BUSINESSWEEK ONLINE : JULY 17, 2000 ISSUE
INTERNATIONAL BUSINESS America or Bust for Deutsche Telekom? The European giant needs to grab a slice of the U.S. market--and now may be the time to strike For years, Deutsche Telekom (DT) CEO Ron Sommer has been promising an acquisition in the U.S. that would, in a stroke, catapult the German ex-monopoly to the top ranks of the global telecommunications business. Now it looks as if he finally has a chance to make good on his vow. Never have so many U.S. telecom companies been in play. Sprint (FON) and WorldCom (WCOM) could be takeover candidates now that regulators have derailed their merger. Denver's Qwest Communications International Inc. (Q) could reopen talks with Telekom now that its merger with US West (USW) is in the bag. Even AT&T (T) is vulnerable. ''[This] is the biggest strategic imperative facing Deutsche Telekom--a very significant presence in the U.S.,'' says Graeme Clark, the London-based head of PricewaterhouseCoopers' information and communications practice. Yet there are perils aplenty for the German colossus. A U.S. acquisition will plunge Deutsche Telekom into a market where it has little experience and where the rules are much different from those in Europe. Integrating a new U.S. company and its employees will be a vast organizational challenge as DT struggles to break free of its own past as a state bureaucracy. Even with its huge resources, a big U.S. move will strain management's ability to focus as competition grows more intense. Little wonder that investors are nervous. Deutsche Telekom shares have sunk more than 9% since June 28, when speculation surfaced that the company might move on Sprint. Even with the recent stock slide, Deutsche Telekom's stock market value of $178 billion remains second only to Vodafone AirTouch PLC (VOD) among telecom companies in Europe. First-quarter profits were $1.86 billion on sales of $9.06 billion. DT just raised $14.6 billion in a bond issue, and its stake in separately listed Internet subsidiary T-Online is worth an additional $14 billion. It can afford practically any deal. The problem will be making the deal work. Think DaimlerChrysler (DCX) has had a tough time? Deutsche Telekom will wish it had it so easy. Unlike Daimler Benz, which had decades of experience in the U.S. before buying Chrysler Corp. in 1998, the U.S. is essentially virgin territory for Telekom. Even after foreign acquisitions such as British mobile-phone company One2One, Deutsche Telekom's home market still accounts for 92% of sales. And the breathless pace of technological change makes the telecommunications business far less predictable than the mature auto market. The U.S. market, where deregulation has been steadily reshaping the telecom business since 1984, is vastly different from Germany's, where Deutsche Telekom still enjoys an effective monopoly in providing phone connections. Early betting was that Deutsche Telekom would pounce on Sprint, of which it already owns 10%. Sprint would supply the Germans with what they need most in the U.S.--a data network to serve DT's corporate customers, not to mention a nice roster of Sprint business customers. But Sprint would be expensive--$110 billion or more. Its boss, William T. Esrey, has already had a run-in with Sommer over Global One, a joint venture that foundered earlier this year. And Sprint comes with some baggage DT doesn't need, such as a marginally profitable long-distance network. For that reason, Telekom might prefer to make another try for Qwest. The Denver company is valued by the stock market at a slightly more digestible $85 billion and is more focused on the fast-growing market for Internet data transmission. BRAVADO. Deutsche Telekom has made huge progress since telecom deregulation came to Germany in 1998. Sommer has tried to push his 196,000 employees to serve customers better and make decisions more quickly. Last year he installed an American, Jeffrey A. Hedberg, on the company's management board. That was an attempt to offset DT's conservative technicians' culture with a dash of U.S.-style bravado. Sommer is planning to spin off the company's mobile-phone arm in the fall, subjecting it to the scrutiny of the stock market. He has trimmed the workforce more than 25% since 1994. But more than a third of employees are government bureaucrats who can't be fired. If it acquires a big U.S. company, Deutsche Telekom will have to change fundamentally. It will have to install several more U.S. managers in its top ranks. It will have to give the U.S. unit's employees a lot of freedom to make decisions at the pace required for the U.S. market. ''Just integrating it into the amorphous mass of Deutsche Telekom is a recipe for failure,'' says Bob House, London-based vice-president at Renaissance Strategy, a telecoms consultancy. So far, Deutsche Telekom has a reputation for being a difficult partner that doesn't like to give up control. Its Global One venture with France Telecom (FTE) and Sprint fell apart after the partners bickered constantly. Deutsche Telekom seems to recognize the need to be more flexible. In Germany, it just formed a partnership with London-based Telint Global, which plans to offer ultra-high-speed Internet services to small- and medium-size businesses. That's a tacit admission by Deutsche Telekom that smaller players can serve niche markets better. ''They can't move fast enough, and they realize that,'' says Telint CEO Peter Balchin. Deutsche Telekom will have to show the same pragmatism in the U.S. TICK-TOCK. Sommer is also pushing Deutsche Telekom beyond its traditional business of providing phone connections. In March, it agreed to pay $2.6 billion for control of debis Systemhaus, DaimlerChrysler's information-technology unit. That will allow Telekom to sell software services, a fast-growing market in Europe. Time isn't on Sommer's side, though. The pressure on Deutsche Telekom shares saps his financial might by the day. The latest threat comes from the benchmark Stoxx index, which creates an index of Europe's top publicly traded shares. Changes in the way the index weights shares will lower Deutsche Telekom's share of the index. That could prompt a sell-off by managers of mutual funds that mirror the index. To add to Sommer's worries, the takeover hunt is getting political. A group of senators claims a takeover of Sprint would violate U.S. laws because Deutsche Telekom is still majority-owned by the German government. Talks with Qwest could also face political objections. After its merger with US West, Qwest is the main provider of local phone service in several Southwestern states. Yet Sommer probably has little choice but to act. Deutsche Telekom must grow fast abroad to offset loss of market share in Germany. Europe alone probably can't provide that growth. And it needs access to the U.S. market to hang on to its corporate customers, especially after selling its stake in Global One to France Telecom. Sommer has already supercharged expectations through moves like his attempt to take over Telecom Italia (TI) last year. So far, all have come to naught. He can't afford another disappointment. By Jack Ewing in Frankfurt, with Stanley Reed in London _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS America or Bust for Deutsche Telekom? TABLE: Deutsche Telekom's Broken Trail of Deals INTERACT E-Mail to Business Week Online

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