Deutsche Telekom Looks to the U.S. for Its Growth

BONN —  With more than $100 billion to spend, Deutsche Telekom’s ogling of U.S. telecommunications giants has unleashed a disruptive mating dance across the Atlantic and beyond.

Hardly a day goes by without a rumored DT bid or flirtation, sending stock prices for the alleged targets toward the heavens and the eager suitor’s shares on a heart-racing roller-coaster ride of their own.

No sooner had reports surfaced that Europe’s biggest phone company had offered $53 billion for a small but strategic U.S. cellular firm, VoiceStream Wireless, than the bidding was rumored Thursday to have widened into a Franco-German affair: France Telecom, the French counterpart to DT, was said to have joined the hunt for VoiceStream as well.

FT categorically denied the reports, but Deutsche Telekom hasn’t been bashful about declaring its global ambitions. The only question was whether DT’s reported bid constituted a far too expensive dowry, as investors obviously believed: The markets beat down DT’s stock price 6%.

Only the latest in a spate of transatlantic merger talks in the telecom world, the reported scramble for VoiceStream enhanced an impression deepening among analysts and investors that there is desperation in DT’s efforts to gain a foothold in the world’s most important market.

DT executives acknowledge that they are shopping but contend that the wide array of potential mergers under consideration all fit into their plan for emerging as the world’s No. 1 telecom power.

“We aren’t out to buy whatever is available. It has to fit into our growth strategy,” said Gerd Tenzer, a member of the board of directors.

Tenzer said a takeover target’s regional position is less important than shareholder value and how the acquisition would contribute to DT’s strength in four arenas: wireless communications, online services, fixed-line access and information-technology systems solutions.

In addition to VoiceStream, a relatively small U.S. mobile provider with about 2.3 million subscribers, DT is also reported by German financial media to be in talks with Sprint Corp., which could offer DT a vital Internet backbone as well as 7 million mobile customers, and with recently merged Qwest Communications International Inc. and U.S. West Inc.

After the collapse of merger efforts between Sprint and WorldCom Inc., the latter company may also be attractive for the Germans. DT has also lately been reported to be looking at Britain’s Cable & Wireless and a host of deals that would enhance its Asian access.

“We don’t speculate and we don’t react to what is being speculated in the media. We are holding talks in a completely calm atmosphere,” Tenzer said shortly after the DT board meeting at which the offer for VoiceStream was reportedly sweetened. “But I can confirm that we’re talking.”

DT Chairman Ron Sommer set industry analysts’ tongues wagging at the start of this year when he said the German company that has evolved from a state monopoly only five years ago into one of Europe’s most dynamic businesses could not risk being “dwarfed” by international competitors.

More recently, Sommer, whose 1995 appointment to run DT infused fresh energy and outlook into the company at a critical time in its evolution, confirmed he has his sights set on the all-important market across the Atlantic.

“Our next focus is in the United States, and we are talking about an acquisition, not just a loose alliance,” the DT chief told the Bild am Sonntag newspaper earlier this month.

While some industry analysts suspect that DT would prefer to join forces with Sprint and enhance basic phone and Internet services as well as mobile, a pairing with VoiceStream would allow the German company, which already boasts 25 million customers in Central Europe, to expand on its successful GSM technology platform in the United States.

VoiceStream is one of the few major U.S. mobile service providers using GSM [global system for mobile communications], a system that has allowed wireless service to soar in Europe and much of the rest of the world because customers have access wherever they roam within the GSM region.

Compared with the rival CDMA [code division multiple access], used by 67 million consumers, primarily in the United States and South Korea, GSM is the platform for more than 330 million mobile users.

“The biggest synergies would be with GSM,” Tenzer asserted. “A partner with GSM would be an advantage, but that doesn’t mean we are focused only on GSM.”

While the incompatible platforms are an issue for DT’s aspirations to gain ground in the U.S. mobile market, the German giant’s ownership structure has emerged as another obstacle to a partnership with a U.S. player.

About 58% of DT shares remain in the hands of the German government. The government has made clear it wants to eventually divest itself of the rest of DT stock, but its current majority ownership could nix a transatlantic takeover because U.S. law prohibits the Federal Communications Commission from licensing any company in which a foreign government owns 25% or more.

The FCC can grant exemptions if a deal serves the public interest and poses no national security concerns. But Sen. Ernest F. Hollings of South Carolina, ranking Democrat on the Commerce Committee, is seeking to eliminate the FCC’s option of a waiver.

“We did not deregulate U.S. telecommunications to permit regulated foreign-government-owned telecommunications companies to take over the U.S. market,” Hollings wrote FCC Chairman William E. Kennard.

Five years into their own broad deregulation plan, DT executives bridle at such suggestions that they are under government control.

“The government has no role in our management,” insisted Ulrich Lissek, an executive vice president and spokesman.

Three public offerings of state shares have been floated since the government’s communications monopoly was divided up and privatized in January 1995, shrinking the government’s holdings from 100% to 58%. The next offering depends on the market, DT says.

“We can’t just put it all up for sale--that would kill demand and destroy the price,” Lissek said.

DT faces stiff competition from the 300 independent telecom companies licensed since the federal monopoly was broken. The company that five years ago was the sole provider of long-distance, like all other services, now commands only 30% of that market and rates have dropped dramatically amid the hot competition.

Since former Sony USA chief Sommer was tapped as DT chairman shortly after the start of privatization, the German telecom giant has managed to reform its monopoly-era reputation for shoddy service and institute what can only be called U.S. management practice.

The corridors of DT’s new headquarters here are a multicultural bazaar, with specialists armed with linguistic and cultural expertise before being deployed on the merger trail. The DT board member in charge of international business, Jeffrey Hedberg, is a U.S. citizen, and the company has shown unusual flexibility and openness to trial and error in managing its subsidiary spinoffs and their stock market debuts.

DT has already acquired an array of European holdings to bolster its position on the Continent, most notably deals adding to its mobile and fixed-line clout in Poland, Hungary, the Czech and Slovak republics and in Croatia.

Its purchase of a stake in Club Internet of France earlier this year also boosted its online profile, and acquisition of DaimlerChrysler’s Debis Systemshaus has made it the No. 2 provider behind IBM of IT solutions for corporate clients on the Continent.

The stock offerings, sale of some divisions and other moves enabled the company to amass its current war chest and look beyond its existing strengths to gain purchase in important global markets.

“Our coffers are well filled,” Lissek said. “I think we’ve prepared ourselves well.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Global Ambitions

Deutsche Telekom is nearing an agreement to buy VoiceStream Wireless Corp. in an effort to get into the U.S. mobile phone market. Monthly closes and latest for each company on Nasdaq:

Deutsche Telekom at a glance:

Net revenue (1999)$33 billion

Net income (1999)$1.2 billion

Employees (1999)172,000

DEUTSCHE TELEKOM

Thursday: $52.56, down $2.38

VOICESTREAM

Thursday: $153.00, up $7.50

“Our next focus is in the United States, and we are talking about an acquisition, not just a loose alliance.”

--Deutsche Telekom chief Ron Sommer, left, earlier this month to newspaper Bild am

Sources: Bloomberg News; company reports Sonntag