| BUSINESSWEEK ONLINE : OCTOBER 25, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
For Deutsche Telekom, Time Is Running Out (int'l edition) It has to find a big partner or find itself frozen out of the global market, and it must move fast As the world's telecom chieftains treat customers to foie gras and fondue and hold court with thousands of journalists at the giant Geneva Telecom99 trade show in mid-October, Deutsche Telekom Chief Executive Officer Ron Sommer is nowhere to be seen. Sommer, the 50-year-old head of the $39 billion German operator, has ducked out of panel discussions and shunned the press. It's no secret that Sommer has more urgent business to attend to. Over the past 12 months, Deutsche Telekom has suffered a series of strategic defeats. Sommer's bid to acquire Telecom Italia failed in May; a key alliance with France Telecom and Sprint Corp. called Global One imploded in September; and his effort to buy Sprint crumbled on Oct. 5 when Chairman William T. Esrey announced that Sprint would be acquired by MCI WorldCom Inc. Those setbacks now threaten to derail Deutsche Telekom's development in global markets, which it desperately needs in order to offset erosion of its core businesses at home. Company officials insist Sommer is tied up in negotiations, but rivals put it more bluntly: Sommer is fighting for Deutsche Telekom's long-term survival as an independent phone company. With the global industry consolidating rapidly, time is running out for Sommer. If he doesn't secure a large U.S. partner soon to extend the German operator's reach, market experts say Deutsche Telekom will be unable to compete in global markets with larger, faster-moving rivals such as MCI WorldCom, AT&T, and British Telecommunications. AT&T and BT, which combined their international assets in a 1998 joint venture, announced on Oct. 11 a major expansion of their high-speed global Internet service. Even in Europe, Deutsche Telekom lacks critical mass. As long as the German state keeps a controlling stake in Deutsche Telekom, the company is shielded from a hostile takeover. But now, government officials are dropping hints that they plan to sell off the remaining 66% state stake in tranches starting in mid-2000. A full-scale privatization would turn up the heat on Sommer to perform, and make DT a plum target. For now, the state's stake is also a golden handcuff. In August, Sommer told analysts in London his strategy was to make ''bold acquisitions.'' But the Italian government balked when Sommer made his surprise bid for Telecom Italia, wary of a merger that would have given the German government ownership of Italy's former monopoly. The German state's stake could complicate his other takeover hunts as well. Sommer also risks cutting a rash or expensive deal. Rival telecom executives expect him to announce a U.S. acquisition soon. With Sprint out of the picture, possible targets include Global Crossing, a Bermuda-based Internet and long-distance company, or SBC Communications Inc., which is merging with Ameritech Corp. But there is no simple solution for Sommer to gain the heft he needs. Most of the large players have already found partners. Acquiring a smaller company such as Global Crossing won't solve Telekom's strategic dilemma, and is pricey to boot, analysts say. It's still building its global network, is thin on multinational customers, and boasts a market capitalization of $28 billion. Giants like Deutsche Telekom could build their own networks for less in dozens of countries, says Peter J. Nicholson, executive vice-president at BCE Inc. In August, still smarting from the loss of Telecom Italia to puny rival Olivetti, Sommer bought Britain's fourth mobile phone operator, One-2-One, for $13.86 billion in cash and debt, a price analysts say was too rich. ''One-2-One lacks high-margin business customers,'' says one executive at British mobile rival Orange PLC. ''They've got everything backwards.'' The pressure is on. Only 4% of Deutsche Telekom's revenues last year came from international operations. Meanwhile, dozens of fierce competitors are pouring into the German giant's home market. Last year, DT lost 30% of its long-distance market to new players such as Mannesmann. On Oct. 4, France Telecom stormed into DT's backyard with the purchase of a 17.2% stake in German mobile phone operator E-Plus Mobilfunk for $1.8 billion. As a result of price wars, DT's sales in the first six months fell 4%, to $17 billion, and net profit declined 4.5%, to $1 billion. To be sure, Sommer has made some headway. He has whittled away at Deutsche Telekom's huge debt and has shed personnel, while generating new growth in Internet and mobile services. That counterattack has helped buoy Deutsche Telekom's share price. Since Jan. 1, the stock has risen 37%, to $44.71. But DT's 14.7% weight in the DAX index helps prop up the price, since managers of DAX index funds have to own a corresponding number of DT shares. A TARGET? But Sommer's slow maneuvering and strategic errors may have cost the company its future. Many say Sommer would be in a pole position had he negotiated to buy Sprint or one of the Baby Bells three years ago. Now it may be too late. ''Even if he closes a deal, he has to make it work fast--and DT's not moving fast enough,'' says one London-based telecom consultant, who gives DT at most three years before it becomes a takeover target. The problem isn't money. DT got $10.86 billion in its recent sale of new shares. To build up his war chest, Sommer has said he would be willing to spin off the Internet and mobile businesses, worth more than $8.15 billion. And its 10% stake in Sprint is now worth billions. Without the right acquisition, though, that money risks being ill-spent. Sommer also risks creating new rivals. Regulators have been pushing him to sell at least part of Deutsche Telekom's extensive cable business by yearend. More than 20 bidders have already emerged to jockey for access to Germany's 18-million-strong cable subscribers, which is 41% of the total West European market. While the sale of the cable assets could bring in as much as $16 billion, the buyer or buyers could upgrade the cables and use them to launch cheap telephone and high-speed Internet services. Mannesmann is keenly interested, along with France Telecom and the Netherlands' United Pan-European Communications, in which Microsoft Corp. owns an 8% stake. Ron Sommer still wields big cash flows and enjoys the protection of the state. But the dealmaking he does in the coming months will either catapult Deutsche Telekom into the top tier or leave it stranded on the sidelines. With a challenge like that, no wonder he jilted the hordes at the Telecom fest in Geneva. By Gail Edmondson in Rome, with Jack Ewing in Frankfurt, Stephen Baker in Geneva, and Bill Echikson in Brussels _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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