What's Ricke's Next Trick?

Finishing the turnaround he started at Deutsche Telekom won't be easy

His name started with "R"... Ron Something-or-other. Oh, yeah -- Ron Sommer. Alas, the erstwhile CEO of Deutsche Telekom (DT ), once one of Germany's corporate luminaries, is all but forgotten these days. He can thank his successor, Kai-Uwe Ricke, who in barely a year has overshadowed his old boss by dispatching many of the problems that ultimately drove Sommer from office. Debt is back under control, the company is profitable again, and it is no longer forced to sell assets to raise cash. Deutsche Telekom shares, though not exactly soaring, have risen 6.7%, to $16.90, since Nov. 13, when the company reported a better-than-expected net profit of $610 million on sales of $16.9 billion.

Now the talk is of growth, acquisitions, and dividends. Banks such as Merrill Lynch (MER ) and HVB Group are raising their estimates of Deutsche Telekom's profit. Analysts expect rating agencies to upgrade the company's corporate debt in 2004, putting it back within blue-chip range and saving tens of millions of dollars a year in interest. In an era of reduced expectations, Ricke's more modest public persona plays well with investors and the media. "Ricke is the right man at the right time," says Stefan Borscheid, an analyst at HVB Group in Munich.

No question, the 42-year-old Ricke, who ran Deutsche Telekom's mobile operations before becoming CEO, has accomplished a lot. But can he turn the Bonn-based giant into a growth company again? Ricke vows that he can. "Profitable growth now has absolute priority," he told reporters on Nov. 13. But delivering will be a lot harder. Like former monopolies all over Europe, Deutsche Telekom is fighting long-term decline in its revenue from land-line traffic, which accounts for half of sales. Increased competition and unfavorable regulatory decisions cut sales at Deutsche Telekom's T-Com unit, which provides traditional land-line service, by 5.2% in the third quarter from a year earlier, to $8.5 billion. Meanwhile, the market for mobile telephone services in Europe is nearing saturation. Fast-growing new services such as broadband Internet access can only partly compensate.


So far, Ricke's strategy has remained vague. He has unveiled a six-point plan that includes continuing to push broadband, cutting labor costs, and selling more services to corporations such as maintenance of local area networks or security measures to thwart hackers. He also vows to focus on quality, innovation, and efficiency. "None of this is particularly life-changing," says Jan Dawson, a senior analyst at market watcher Ovum in London.

Can Ricke back up these corporate platitudes with action? At least his execution has been good. Deutsche Telekom has already exceeded its stated goal for debt reduction in 2003. By selling assets such as its cable-television network and stakes in foreign telcos, the company cut debt to $59 billion from $77 billion a year earlier. Now the company is forecasting that operating profit will hit $22 billion for the full year, a 12% increase over 2002. With the increased financial breathing room, Ricke is promising to resume paying a dividend for 2004 and is carefully talking about modest acquisitions. For example, there is speculation Deutsche Telekom will revive its efforts to win control of Polska Telefonia Cyfrowa, Poland's No. 1 mobile-phone company. "If Ricke can apply himself to the growth initiatives the same way he applied himself to debt reduction, we're going to see some further margin improvements," says Christopher Watts, a telecommunications analyst at Bank Metzler in Frankfurt.

Ricke also took advantage of a new law to trim Deutsche Telekom's still-bloated German workforce. Some 12,000 workers, about 7% of the company's total in Germany, were transferred to an in-house "personnel service agency" called Vivento. The workers continue to draw their salaries, but by hiring them out to other companies Deutsche Telekom is already saving tens of millions, Ricke says. The workers also are deployed as temporary workers within Deutsche Telekom, saving money that might otherwise have gone to outside temp services. And the savings are likely to rise as the economy improves and demand for such workers grows. Such creative leadership is helping to combat skepticism. "He's got a real sense of discipline, a willingness to just get things done," says Ovum's Dawson.


The German CEO is banking on new technology to offset decline in traditional voice minutes. Deutsche Telekom has already sold 4 million broadband DSL connections, which now account for about 8% of the company's total land-line connections in Germany. The next step will be getting Germans to install wireless networks in their homes that connect PCs and other digital devices to the DSL network. Ricke hopes that will help keep fees up and prevent customers from defecting to competitors. And because the country's cable-TV network is not yet equipped to offer competing broadband access, Deutsche Telekom has a big head start.

Ricke still has plenty of tough decisions to make. Take Deutsche Telekom's operations in the U.S. The T-Mobile unit, formerly known as Voicestream Wireless, boosted sales 24% in the first nine months of 2003, vs. a year earlier, while tripling operating profits. Yet some analysts say euphoria about the U.S. business is misplaced. Falling prices for mobile service are expected to put pressure on U.S. wireless carriers to merge in the next few years. As the sixth-largest of the U.S. operators, T-Mobile would probably have to merge with a larger company such as AT&T Wireless (AWE ), leaving Deutsche Telekom with a minority stake in the combined company. The only other merger partners would be small regional providers, which wouldn't provide enough of a boost in market share.

For now, Ricke rules out a merger in the U.S. He argues that the U.S. market is plenty big enough for six nationwide providers. The risk, though, is that other big players merge. That could leave T-Mobile with a size disadvantage and no more attractive partners. "You want to be in the first wave," warns Taher Bouzayen, vice-president at consulting and research firm Atlantic-ACM in Boston.

Ironically, Deutsche Telekom's rising profit has a downside in Germany: It could prompt regulators to take steps that would help competitors -- for example, by further lowering the rates they pay to use Deutsche Telekom's network. And improving financial results will make it harder for Ricke to wring concessions from labor unions in upcoming negotiations. Ricke is hoping to save hundreds of millions by cutting the workweek by 10% for some 100,000 employees, with a corresponding cut in pay. The shorter workweek is easier to implement than wholesale layoffs, which would be costly and time-consuming under Germany's labor laws. It's also politically difficult for Deutsche Telekom to fire people, because the center-left government still controls a 43% stake in the company. The union that represents Deutsche Telekom workers has already signaled it will oppose the cuts.

Ricke's most difficult job may be to balance the need to cut debt, which remains massive by any standard, with the need to grow. Shareholders have cheered his leadership so far, but they could become restive if Deutsche Telekom doesn't continue to show improved profit margins. That, in fact, is a problem facing most chief executives at European telcos. "Management at these big telcos has yet to be tested by significant shareholder pressure," warns Guy Deslondes, team leader of the telecommunications group at Standard & Poor's (MHP ) in Milan. A corporate hero today can easily become tomorrow's What's-his-name.

By Jack Ewing in Frankfurt

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