&telcom takeover stuff. Interesting story
05:38 ET Deutsche Telekom AG (DT) 97 1/16 : --Germany-- Stock rose over 2% breaking the euro 100 level following confirmation of earlier rumors suggesting DT is holding talks with Global Crossing (GBLX: 54 3/8) - Bloomberg News reports
WSJ March 3, 2000
Deutsche Telekom Is Prowling
Again to Buy Global Presence
By WILLIAM BOSTON
Staff Reporter of THE WALL STREET JOURNAL
BONN -- Just last week, Ron Sommer, chief executive of German phone titan Deutsche Telekom, faced Europe's technology elite in a darkened conference hall and asked bluntly: "Will we plow the global economy or will it plow us under?"
He was speaking about the challenges facing Europe as it struggles to deal with the groundswell dubbed the new economy, but he could just as easily have been referring to his own company. This is the year that Deutsche Telekom AG either becomes a contender in international telecommunications or risks getting shoved aside by global rivals.
Qwest's Dance With Germans Pains 'Arbs'
With its home market, which still accounts for more than 90% of revenue, under attack by companies large and small, Deutsche Telekom has been trying to go global for years. But its minority stakes in Asian telecommunications firms were nearly wiped out by the Asian financial crisis. Its Global One alliance with Sprint Corp. and France Telecom SA, which aimed to provide telecommunications services to multinationals, produced nothing but losses and now belongs entirely to the French. And a bold bid to acquire Telecom Italia SpA flopped. Turning a state-owned monopoly, still 65%-owned by the German government, into a fleet-footed competitive enterprise is tough.
So now Mr. Sommer is eyeing a couple of big fish in the U.S. -- including Qwest Communications International Inc., U S West Inc. and Global Crossing Ltd., which is building an underseas telecommunications network intended to link five continents. If he reels one of those companies in, he will transform Deutsche Telekom overnight. Associates say he has never been more determined to complete a deal and achieve his goal of creating a global powerhouse from what was once a piece of the German post office.
Mr. Sommer knows that time is running out. With the Internet rapidly becoming the global marketplace, only those telecommunications firms with world-wide reach will be able to serve the multinationals as they move their businesses online. Compelling evidence of the trend came last week with the creation of an online market by the world's largest car makers and their suppliers.
"He knows that the next deal has to hit home," says a Deutsche Telekom executive
When German politicians carved Deutsche Telekom out of the postal system in 1990, their intention was to create a global player in an industry that they hoped would be the job machine of the coming decades. It all seemed promising. By revenue, Deutsche Telekom was the third-largest phone company in the world, after Nippon Telegraph & Telephone of Japan and AT&T Corp. But it soon became clear that the German company was ill-prepared for the harsh winds of competition.
When the first outside executives were brought in to prepare Deutsche Bundespost Telekom for privatization, the company was saddled with a huge payroll. It had more than 230,000 employees, and many of them were civil servants with lifetime jobs. Financial controls were lax at best.
Although its purchasing department was spending more than 80 billion marks a year (about $40 billion), it had no finance department, recalls Joachim Kroeske, the company's first finance director, who retired last year. "The title of the first meeting I attended was called: 'Do We Need a Finance and Controlling Department?' " he says. "I discovered that we had four communications satellites in orbit. Eventually, we found two of them." The other two remain missing.
The company's first chief executive was Helmut Ricke, a likable, rotund man from one of the midsize telecommunications-equipment makers that had lived off the Bundespost for years. Mr. Ricke's skills were perfect for reaching consensus with the postal-workers union, but he lacked the clout to stand up to German politicians and he had no international experience.
It showed. In 1994, Chancellor Helmut Kohl and French President Francois Mitterrand, the driving forces behind European integration, pressured Deutsche Telekom and France Telecom to join in a strategic alliance. The deal was to be the industrial analog to the Franco-German political axis. But the terms to which Mr. Ricke agreed tied many of Deutsche Telekom's future investment decisions, particularly in Western Europe, to the approval of his new partner, France Telecom. For the French, it turned out to be the perfect way to contain the Germans.
Deutsche Telekom began moving on its mandate to become more global. It started looking for deals abroad, including a string of minority investments in Russia, Belarus and elsewhere in Eastern Europe, as well as minority stakes in phone companies in Singapore, the Philippines and Indonesia, which were later written off after the onset of the 1997 Asian financial crisis.
As the German government prepared to sell Deutsche Telekom shares to the public, the pressure on the company's management was intense. At a routine meeting in July 1994 of the management board, which runs the company's day-to-day business, Dieter Gallist, who was in charge of residential business, suffered a heart attack and died. His sudden death shocked Mr. Ricke, who resigned and left the company at the end of the year.
A few months later, in May 1995, the company decided to bring in an outside executive with international business experience: Mr. Sommer. A dapper dresser with a quick wit, he was born in Israel in 1949 and raised in Vienna, where he earned a doctorate in mathematics at age 21. He had begun his business career at Nixdorf Computer AG (now part of Fujitsu Siemens Computers, the Japanese-German computer maker), first in New York and then in Europe, before joining Sony Corp. in 1980. There, he ran the Japanese consumer-electronics company's German operation, then was chief operating officer of its U.S. electronics unit and, later, Sony's European business. In Europe, Mr. Sommer clashed with his boss there, Jack Schmuckli, and eventually left for Deutsche Telekom.
