Bloomberg News

Deutsche Telekom Said to Merge Technology Systems on Costs

October 26, 2011

(Updates with share price increase in sixth paragraph.)

Oct. 26 (Bloomberg) -- Deutsche Telekom AG, Europe’s largest phone company, plans to merge its internal computing and communications systems to lower costs as the economic crisis threatens profit and the legal battle over the sale of T-Mobile USA drags on, according to people with knowledge of the matter.

The plan, to be presented to the supervisory board in December, foresees the combination of the information-technology systems and services of Deutsche Telekom’s private customer business with that of the T-Systems enterprise unit, said the people, who asked not to be identified because the proposal is confidential. It would add to cost-cutting measures already announced, they said.

Steffen Roehn, chief information officer since 2009, will leave the company at the end of this month, according to an internal announcement obtained by Bloomberg News.

The Bonn-based operator is intensifying efforts to reduce expenses as the European debt crisis damps demand and challenges an attempt to return its non-German business to growth. T- Systems alone sold services valued at 2.6 billion euros ($3.6 billion) within the parent company in 2010. The company doesn’t break down spending on internal information and telecommunications systems.

Potential Savings

“There must be huge costs there to be saved if you combine the two systems,” said Jonathan Dann, an analyst at Barclays Capital in London who recommends buying Deutsche Telekom shares. “The internally focused account managers could be redeployed to drive external sales. The risk is that you lay off your best sales people who then go to competitors and help them sell services back into Deutsche Telekom.”

Deutsche Telekom rose as much as 1.7 percent to 9.26 euros, the biggest intraday gain in two weeks, and traded at 9.12 euros as of 4:38 p.m. in Frankfurt. The shares are down 5.5 percent this year, valuing the company at 39.4 billion euros.

Stefan Koenig, a Deutsche Telekom spokesman, declined to comment on the plan. The company generally aims to standardize its IT operations, he said, referring to remarks Chief Executive Officer Rene Obermann made in March last year.

The T-Systems unit, which sells computing services to large corporations, aims to increase external sales to about 8 billion euros in 2015 from 6.4 billion euros in 2010 by offering storage and computing resources via the Internet.

Profit Margins

The merger would be implemented over the next three to four years, the people said. No target savings amount has been decided, they said. The aims include enabling more centralized purchasing decisions, reducing the need for internal sales and getting the various divisions to use matching software, they said.

“They’ll combine related operations as they continue to try propping up margins and keep some money in hand for marketing,” said Adrian Pehl, a Frankfurt-based analyst at Equinet AG with an “accumulate” rating on the shares. “It may also help to avoid internal conflicts over who is in charge of what.”

The phone company’s current “Save for Service” cost- reduction program targets 4.2 billion euros in cumulative savings between 2010 and 2012. Last year, Deutsche Telekom completed the combination of its fixed-line and mobile businesses in Germany, and is following that example in other European markets.

Deutsche Telekom is trying to rescue the planned $39 billion sale of its U.S. mobile-phone unit to AT&T Inc. after the U.S. Department of Justice sued to block the merger, saying it would “significantly” reduce competition. Proceeds from the transaction would be used to reduce debt and buy back shares, and free up funds for investment in infrastructure.

The German company will probably say on Nov. 10 that third- quarter revenue fell 6 percent to 14.6 billion euros, according to the median of six analyst estimates compiled by Bloomberg.

--Editors: Kenneth Wong, Simon Thiel

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


Coke's Big Fat Problem
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus