Commentary: Firing the Boss Won't Fix Deutsche Telekom

Deutsche Telekom (DT ) Chief Executive Ron Sommer must feel a bit like Dr. Frankenstein. Over the past six years, he has conjured a real live company from the corpse of a state bureaucracy. Yet lately there seems to be a torch-bearing mob outside his office.

They're not celebrating Karneval. Shareholders, many of them ordinary Germans, are enraged at Deutsche Telekom's admission that its real estate assets are overvalued, forcing a recent $1.4 billion write-down. The company's stock price has slipped 75% from its March peak amidst fears the company is spending too much for a third generation mobile-phone network. Chancellor Gerhard Schroder has publicly supported Sommer--a tacit admission that the Deutsche Telekom boss is in hot water. Indeed, German newspapers are speculating that Sommer could be replaced by someone like Klaus Esser, who transformed rival Mannesmann from an engineering conglomerate into a telecom star.

Yet investors are deceiving themselves if they think Sommer's departure would solve the company's problems. The issues surrounding Telekom don't concern its boss: They pertain to a whole host of woes afflicting Europe's former phone monopolies. Deposing Sommer may even distract the company from the task of prevailing in a savage industry.

3G STRAIN. Not that Sommer hasn't made mistakes, some of them whoppers. Deutsche Telekom has failed to establish a solid footing in major European countries such as France and Italy. A recent attempt to introduce flat-rate Internet surfing proved a costly disaster. He racked up so much debt investing in 3G that the company is now being forced to sell assets, such as its stake in Sprint Corp., when prices are way off their peak.

To top it off, shareholders are organizing lawsuits, claiming Deutsche Telekom misled them by failing to disclose the overvalued real estate sooner. Sommer's combative personality and strident defense of his record also rub people the wrong way. "He has got to start talking about his own guilt," says Elmar Muller, a member of parliament. "He can't hold anyone else responsible."

Sommer may not be the perfect CEO, but the basic issue is this: Deutsche Telekom faces the same conundrum as other European ex-monopolies--France Telecom, for instance, or British Telecommunications, or KPN Royal Dutch Telecom. All must invest massively in 3G even as their bread-and-butter voice business comes under attack. In fact some, such as KPN, are in even worse shape. They lack assets like Deutsche Telekom's nationwide cable-television system, which Sommer can sell to offset debt. If Sommer goes, Deutsche Telekom would probably still have to invest in 3G and battle on. It's not clear anyone else would have a better idea about how to proceed.

A few analysts are even starting to put Deutsche Telekom on their buy lists again. Investment in 3G may strain Deutsche Telekom, they argue, but it could prove life-threatening to smaller players such as German competitor MobilCom. "Deutsche Telekom still has a lot of resources to get through this dry spell. It will be terribly difficult for the newcomers," says Christoph Vogt, an analyst at M.M. Warburg & Co. On Feb. 21, Vogt upgraded Deutsche Telekom shares from hold to buy.

So shareholders should give Sommer a bit more time. At the least, he should get to stay on until the company closes on its acquisition of U.S. mobile-service provider VoiceStream Wireless Corp. In Germany, Telekom can do little but lose market share to new competitors. The rest of Europe is largely staked out. But the U.S. is more than a year behind Europe in mobile-phone use and offers more opportunity for growth. VoiceStream's digital technology, which is better suited than analog mobile services to transmitting data, could give it a competitive edge as the Internet goes mobile.

Yet VoiceStream is not a done deal. Deutsche Telekom hopes to wrap it up by mid-year. But because of its depressed share price, Deutsche Telekom may need to rework the terms to get VoiceStream shareholders to agree. That's going to take finesse--and management stability. Sommer's big strength has been in marketing Deutsche Telekom, first to German shareholders and now to Americans. It's in shareholder interests to give him a chance to close the VoiceStream deal, and a last chance to prove his worth to investors.

By Jack Ewing

Frankfurt bureau manager Ewing covers German business and politics.

    Before it's here, it's on the Bloomberg Terminal.