Deutsche Telekom's Embattled Boss

Deutsche Telekom's Ron Sommer runs the AT&T of Europe. Break it up? No way, he says

He was missing when the telecommunications giants of Europe gathered last month in Rome to bid on licenses to build Italy's mobile Internet. And he will be a no-show when Switzerland invites those telecom giants to a similar bake-off early next year.

Where is Ron? That's the question rival telecoms' execs have been asking about Deutsche Telekom Chief Executive Ron Sommer. A few months ago the Israeli-born CEO was ubiquitous, lunging at any asset that might spread DT's global reach. In 18 months, he wagered some $80 billion on such properties as British mobile carrier One2One and U.S.-based mobile operators VoiceStream Wireless Corp. He spent $13 billion on mobile licenses in Britain and Germany. But things have suddenly gone quiet at Deutsche Telekom's glass and aluminum headquarters in Bonn. No big bids. No bold moves to expand territory.

Deutsche Telekom is entering a new phase in its tortuous journey from government ministry to tech powerhouse. Now Sommer must prove he can forge the Telekom's far-flung holdings into a company capable of holding off the likes of Vodafone Group PLC. "It's going to be a never-ending story," Sommer warns. He's too ambitious to rule out more big acquisitions. But that's no longer the top priority. "We need to demonstrate to the markets that we can expand the businesses we've acquired," says Jeffrey A. Hedberg, an American in charge of DT's international business.

The markets want that proof. Since he took over Telekom in 1995, Sommer's quest to create a world-class company has been a bruising one. A bid to merge with Telecom Italia last year collapsed. Vodafone, the world's biggest mobile-phone company, jumped into Sommer's home territory by acquiring Mannesmann. Because of big writedowns of goodwill, operating profit is heading into the red, and the company must sell off assets such as its cable-television network to compensate. After rising steadily for more than a year, the stock has swooned since March.

Sommer's plight calls to mind the woes of another high-profile telecom executive, C. Michael Armstrong of AT&T. Armstrong wanted to remake his company, too--and spent even more than Sommer to do it. But now he's ordering a dramatic split of AT&T into separate companies.

Sommer denies he will go AT&T's route. There will be partial spin-offs to raise some stock, sure, but no bust-up. He's out to create Europe's biggest and best telecom, one capable of offering any service a customer might want, from mobile Internet access to business software. The vision goes like this: A German businesswoman goes on a trip to New York via London. Her Deutsche Telekom mobile phone switches automatically from the company's D1 service in Germany to One2One in London to VoiceStream when she lands at JFK. En route, she reads her office e-mail over a Palm computer using software supplied by debis Systemhaus, majority-owned by Deutsche Telekom. She even gets in some Christmas shopping via T-Motion, a mobile portal founded by--you guessed it--Deutsche Telekom. A nifty high-tech scenario--and Sommer has more than 50 million fixed-phone connections, 30 million mobile customers, and 8 million Internet subscribers to make it come alive.

But it comes down to one nagging question: Given the pattern of fumbled deals, the relentless competition, the debt pileup, can Sommer execute? He has certainly been savaged by his critics--and they may still be proved right. But lately there have been signs that Sommer is regaining momentum. Thanks to relentless price cutting and advertising, Deutsche Telekom is retaking share of the German mobile market from Mannesmann's D2 service, pulling nearly even in subscriber numbers. Sommer is fighting back in long distance as price declines push domestic startup providers to the wall. The $51 billion agreement to acquire VoiceStream quelled criticism that Sommer couldn't put together a deal. And even after a recent downgrade by rating agencies, DT is still among the most creditworthy telecom companies in the world. Estimated cash flow of $11 billion in this year, on sales of $34 billion, will be down some 8% from 1999. But the signs point to an upward swing in 2001.

