A Bitter Experience for German Novice Investors
When Deutsche Telekom floated its first shares five years ago in the flashiest stock launch ever witnessed in Europe, public enthusiasm exceeded the management’s wildest expectations.
Millions of schoolchildren watched the buying and selling on virtual trading floors on the Internet. Mounted police had to keep order outside Frankfurt’s thronged Stock Market Square, the epicenter of an earthquake of hype and celebration for the stock launch. Three million of Germany’s notoriously conservative savers raided their passbook accounts and bought “the people’s shares,” giving birth to a new community of small investors.
Since then, the stock has lost more than 85% of its March 2000 peak value, hitting a record low Monday. The company posted a breathtaking loss of $3.2 billion last year. And its much-criticized investment in third-generation mobile licenses and its acquisition of U.S. company VoiceStream Wireless have pushed debt close to the company’s total value.
Germany’s “baby shareholders,” as Telekom Chairman Ron Sommer calls those swept up by the initial public offering, are now squalling. One group has sued Telekom and the federal government, which remains the biggest stockholder. Others have been howling for Sommer’s head to roll. Some have even lambasted the TV personalities hired to promote the IPO, accusing them of luring loyal fans into bad investments.
Like hundreds of thousands who jumped on the Telekom bandwagon too late, Petra Pankoke, a 31-year-old fashion designer from the Munich area, regards the investment experience as a bitter lesson about getting infected by “stock fever.”
“It seemed like a good alternative to the meager returns of a normal savings account,” she said of her more than $5,000 stake in Telekom. “My main reasoning was that this was a good, solid German company that would be a sure bet. I just blindly trusted everything that was being said,” said the first-time investor who has lost about half of her savings.
“I knew it was a risk, but it didn’t seem like such a big one when we all bought our first shares and they went straight up for more than a year,” recalled Friedrich Geyer, a retired electrician in the eastern town of Auerbach.
Analysts and litigators accuse Telekom of overly ambitious acquisitions and excessive borrowing.
“It is certainly to Sommer’s credit that he took a state-owned company into the stock market with the success he did,” said Lars Labryga, an attorney for the Society for the Protection of Small Shareholders, which keeps tabs on nearly 900 publicly traded companies in Germany.
Labryga said he recognized that the global economic stagnation of the last year has been a key influence on stock markets, but he contended that much of the problem with Telekom has been caused by bad management.
Chief among those missteps, professional analysts and disappointed investors insist, were the company’s staggering bids for third-generation mobile licenses and early-retirement buyouts that pushed it deep into debt.
Telekom’s flagging fortunes provoke some comparison to the fate of Enron Corp., the Texas-based company whose bankruptcy filing last year left employees and small shareholders with almost worthless investments.
But there are differences. For example, the German government’s generous retirement provisions are still relied on by most people in this country to cover the bulk of their golden-years expenses. It was the government’s push to get savers to put more of their money into shares that probably is Telekom’s chief victim.
Pouring salt on investors’ wounds, Telekom announced in March that it was slashing its 2001 dividend by 40% to cut costs. Many of the 3 million small investors in Telekom have been further infuriated by a proposed 89% increase in salaries for the eight board members, to a collective $16 million, that shareholders will vote on and probably approve at the May 28 annual meeting.
Sommer conceded in an interview that the last year has put a damper on Germans’ enthusiasm for putting their money into stocks. But he blames a lack of experience for the widespread disappointment.
“On one side, we were the ones who convinced Germans to invest in stocks and not just bonds. The problem was in the baby investors. They felt it was very easy to make money by investing in stocks in the boom market that followed the IPO, that they didn’t have to work to make money,” Sommer told The Times. “Experienced investors like those in the U.S. know that this isn’t the case. They know that markets have cycles.”
Though there has been much hand-wringing over the stock’s value, Sommer insisted Telekom was never pushed as a short-term investment and shareholders are best advised to ride out what he sees as a temporary trough. He also predicts small investors will regain their confidence in the market if Telekom can deliver on its forecast of 10% growth this year and debt reduction from $56.8 billion to $45.8 billion by the end of 2003.
“We have a clear strategy. We have to do what is right for the long term, even if painful in the short term,” he said.
Sommer insisted that analysts’ guarded outlook on his company’s stock is “unfounded.”
“They think in segments, and the telecommunications segment of the stock market is not seen as ascendant at the moment,” he said. “But this is because of a few black sheep. Deutsche Telekom is a strong company with a strong future, and the reaction of investors is not justified.”
It is the company’s long-term growth strategy that has forced it into debt. Ongoing restructuring has cost the company dearly in early-retirement write-offs, and Sommer recently said the 3G mobile-phone services would be marketable only in 2004.
Telekom also was hit last year with the “flowback” of shares it used to pay for its acquisition of VoiceStream to get a foot in what it sees as a promising U.S. market. The deal allowed those shares to be cashed in last summer, putting a strain on resources.
Savvy investment managers at Deutsche Bank foresaw the flowback effect and sent the stock plummeting by 20% last August when they sold 44 million Telekom shares on behalf of an institutional client.
Just that kind of bruising of the babies by the big players is what has dealt an incalculable setback to the hopes--so high just two years ago--for nurturing a nation of equity investors.
“The Deutsche Telekom experience has been a gigantic disappointment for many people, and I can imagine it makes them very wary of stock ownership,” Labryga said. “And not just Deutsche Telekom but the whole market.”
*
(BEGIN TEXT OF INFOGRAPHIC)
Telekom Troubles
(text of infographic not included)
