Quo Vadis, Deutsche Telekom? - Brief Article

Chief Executive, The, Dec, 2000 by Stephan Richter

It's not easy these days being at the helm of almost any large telecommunications company. The stock prices of the large U.S. and European telecom groups are slumping, leading unnerved investors to increasingly question the strategies of top management. One of the most beleaguered top managers is Ron Sommer, CEO of Deutsche Telekom. His list of worries is long indeed: the share price plummeted from a high of 104 euros in early March to the low 30S. This wiped out two-thirds of Deutsche Telekom's market value, and simultaneously hampered the company's future ability to use its stock as an acquisition currency.

But Deutsche Telekom's worries run deeper than just the mediocre performance of its share price. Some recent strategic blunders by Sommer raise the question of whether this flagship of corporate Germany still has the right man at the helm. It's widely recognized that Sommer excels at marketing and corporate communications. Where many experts see deficiencies, however, is in his strategic vision.

As proof, these critics cite the many failed deals that Deutsche Telekom's CEO had tried to forge over the last months, such as alliances or mergers with Qwest, Telecom Italia, and Freeserve. All of these planned deals eventually fell apart. The root cause for these blunders appears to be an inability by Deutsche Telekom's top management to bridge cultural divides and different corporate cultures, skills essential to making cross-border mergers work. More than in many other industries, that is, of course, the name of the game.

Deutsche Telekom finally managed to get a foothold in the U.S. by offering to acquire VoiceStream. But far from welcoming the news, investors sent the "T-Aktie" into a tailspin when they realized that Sommer--at around $50 billion--had paid a very steep price for a company that is essentially still a niche player in the U.S. market. At the time, even most Americans had never heard anything about the Washington-based company.

When announced, the value of the deal equaled around one-third of Telekom's market capitalization. Thus, the Germans paid about $16,000 for each of VoiceStream's three million U.S. customers. That's far above the $9,000 per customer that Britain's Vodafone shelled out for each of Mannesmann's customers in 1999--a price many experts ridiculed at the time as excessive. No wonder that, after the Telekom-VoiceStream deal was announced, commentators joked about Sommer wanting to join the Internet age by paying "bubble valuations" for his American acquisition. Deutsche Telekom has placed a huge bet on its proposed merger with VoiceStream.

But Sommer's problems don't stop there. Deutsche Telekom incurred huge debts to compete in European auctions for third-generation mobile phone licenses. While these technologies are likely to become hugely popular in cell phone-crazed Europe, it's far from certain that the companies that bid in the auctions will ever recoup the huge investments they made. The folks at Standard & Poors appear to agree and recently slashed DT's credit rating from AA- to A-.

Sommer has largely made his name as a CEO who can win over investors so raising the money for his acquisitions turned out to be the easy part. The biggest revelation for German companies in the past five years has the necessity of dramatically improving relations with shareholders, and Sommer has done so admirably. Two million Germans bought Deutsche Telekom stock at the former state-owned monopoly's IPO in 1996-and most still hold it, despite its poor performance. Even after the high-profile failure of the Telecom Italia deal, institutional investors forgave Telekom's dithering, giving it mountains of money for a new run at one of the big U.S. telecom groups.

The good news for DT is that its merger with VoiceStream is finally garnering support in the U.S. political establishment. Initially, its U.S. competitors tried to keep DT from swallowing up a "valuable U.S asset." They argued that a company in which a foreign government owns a large share (still around 55 percent in DT's case) should not be allowed to take over a U.S. telecom company for reasons of national security.

But the initial resistance the deal encountered in the U.S. appears to be dwindling. A big factor in that may be that U.S. politicians, competitors and regulators are realizing that Deutsche Telekom grossly overpaid for VoiceStream and may well be punished enough by the markets without further trouble from the U.S. government.

Stephan Richter is publisher of TheGlobalist.com