to manufacture rubber goods.
- Manufacture of insulated telegraph cables begins.
- Company begins producing underwater telegraph cables.
- Pirelli produces its first pneumatic bicycle tires.
- First Pirelli automobile tires roll off the assembly line.
- In first overseas venture, Pirelli opens factory in Spain.
- Pirelli & C. is transformed into an investment company controlling a newly incorporated industrial holding company, Società Italiana Pirelli (later Pirelli S.p.A.).
- Pirelli & C. is taken public.
- Pirelli S.p.A. is taken public.
- Pirelli produces the first fabric-belted tire, the Cinturato.
- The P7 low-profile tire is introduced.
- The Pirelli group is extensively reorganized.
- The German firm Metzeler Kautschuk GmbH is acquired.
- Pirelli acquires Armstrong Tire and Rubber Company and Filergie S.A.; a further restructuring creates self-contained divisions focusing on tires, cables, and diversified products.
- Pirelli launches an ultimately unsuccessful and near disastrous attempt to merge with Continental AG.
- Newly installed CEO Marco Tronchetti Provera launches a massive restructuring that reduces Pirelli to two core divisions, tires and cables.
- Pirelli divests two businesses: terrestrial fiber-optic equipment and fiber-optic components, generating about $5 billion in cash.
- Pirelli gains control of Telecom Italia S.p.A. by leading a takeover of Olivetti S.p.A.
- Company restructures into four businesses: tires, energy cables and systems, telecommunications cables and systems, and real estate; Pirelli S.p.A. is acquired by and merged into Pirelli & C. S.p.A.
- Pirelli divests its energy and telecommunications cables businesses.
Early 1990s: Near Disastrous Attempt to Merge with Continental and a Massive Restructuring
Pirelli's second attempt to increase its market share by entering the world of mergers and acquisitions led to a long series of merger discussions with the German company Continental AG and ultimately, near disaster. The plan to merge the fourth- and fifth-largest tire producers in the world was designed to produce a force powerful enough to achieve critical mass in a fairly stagnant market. Damaging price competition would be avoided and overcapacity would be reduced. This deal seemed a far more attractive proposition than the opportunity to acquire Firestone two years earlier. The proposed merger, however, proved to be problematic from the very first time the two parties met. The board of Continental, led by CEO Horst Urban, angered the Pirelli leadership by publicly revealing details of secret meetings. Pirelli believed that its attempts to follow traditional German merger practice, in which friendly approaches are made to willing partners in order to achieve mutual benefit, was the best way to act in the early stages of the deal. Continental's belligerent defensive strategy, inspired by the aggressive tactics employed by the City of London and Wall Street in the mid-1980s, led Pirelli to hire an investor group to buy up Continental stock. While talks between the two firms dragged on into 1991, Pirelli's financial condition weakened under the strain of the stagnant economy to the point where Continental pulled out of the merger discussions.
It was subsequently revealed that Pirelli lost almost $300 million on the Continental stock its investor group had purchased, further damaging the company's fortunes and instigating a shareholder revolt (after an earnings gain of 11 cents per share in 1990, the company posted a loss of 48 cents per share in 1991). In 1992 Leopoldo Pirelli was pushed aside from day-to-day management (he remained chairman of the board) in favor of his son-in-law Marco Tronchetti Provera, who had opposed the Continental takeover attempt. Tronchetti instigated a massive restructuring effort to forestall threatened bankruptcy. Many of the businesses his predecessors had acquired in preceding decades were sold off, eventually reducing Pirelli to two core divisions, tires and cables, out of the nine it had operated at its peak of diversification. In addition to the sale of such operations as conveyor belt and apparel manufacturing, much of Pirelli's downtown Milan real estate was sold, bringing in $563 million which contributed to cutting the firm's $2.5 billion debt load in half. The company's workforce was cut from 53,500 in 1990 to 38,500 in 1994, or about 25 percent, and the number of factories Pirelli operated was reduced from 103 in 1990 to 74 in 1994.
After its loss of ITL 657 billion in 1991, Pirelli's newfound concentration on its core tire and cable businesses slowly turned the company around. After smaller losses of ITL 69 billion in 1992 and ITL 41 billion in 1993, Pirelli returned to profitability in 1994 with a gain of ITL 72 billion. Its tire operation was boosted by a resurgence in European sales based primarily on Pirelli's emphasis on increasingly popular high-performance tires. By 1995, Pirelli had captured 12 percent of the European tire market, second only to Michelin. The North American market lagged behind, however, because of the poor performance of Armstrong. Pirelli replaced Armstrong's management team in early 1995, giving the new team until 1997 to break even. At the same time, Pirelli began to expand its tire business into East Asia.
