Commentary: No, Germany Isn't A Nation Of Stockholders Yet

The champagne flows, filmed fireworks light up giant screens, and investment bankers pound one another on the back. It's Nov. 18 at the Frankfurt Stock Exchange, and Deutsche Telekom has just made history by raising more than $13 billion in the world's second-largest public offering ever--$3 billion more than expected. As DT Chairman Ron Sommer jets off to preside over similar festivities in New York and Tokyo, German investors rack up a cool 19% gain in the first day of feverish trading.

Floating the so-called T share may well be the marketing coup of the decade. No one dreamed 18 months ago that 2 million private German investors would buy a stake in the state-owned telephone monopoly they love to hate. But it's far too early to declare the issue a resounding success. With Germany's blue-chip DAX stock index at record highs and interest rates at record lows, just a hint of tighter monetary policy could send stock prices tumbling. And many analysts expect that after DT's initial spike from the offering price of 28.50 marks ($18.92) to 32.95 marks ($22.02), the price will be flat for some time. In fact, in the third day of trading, DT shares dropped back to 31.70 marks ($21.05).

More broadly, despite all the hype, it's too soon to say that the Deutsche Telekom offering succeeded in teaching Germans the joys of equity investing. Individuals tried to get a piece of the action because everything was orchestrated to make this issue fly. Banks gave special interest rates to account holders who bought T shares. One bank even offered a deal that hedges against any drop in the share price until 2002. Telekom pays a rich dividend, and people who keep the stock for three years get a free share for every 10 they hold.

Trouble is, all these enhancements to safety and income just made Germany's superconservative investors think of the T share as a bond in disguise. If the stock were never to budge from its closing price on the first day, German buyers could calculate a total yield of 5.6%, assuming they hold the stock long enough to pocket their bonus shares and factor in their tax credit on dividends. That beats a nominal yield of 5.3% on Germany's 10-year bond.

In the U.S., a Microsoft Corp. going public doesn't have to offer such incentives. Investors buy because they believe in the company's future earning power. But DT faces the daunting challenge of a telecommunications market that will be open to full competition for the first time in 1998. Although it boasts state-of-the-art technology and robust cash flow, Telekom still needs to boost efficiency. Moreover, because of his yield-hungry individual shareholders, Sommer is under pressure to maintain a high dividend. If Telekom uses its cash flow elsewhere--even to make the company more competitive--Germans may cash in their shares.

Another problem is DT's heavy concentration of domestic investors. Two-thirds of its shareholders are German individuals, and Sommer is said to have resisted pressure from Bonn to make DT a fully domestic issue. But more global investors would fit better with Telekom's aim to grow overseas. It's easier to take on big global projects if it can tap investors worldwide.

CORK UP. But Telekom set the offering price at the high end of what global institutions were willing to pay. Oscar Castro, portfolio manager of the $210 million Montgomery Global Communications Fund, thought 26 marks ($17.37) was a fairer price. Castro says he wouldn't pay today's market price "until management proves they can add value." Indeed, after three days of trading, DT's New York-listed American Depositary Receipts slipped to $14.20.

With future privatizations at stake, the German government will be closely watching DT's performance. But to really create an equity culture, Germany needs a tax structure that encourages long-term stock investment by pension funds. Also, banks must change their fees and begin marketing stocks instead of savings accounts and bonds.

So cork up the champagne, and remember that in May, 1995, Sommer took on two daunting jobs: to sell off up to 26% of the telecom giant and to prepare the company for the competitive onslaught in 1998. "We've taken a giant step," he says. "But I can't relax now; there's too much work to do." Sommer knows that if he can't clear the second hurdle and DT's share price deflates, he won't have cleared the first one, either.