European Deal Aims Beyond Borders

Deutsche Telekom and Telecom Italia confirmed Thursday that they will merge into the world’s second-largest telecommunications group, but analysts voiced doubts about their ambitious plans to take on the rest of the world.

Despite their vow to take aim at industry giants in the United States, the two companies with their bloated work forces and too much state influence won’t be in shape to compete for a commanding position in the global market any time soon, experts here say.

The biggest corporate marriage in history is also far from consummation. Stockholders have yet to be convinced that there are real prospects for cost-cutting synergies from the merger, and European regulators might fear the elephants’ wedding would stifle competition on the continent.

The deal would create a European behemoth with $173 billion in market capitalization and $64 billion in annual sales. Together, they already serve 100 million phone customers, about one-third of the European population.

The venture also must win approval of both the German and Italian governments--a hurdle seemingly cleared by Bonn’s assurances to Rome late Wednesday that the joint company’s management would be a parity partnership.

But two Italian ministers complained that they were still unsatisfied by the “generic indications” that Bonn would not take advantage of its 72% stake in Deutsche Telekom to control the joint company.

At a news conference Thursday in London to announce the merger, which had been rumored to be imminent for nearly a week--driving down Deutsche Telekom stock by 8% in the confusion--Deutsche Telekom chief Ron Sommer and Telecom Italia’s Franco Bernabe disclosed plans to forge into markets beyond Europe.

“This is the first step in creating a European telecom powerhouse. We intend to increase market share in Europe and to compete with the U.S.,” Bernabe told reporters, conceding that neither company currently has much business beyond Europe. “We need global reach.”

Sommer declined to comment when asked if the new team would pursue takeover of U.S.-based Sprint Corp. Deutsche Telekom already holds a 10% stake in Sprint and Sommer a seat on the board, which he noted meant he was “always talking” with the U.S. carrier.

But some analysts see the pairing of Deutsche Telekom and Telecom Italia as hampering both companies’ efforts to range farther afield, confronting them with time-consuming challenges to cut costs and integrate operations.

Economists fear managers would be under pressure from both Bonn and Rome to preserve jobs in the combined 300,000-plus work force amid already existing double-digit unemployment.

“It’s not possible to change the whole culture and philosophy of managers who were running a state monopoly only a few years ago,” said Hans-Joachim Frank, an analyst at Deutsche Bank. “There is a need for good new managers at both companies to face the hard decisions that managers who come from the state sector are reluctant to deal with.”

Economics professor Mario Baldassari of the University of Rome-La Sapienza is even more disparaging of the partnership, which he sees as lacking in dynamism and detail on its plans for the future. “I have been hoping for years that Italy would become more European, but I’m afraid Europe is becoming more Italian,” he said.

Both companies are in dire need of streamlining, with at least 30,000 excess employees at Telecom Italia and 80,000 at Deutsche Telekom, Baldassari estimated.

The German-Italian courtship was short and passionate, primarily driven by Telecom Italia’s rush to avoid a hostile takeover by its much smaller national rival, Olivetti. The Italian suitor had offered $12.17 in cash and stock for each share of Telecom Italia, while Deutsche Telekom’s offer is solely a stock swap, valuing the Telecom Italia shares at about $12.28 each.

German analysts tended to see more opportunity in the linkup, noting that Deutsche Telekom’s technological potential and Telecom Italia’s powerful position in the mobile phone market marry well.

“Telecommunications markets operate on a large scale, requiring high investment, high capital endowment and a lot of technological and market strength,” said Brigitte Preissl, an analyst with the German Institute for Economic Research in Berlin. “What the market shows is that success is achieved through joint ventures to create large companies. Even some competitors of Deutsche Telekom are joining together. It’s a natural tendency for technical reasons as well as financial.”

The clout of the new company could prove to be a brake on competition, because big former monopolies tend to retain their control over domestic markets and prevent incursions by foreign challengers, Preissl said.

But Eckhard Schulte, a macroeconomic analyst with the Industrial Bank of Japan in Frankfurt, Germany, insisted that the telecom market is “too big and too evolving” to be controlled by any one company.

Sommer and Bernabe, who would jointly run the new telecom giant and alternate in yearlong stints as chief executive, predicted the merger would create synergies saving as much as $635 million before taxes in 2000 and more than $1 billion by 2003.

Despite the exercise in management parity, Deutsche Telekom accounts for two-thirds of the combined sales and its shareholders will hold 57% of the new company. The lingua franca will be English, but a name for the new company has yet to be decided.

Researcher Maria De Cristofaro in The Times’ Rome bureau contributed to this report.

* IS SPRINT NEXT? Sprint could be next takeover target in rapidly consolidating industry. C12

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Phone Giants

The $82-billion planned merger of Deutsche Telekom and Telecom Italia would create a global telecommunications giant that in some aspects would rival the largest U.S. phone company, AT&T.; A brief look at their assets:

Deutsche Telekom / Telecom Italia

* Employees: 318,451

* Mobile telephone customers: 33 million worldwide

* Total customers: 100 million worldwide

* Market capitalization: $173 billion

* 1997 sales: $64 billion

* 1997 income: $3.3 billion

*

AT&T;

* Employees: 108,000

* Mobile telephone customers: 11 million worldwide

* Total customers: 80 million worldwide

* Market capitalization: $189.7 billion

* 1997 sales: $51.6 billion

* 1997 income: $4.4 billion

Sources: Company reports