On the cable side of its business, Pirelli had built itself into one of the world's top two manufacturers of fiber-optic cables. It aimed to increasingly emphasize telecommunications cables over those used for power. The company was also doing pioneering work in the area of photonics: the use of optical fiber and other components for high-speed transmission of information as pulses of laser light. Pirelli had expressed interest in broadening its telecommunications business by purchasing a stake in the state-owned Telecom Italia, which the Italian government had considered privatizing. However, threats to block any such Pirelli move to further enhance its position in the Italian telecommunications sector were immediately raised by Italian legislators.
Late 1990s: Solidifying the Turnaround
By 1996 net income had jumped to ITL 436 billion on revenues of ITL 10.24 trillion ($6.2 billion), while Pirelli's debt load had been cut to just ITL 1.02 trillion ($617 million). In a further signal of the company's turnaround, Pirelli made its first dividend payment in five years. In June 1996 Tronchetti succeeded the retiring Leopoldo Pirelli as chairman of Pirelli, becoming the first non-Pirelli to chair the group. Early the following year, Tronchetti unwound his predecessor's disappointing acquisition of Armstrong. Pirelli closed the last of the factories inherited from Armstrong, consolidated its North American production at its plant in Hanford, California, and ended its use of the Armstrong brand. The new strategy in North America was to sell high-performance tires under the Pirelli brand and use its Formula brand in the broad-line replacement passenger tire market. Pirelli's main U.S. tire subsidiary, Pirelli Armstrong Tire Corporation, was renamed Pirelli North America Inc.
At the beginning of 1999 Pirelli completed a further simplification and modernization of its ownership structure. Pirelli & C., the principal holding company of the Pirelli family, maintained control of Pirelli S.p.A. through three intermediary holding companies. In a complex series of transactions, these intermediary companies were eliminated, after which Pirelli & C. directly held a controlling 30 percent stake in Pirelli S.p.A. Meanwhile, Pirelli was in the midst of bolstering its position in power cables through several acquisitions. In 1998 the company purchased the power cables operations of Siemens AG for $277 million, gaining businesses in Germany, Hungary, Romania, Turkey, Italy, Spain, Austria, Slovakia, and China and making Pirelli the world's largest producer of energy cables. This deal was followed in 1999 by the purchase of the power and construction cables division of Metal Manufacturers Limited of Australia and in 2000 by the acquisitions of part of the power cable operations of the electricity companies of NKF, a Dutch cable company, and of the energy cable operations of BICCGeneral, a unit of General Cable Corporation. The latter deal included 11 factories, five of which were in the United Kingdom and one in Italy along with additional facilities in Africa and Asia and joint ventures in Malaysia and China. A restructuring announced by Pirelli in late 1999 involving the elimination of 2,800 jobs and the closure of five plants was mainly aimed at streamlining its acquisition-bolstered cable operations.
On the tire side, meanwhile, Pirelli formed alliances with Cooper Tire & Rubber Company in North and South America in 1999. Cooper agreed to distribute and sell Pirelli passenger-car and light-truck tires for the North American replacement-tire markets, while Pirelli agreed to distribute and market Cooper tires in South America. For Pirelli, this alliance was mainly intended to shore up its position in its weakest market, North America. In June 1999 Pirelli acquired majority control of Alexandria Tire Co. S.A.E., the largest tire manufacturer in Egypt. As part of a drive to cut costs, Pirelli also developed a new production process it dubbed the Modular Integrated Robotized System (MIRS). A highly flexible, robot-run mini-factory integrated with the entire supply chain, MIRS made its debut in 2000 at the firm's Milan factory.
Early 2000s: Enter Telecom Italia, Exit Cables
In 2000 Pirelli completed two large divestments that left it with a horde of cash. In February Pirelli sold its terrestrial fiber-optic equipment business to Cisco Systems, Inc. for about $2.2 billion. As part of the deal Cisco invested $100 million for 10 percent stakes in Pirelli's fiber-optic components and submarine-cable businesses. Part of the fiber-optics components business, however, was sold in December 2000 to Corning Inc. for approximately $3.6 billion. In the wake of these deals, which left Pirelli with about $5 billion in cash—Pirelli having sold the assets at the peak of the market—the company split its cables and systems division in two, effective at the end of 2001, creating two new units, one focused on telecommunications cables and systems and the other on energy cables and systems.
