Deutsche Telekom – Shares under Siege

Ron Sommer had his work cut out for him this Tuesday, August 28. The chief executive of German telecommunications giant Deutsche Telekom presented the group's financial results for the first half of 2001 in Berlin.

Although sales were up 16.9% to 22.5 billion euro, the big question on everyone's minds was: what about the stock price? Sommer is trying to convince investors to keep faith in the group's decimated shares. They are currently worth hardly more than their original sale price of five years ago.

The Peoples‘ Shares

When Telekom first sold its shares to the public in 1996, a huge advertising campaign touted the stock as the "peoples' shares". Never before had a German company made its stock launch such a public spectacle directed at ordinary people. The campaign had the desired effect. People emptied their savings accounts to buy Telekom shares.

A new hobby surfaced: stock market speculation. Three million people - mainly private investors - eagerly snapped up Telekom shares. And most of them are probably regretting it today. From an initial price of 14 euro, the stock's value quickly soared. By June 1999, it had almost tripled. At the third public offering in June 2000, the stock market turned its back on its former darling and it has been downhill from there.

Striving to be a Global Player

Chief executive Sommer remains intent on turning the former state-owned telephone monopoly into a global player in the telecommunications industry. With the purchase of US cellphone operator VoiceStream in May, Deutsche Telekom seemed to move one step closer to this goal. It financed the deal by paying VoiceStream's major stakeholders with Deutsche Telekom shares, which now hold more than one quarter of the German group.

But it looks as if not all of these firms want to keep their shares. Speculation that there could be a massive flowback of Telekom shares onto the market has made traders nervous. Lock-ups, which are restrictions to prevent shareholders from reselling shares too quickly, will expire in September.

At Tuesday's press conference, Sommer expressed his empathy with shareholders. "It is extremely distressing for me to follow what has been happening to the T-Share over the last few weeks," he said. "All the more so, since this very unpleasant development is completely obscuring the fact that Deutsche Telekom is experiencing an extremely positive business development."

In view of upward sales, he attempted to soothe irritations by stressing that "substance and quality" would prevail in the medium term. But judging by the level of shareholders' anger, his words will probably fall on deaf ears. This is particularly the case with small investors. They have already started legal action once they learned Telekom overestimated the value of its property assets.

Ron Sommer continues to have his work cut out for him