Of course, even though the bullets have seemed to bounce off his chest, Sommer is not out of danger. The next six months will be tricky. If Deutsche Telekom shares fall below $28, the stock-and-cash VoiceStream deal, which still has not closed, would be in danger--leaving Sommer's international strategy in tatters. DT shares have been trading at around $34, not exactly a comfortable margin. "If VoiceStream doesn't work, his job could be in danger," says Josef Scarfone, a fund manager at Frankfurt Trust in Frankfurt, which owns more than 1% of Deutsche Telekom shares.

"I SLEEP WELL." The question is, could anybody have done a better job? Even today, because of grandfathered work rules, 40% of DT's employees are civil servants who can't be fired. Worker representatives hold half the seats on the Deutsche Telekom supervisory board. Along with two seats held by a sympathetic government, they control Sommer's fate. So far, they're behind him. "This is very different from American companies," says Peter Glotz, a former member of the supervisory board who represented shareholders.

Yet Sommer has still managed to tackle the company's huge staffing costs. He has spent lavishly to improve customer service, upping sales per employee by 34%. In the meantime, he cut the workforce by 20% since 1995, to 172,000, through attrition and buyouts. And the 51-year-old boss shows no sign of easing back on his incredible schedule, which calls for 16-hour days, seven days a week, and an ability to remain impervious to the gut-wrenching tension of huge deals and competitive firefights. "I sleep well at night," he boasts in an interview at his minimalist office in Bonn.

A pause in the acquisition race would give Sommer more than a chance to grab some extra shuteye. It would also give Telekom time to spend more on the essential areas of customer service, instead of ladling out billions on licenses and deals that many investors now find far too richly priced. The danger is that the wars could heat up again, forcing him to make another string of acquisitions. "In this business, a month is like a year," acknowledges Chief Financial Officer Karl-Gerhard Eick.

Deutsche Telekom still has major gaps in its geographic and strategic map. VoiceStream doesn't give DT the data infrastructure it needs to serve corporate customers in the U.S. In Western Europe's biggest economies, outside its home market Deutsche Telekom is strong only in Britain. So company execs may still need to make some big moves--even another run at Telecom Italia or its mobile unit, Telecom Italia Mobile. "I think it would make great sense," says international chief Hedberg, an American who has pushed for acquisitions that will help teach the German company about New Economy entrepreneurship.

Getting all the parts to move in unison is the challenge. The assets Sommer has acquired or built from scratch are attractive. Take T-Motion, a mobile Internet portal designed to capture a big piece of future revenues from data traffic over mobile phones. T-Online International, Telekom's partly spun-off Internet service, owns 40%, while T-Mobile International, Telekom's mobile unit, owns 60%. "This will be a profitable business for those who understand that technology will make everything mobile," says T-Mobile CEO Kai-Uwe Ricke.

So far, though, Sommer is having trouble getting all the units to cooperate. In the summer, management of T-Online, which offered stock to the public in April, fell to bickering with the parent company about how much independence it should have. Now, almost the entire management board of

T-Online has left, including CEO Wolfgang Keuntje. The episode led to accusations that Sommer is a control freak. Former colleagues say the charge is unfair and that Sommer grants independence to those he trusts. Still, the turmoil showed the perils of having it both ways--startup spirit under the auspices of an established corporate giant.

CULTURE CLASH. Just as important, Sommer has to cope with the company's weakened financial state. The $53 billion debt load is up 60% from a year ago. The war chest for acquisitions is nearly empty. And Telekom needs to spend heavily to build out DSL broadband technology along its existing fixed-line network. There's no guarantee this new network will ramp up Telekom's Internet profits. "On the one hand, you have to invest like hell to keep up with technology; on the other hand, prices are going down," says Dirk Reiter, a partner at Munich-based consultant Roland Berger & Partner, which advises telecoms. "The market is crazy."