In September 2001 Tronchetti stunned the European financial community when he used Pirelli's pile of cash to gain control of Telecom Italia, at the time the fourth largest telecommunications firm in Europe, with interests in the telephone, Internet, and television sectors, and a debt-laden company struggling to shake off its past as a bloated state-owned monopoly. Telecom Italia had been privatized in 1997 and then taken over by Olivetti S.p.A. in 1999 in a highly leveraged hostile takeover engineered by Roberto Colaninno. Tronchetti joined with the Benetton family, Italy's three largest banks, and the investment fund Hopa in a EUR 7 billion ($6.1 billion) deal to take a controlling 27 percent stake in Olivetti, which in turn controlled 55 percent of Telecom Italia. Pirelli set up a new holding company called Olimpia S.p.A. as the vehicle to hold the stake in Olivetti. Pirelli initially held a 60 percent stake in the new company.
This deal was treated quite coolly by investors, and Pirelli's stock was pummeled. Tronchetti's plan was to refocus Pirelli on telecommunications, including the Telecom Italia assets and Pirelli's own fiber-optic cables, components, and networking gear. Toward this end a plan was announced to divest the firm's tire and energy cable operations by the end of 2002. Luckily for Pirelli, this plan was never put into full effect, sparing it the prospect of being fully exposed to a worldwide telecommunications industry gone bust. Instead, Pirelli restructured into four businesses in 2003: tires, energy cables and systems, telecommunications cables and systems, and real estate. Seeking to further simplify its convoluted ownership structure, Pirelli S.p.A. was acquired by and merged into Pirelli & C. S.p.A. in 2003, the latter becoming the main holding company for the Pirelli group. At the same time, Olivetti was merged into Telecom Italia, further reducing the number of companies linking Pirelli to the latter.
While Pirelli's telecommunications and cables businesses suffered from deep slumps, its tire business was doing quite well thanks to an emphasis on high-performance products and the spread of its automated factories. In 2003 a new MIRS plant in Rome, Georgia, began churning out tires, including a new model called the Scorpion that was intended to reintroduce the Pirelli brand to the U.S. market. During 2004 Pirelli's tire operations enjoyed their best performance in ten years as Pirelli's emphasis on high-end tires continued to pay dividends. The tires unit posted profits of EUR 169 million on revenues of EUR 3.26 billion. Overall net income amounted to EUR 274 million on revenues of EUR 7.11 billion.
By this time, Pirelli had placed both of its cables units up for sale, and in June 2005 it announced their sale to the private equity arm of Goldman Sachs for EUR 1.3 billion ($1.6 billion). This left the group focused primarily on tires, telecommunications, and real estate. With Telecom Italia beginning to perform better and the tires unit riding high, Pirelli's future seemed bright. Not resting on its laurels, the company was actively pursuing new markets for its tires business and by late in 2005 had set up new joint ventures for tire manufacturing in Romania and China.
Olimpia S.p.A. (57.7%); Pirelli Labs S.p.A.; Pirelli & C. Real Estate S.p.A. (53.9%); Pirelli Broadband Solutions S.p.A.; Pirelli Ambiente Holding S.p.A. (51%); Pirelli Pneumatici S.p.A.; Pirelli Gesellschaft mbH (Austria); Pirelli Tyres Belux S.A. (Belgium); Pneus Pirelli S.A.S. (France); Pirelli Deutschland GmbH (Germany); Elastika Pirelli S.A. (Greece); Pirelli Hungary Tyre Trading and Services Ltd.; Pirelli Tyre Holding N.V. (Netherlands); Pirelli Tyres Nederland B.V. (Netherlands); Pirelli Polska Sp. Zo.o. (Poland); S.C. Cord Romania SRL (80%); S.C. Pirelli Tyres Romania S.R.L.; Pirelli Slovakia S.R.O.; Pirelli Neumaticos S.A. (Spain); Pirelli Tyre Nordic AB (Sweden); Agom S.A. (Switzerland; 80%); Pirelli Tyre (Europe) S.A. (Switzerland); Çelikord A.S. (Turkey; 50.76%); Türk-Pirelli Lastikleri A.S. (Turkey; 63.05%); Pirelli UK plc; Pirelli UK Tyres Ltd.; Pirelli Tire Inc. (Canada); Pirelli North America Inc. (U.S.A.); Pirelli Neumaticos S.A.I.C. (Argentina); Pirelli Pneus S.A. (Brazil; 99.73%); Pirelli Neumaticos Chile Limitada; Pirelli de Colombia S.A.Pirelli Neumaticos de Mexico S.A. de C.V.; Pirelli Venezuela C.A. (96.22%); Alexandria Tire Company S.A.E. (Egypt; 86.82%); Pirelli Tyre (Pty) Ltd. (South Africa); Pirelli Tyres Australia Pty Ltd.; Pirelli Tyres (NZ) Ltd. (New Zealand); Pirelli Japan K.K.; Pirelli Asia Pte. Ltd. (Singapore).
Bridgestone Corporation; Compagnie Générale des Établissements Michelin; The Goodyear Tire & Rubber Company; Continental AG.
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—update: David E. Salamie