Mr. Sommer didn't get an entirely friendly welcome. The union feared, with good reason, that he would begin axing thousands of jobs. Some of his colleagues -- Mr. Kroeske among them -- felt as if they had been passed over. The two men frequently argued during board meetings. But Mr. Sommer had little time to make friends. He had to persuade international investors and equity-shy German savers to buy shares in the company's planned initial public offering, the largest Europe had ever seen. In the end, about two million individual investors bought Deutsche Telekom shares, marking the start of a new equity culture in conservative Germany.
The shares began trading in November 1996 at 28.5 marks each ($18.88 at the time). After languishing for a couple of years, lagging both the German Xetra DAX index -- which covers computerized trade in 30 blue-chip stocks on the Frankfurt exchange -- and other telephone-company stocks world-wide, the stock took off last year. In the past six months, Deutsche Telekom shares have nearly doubled on the Frankfurt exchange, helped by the company's plan to capitalize on Internet euphoria with an initial public offering of 10% of the shares of its T-Online unit. With 4.2 million subscribers, T-Online is Europe's largest Internet-service provider. The shares closed Thursday in Frankfurt at 99.38 euros, or $95.40, up 7.39 euros, or 8.03%.
A Flying Dutchman
As the IPO was being prepared, Mr. Sommer tried to put some flesh on the bones of the company's international strategy. In April, he hired Erik Jan Nederkoorn, a Dutchman and former chief executive of the Fokker NV aircraft group, to lead Deutsche Telekom's international expansion. But Mr. Nederkoorn failed to focus on international strategy, and overseas losses rose during his tenure. He was forced to resign in January 1998.
His post was empty for an entire year when Mr. Sommer turned to an American, Jeffrey A. Hedberg, a Boston native who had dreamed of playing professional hockey but instead heeded his father's advice and went into business. The 38-year-old M.B.A. had drawn Mr. Sommer's attention for successfully turning around the soured Asian investments of Swisscom AG, the Swiss telecommunications company.
When Mr. Hedberg arrived in Bonn, Mr. Sommer was just about to launch an audacious attempt to merge with Telecom Italia, the former Italian monopoly that was resisting a hostile bid from Olivetti SpA, the typewriter maker turned computer company. Olivetti eventually won, dealing Mr. Sommer a serious blow -- and not only in prestige.
His lunge for Telecom Italia angered France Telecom Chief Executive Officer Michel Bon, Mr. Sommer's partner in the Global One alliance with Sprint. Deutsche Telekom executives says Mr. Sommer knew he was putting the Global One alliance at risk but figured it was already doomed. The partners hadn't been able to agree on a budget for 1999, and the venture was losing money and customers. More important, the terms of the alliance prevented Deutsche Telekom from expanding in Western Europe or the U.S.
Two Bids on a Desk
Then, late last year Sprint agreed to be acquired by MCI WorldCom, starting a chain reaction that ended last month when France Telecom bought out both its partners in the ill-fated Global One alliance. Mistrustful of each other right until the end, the French and Germans took months to decide on which company would buy the other out. Finally, they agreed that the companies would meet in the offices of a Paris lawyer, and each would place its bid in a sealed envelope; the one willing to pay the most would take control. By that point, Deutsche Telekom had already decided that it wanted to be the seller.
France Telekom's bid valued the whole Global One at about $10 billion; Deutsche Telekom's bid, according to people familiar with the situation, valued the company at just over $3 billion. Separately, Deutsche Telekom has said it will sell its 10% stake in Sprint. The net result: Mr. Sommer has a lot of cash in his wallet to help finance a big acquisition.
Over the past few months he has bolstered the company's position in Western Europe through midsize acquisitions, including British mobile-phone company One-2-One and the French Internet service provider Club Internet. Deutsche Telekom also plans to float minority stakes in its T-Online unit and its T-Mobile wireless unit as part of a strategy to build its wireless and ISP activities into global businesses.
But investors are still waiting for the big bang.
Embracing Baby Bell?
He has a few choices. One is to merge with a company such as Bell Atlantic, which has been left on the sidelines of the recent merger frenzy in the U.S. industry, and use that as a base to build a global business. But that strategy, while it would give the German firm a U.S. arm, would leave it substantially short of a global network. The more likely strategy is for Mr. Sommer to find a company that will give him both a solid footing in the U.S. market for Internet services for big companies and the global reach needed to work around the world with the biggest multinationals.
So Mr. Sommer's shopping list includes Qwest, Global Crossing and Cable & Wireless PLC. Qwest and Global Crossing have been building global networks to connect the cities with the largest amount of telephone traffic. Both companies have nearly completed that task, and are believed to be ready to sell out to a company like Deutsche Telekom because it would be too costly for them to develop local businesses on their own. Britain's Cable & Wireless operates a global high-speed communications network and carries a large amount of the world's Internet traffic.
But dithering won't do. The rest of the industry is moving fast. A pair of companies that were upstarts 10 years ago -- Britain's Vodafone AirTouch PLC and Germany's Mannesmann AG -- are merging to create what will be the largest wireless-telephone company in the world and will replace Deutsche Telekom as Europe's biggest phone company. MCI WorldCom and Sprint are also combining to form another global behemoth. And U.S. carriers are eyeing the European market for opportunities.
If Mr. Sommer waits too long, he might find that the window of opportunity has closed -- and that his company has become a takeover target, made vulnerable as the German government reduces its stake to a minority position later this year.
"Deutsche Telekom is determined to be a player in this symphony of megacompanies -- and to take a leading role," he vows.
|
