Deutsche Telekom Sets Off Alarm Bells

A backlash in Congress against state-owned telecoms

Armed with a $100 billion war chest for acquisitions, Deutsche Telekom is ready to charge into the U.S. Buying an American carrier is key to Chairman Ron Sommer's plans to turn the largely government-owned German behemoth into a global player. So it's no surprise DT is talking to VoiceStream Wireless even as it continues to flirt with Qwest Communications International and consider a run on Sprint.

But even before any of the company's potential partners say yes, Sommers is running into a brick wall: Capitol Hill. The German government has a 58% stake in DT, and all its acquisitive talk has set off a firestorm in Washington. A bipartisan group of 30 senators, including Republican and Democratic leaders, is urging Federal Communications Commission Chairman William E. Kennard to block U.S. telecom purchases by foreign corporations that are more than 25% state-owned. And Senator Ernest F. Hollings (D-S.C.) is sponsoring a bill that would bar telecom takeovers by foreign government-controlled companies. Warns one major German executive who does business in the U.S: DT will run into "massive opposition."

Can Congress really do this? Apparently so. Though many telecom execs dismiss the moves as political grandstanding, they may have cause for concern. Even though the White House agreed to roll back a long-standing 25% cap on foreign ownership of telecom companies as part of a 1997 World Trade Organization accord, the FCC can block any cross-border deals it deems contrary to the public interest. And so even though the FCC interprets the WTO agreement to mean the public interest is safeguarded if the acquirer is from a WTO member country, Congress never approved the change.

PROTECTIONISM. The political backlash is coming just as the urge to merge is coursing through the global-telecom industry. Carriers everywhere, driven by the need for economies of scale and the demands of corporate customers, are seeking international partners. The big European and Japanese companies want footholds in the U.S. market. But DT, France Telecom, and NTT, among others, are all majority government-owned.

To some industry executives, the congressional meddling smacks of techno-protectionism. "This is contrary to U.S. policy" of encouraging other governments to open their telecom markets, argues Joseph P. Nacchio, chairman and CEO of Denver-based Qwest. "We shouldn't be putting up protectionist barriers."

But Hollings & Co. insist they aren't trying to shelter U.S. companies from global competition--and some of Sommer's American counterparts agree with Congress that DT enjoys unfair advantages. Senators note that Washington was quiet when Vodafone, a publicly traded British company, bought AirTouch last year. But letting state-owned companies, with their deep pockets and easy access to capital, purchase American carriers distorts the playing field and raises national security concerns. "We didn't deregulate America's telecommunications industry from government support, protection, and control only to give it over to German government support, protection, and control," says Hollings. Adds Senator John Kerry (D-Mass.), a standard-bearer for free trade: "A government-owned entity has the ability to restrict American companies' access to its markets."

Some U.S. telecom experts agree. "It's perfectly legitimate for Congress to demand a two-way street," says former FCC Chairman Reed Hundt. France, for example, caps foreign ownership--even by a wholly public company--at 20% for carriers that operate in its market. And in the past year, Spain, Italy, and Hong Kong have all nixed cross-border deals due to state ownership of the acquiring companies. Moreover, one reason DT in particular is raising hackles is that the German telecom giant uses its market dominance to slow entry by foreign players. Earlier this year, for instance, DT introduced lower phone charges for customers of its own Internet service provider without giving customers of America Online Inc. a similar break. AOL sued and eventually won, but DT gained a head start.

Still, to avoid accelerating tit-for-tat protectionism, Clintonites are trying to dampen enthusiasm for Hollings' bill. "There are legitimate concerns, but that's not the way to go," says a U.S. official. Administration officials worry that if the bill becomes law, the EU or Japan would bring suit in the WTO court and retaliate against U.S. companies.

GROWING CONCERN. Even if Hollings' legislation languishes, lawmakers' will balk at these deals. "This is not a passing fancy," warns Kerry. "Concern is growing as people start to scrutinize it." Indeed, one investment banker familiar with DT's thinking believes that the fear of a regulatory roadblock played into DT's decision to shift its attentions away from Sprint and towards the smaller and much less well-known VoiceStream. After several failed efforts to get into the U.S. market, Sommer can't afford to do a deal only to see regulators undo it.

Ultimately, telecom execs are counting on the market's imperatives to push against any roadblocks. "The economics of telecom consolidation are too strong to be stopped," predicts Jack McMaster, CEO of KPN Qwest, which is jointly owned by Qwest and Dutch carrier KPN Royal NV. Considering the potential rewards, it's likely some will be willing to take the heat. But they had better come equipped with protective gear.

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