Decision-making can be deadly slow. The company took more than two years to agree internally on a plan to divide the company into four semi-autonomous units. Indirectly, Sommer concedes he's still fighting Deutsche Telekom's legacy as an arm of the government Post & Telecommunications Ministry. "We fought very hard to get rid of this bureaucratic culture," he says. "If somebody tries to bring this back to the company, that's when I really go ballistic." Sommer says he has fired or demoted managers who didn't perform. But remnants of the old monopoly attitude remain. One industry source was surprised recently to hear a DT engineer still refer casually to a "monopoly socket," a 1980s term used to describe the phone jack found in every German home. The term summarized Telekom's complete control of the market.

Indeed, Deutsche Telekom still has a near-monopoly on residential connections--and an alarming amount of revenue depends on this business. That will soon be under attack, though, after regulators cut the prices Telekom is allowed to charge competitors for use of its network. To avoid massive price declines such as those in long distance, Telekom is trying to bundle services in ways competitors can't match. For example, it's offering broadband Internet surfing via T-Online along with standard voice service for about $30 a month.

To boost the uniqueness of his offerings, Sommer is banking on the acquisition of VoiceStream, which will probably be completed early next year. The theory is that VoiceStream's digital network can adapt more cheaply and more quickly than analog-based rivals as the Internet migrates to mobile phones. That could put DT in a position to lead growth of the new Net-phone technology in the U.S., where mobile-phone use still lags Europe. "The opportunity that VoiceStream provides is one-of-a-kind," asserts VoiceStream CEO John W. Stanton.

VoiceStream will also give Telekom a transatlantic network based on the digital global system for mobile telecommunications (GSM) standard, something no other company can offer. Deutsche Telekom's increased clout with suppliers will help keep prices down, and give DT a huge say in how mobile technology develops and what standards are used. Do customers care whether their mobile phone works in London and Frankfurt as well as New York? "The number of people who actually use their phones around the world is relatively small," admits Stanton. "But they're very influential people"--people who control corporate buying decisions. Analysts say that alone won't ensure VoiceStream's success.

These big bets will weigh on the stock for some time. At $32.45, the stock is up 9% since hitting a low in October, but way off the March peak of $88.40. All the telecoms have been hit, but that's small comfort. "Shareholders have a long haul ahead of them," says Jella Benner-Heinacher, executive director of the Deutsche Schutzvereinigung fur Wertpapierbesitz, a shareholders group.

MAKING ENEMIES. There's no sign of a shareholder uprising yet. Nor is there any solid evidence of a move to replace Sommer by the German government, which still owns a majority in DT. It probably helps that Sommer has a good relationship with German Chancellor Gerhard Schroder. But Sommer also gets more slack because Germans wonder if anybody else would want the job.

In fact, Deutsche Telekom's supervisory board hoped to hire a manager with greater international stature when it went hunting for a new CEO in 1995. But several better-known candidates weren't interested, recalls Peter Glotz. The other candidates figured the job wasn't worth the grief, especially with a salary at the time estimated to be somewhat under $1 million. It's thought to be barely double that now.

Sommer, then chief of Sony Corp.'s German operations, impressed the board by speaking without notes as he answered questions and outlined his vision of the future of telecommunications. Sommer's most immediate challenge was to persuade investors to buy shares in the company, which went public in 1996. "Some people said to me, why don't you, instead of bringing Deutsche Telekom public, do virtually the same thing and jump out the window?" Sommer recalls. But with clever marketing, Sommer sold $10 billion in stock to German households.

Sommer has not tried to endear himself, though, to Germany's other top bosses. He has even made enemies among Germany's corporate elite by defending DT's few remaining monopoly privileges. One example: using dominance of Germany's residential phone network to give customers of T-Online special deals on phone charges and broadband access. Rivals such as AOL Europe complain that Deutsche Telekom's stance violates regulations requiring the dominant carrier to give all rivals the same deal. Sommer characteristically shrugs off the complaints. "If you can't take the criticism, you'd better not do [this] job," he says. Sommer is a competitor, all right. Now, he has to prove he's a winner.

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