Deutsche Telekom boss Ron Sommer finally quits

TIME Europe Magazine

Jul. 29, 2002/Vol. 160 No. 5

Wrong Numbers

Deutsche Telekom boss Ron Sommer finally quits, but will the move backfire on Chancellor Schröder as he battles to be re-elected?

By CHARLES P. WALLACE/BERLIN

IN WITH THE NEW: Sommer radically changed Telekom

There is often only a small step between a disgruntled shareholder and an angry voter: if someone is furious over an investment going down in flames, if the company involved has a thick skin, who better to blame than the government? Governments, of course, prefer to redirect flak. The scenario has just been played out to perfection in Germany — an election around the corner, an icon company that inspired many cautious citizens to dabble in the market for the first time, and a fall guy.

Deutsche Telekom is a stock so widely held that it has become known as the Volksaktie, or people's share, with nearly 3 million Germans holding them. The government itself kept 43% of the stock after Telekom was part-privatized in late 1996, a move that led hundreds of thousands of Germans to become first-time share buyers, creating the basis for an equity culture rather than squirreling away in banks.

It turned out to be a brutal initiation. Germans have seen their investment in Telekom plummet by nearly 90% from its 2000 high after chief executive Ron Sommer led the phone company on a binge of global acquisitions. The shareholders have been screaming for months. Chancellor Gerhard Schröder, in the midst of a tough campaign to be re-elected on Sept. 22, saw the punter-voter connection and began putting the bite, or at least the sound-bite, on the company. Last week, under this intense pressure, Sommer resigned, admitting that he had lost the board's confidence. It was the end of seven stormy years for the 52 year-old, Israel-born CEO, who earned the nickname "the Teflon manager."

But his departure hasn't automatically solved the problems at Telekom — and it may have back- fired politically for Schröder. Telekom board member Hel-mut Sihler was nam-ed to succeed Sommer for six months while a permanent successor is sought. Sihler, 72, a former chairman of the Henkels chemical group, is joined by Gerd Tenzer, head of Telekom's network division, as deputy. Board chairman Hans-Dietrich Winkhaus promised a "very radical consolidation" at the company.

Deutsche Telekom shares rallied 7% on the announcement of Sommer's resignation, but analysts were less than confident about its future. "There is no clear strategy and the company needs one," said Rodney Sherrington, a telecoms analyst at ABN AMRO in London. He said Sihler, chairman of Telekom's supervisory board until 2000, was "directly involved in the strategy that brought us to where we are today."

There were three earlier attempts to remove Sommer, a former Sony Europe executive. Now that he has finally fallen, his successors face the nightmare of a ?67 billion debt pile. Sommer bought stakes in telecoms companies from Britain to Hungary, but his most controversial decision was to buy U.S. mobile-phone operator VoiceStream for ?33 billion in May 2001. The company is the sixth-largest mobile operator in the U.S. and many analysts believe it is too small to survive on its own. "VoiceStream should be sold," says Robert Vinall, an analyst at DZ Bank in Frankfurt. He puts VoiceStream losses at ?2 billion a year.

Because valuations for all telecoms companies are sharply down, VoiceStream may prove hard to sell. One other possibility reportedly being considered is to merge it with AT&T Wireless, which like Voice-Stream uses GSM mobile technology.

That would create the second-largest mobile group in the U.S. Losses would be stemmed, or at least shared. Preliminary merger talks are believed to have started before Sommer quit.

Because the German government still owns 43% of Telekom, its two votes on the 20-member supervisory board carry a lot of weight. But Schröder's efforts to win voters by intervening in Telekom's business may prove to have backfired. An opinion poll by TNS EMNID said four out of five respondents said what happened at Telekom would have no role in their decision on which party to vote for.

Shareholder anger became a topic in the campaign when Edmund Stoiber, the conservative candidate, raised the issue in a debate with Schröder two weeks ago. Stoiber complained that Telekom executives had granted themselves 90% pay rises while the value of the stock fell by almost 90%. He said that he would not tolerate such behavior if he were chancellor.

Now the Christian Democratic Union and Stoiber's Bavarian sister party, the Christian Social Union, are attacking Schröder for intervening for political reasons in a privatized company. "By using political influence, the government has severely damaged Telekom," said Laurenz Meyer, the cdu General Secretary. "It created insecurity for the employees, damaged the shareholders' assets and has made a fool of Germany in the entire world." Business leaders were more cautious, but many said they were concerned about the government's intervention in the company's daily business. After all, what is privatization for if not to remove a company from the influence of the government? "The interference of politics was completely wrong," said Michael Rogowski, president of the Federal Association of German Industry.

At least Sommer has the consolation that he is not alone among embattled European CEOs. Only three weeks ago, Jean-Marie Messier was removed as chief executive of French media giant Vivendi, where a string of acquisitions had left the company with a pile of debt and a slumping share price. France Télécom chairman Michel Bon is also under pressure because of high debts. In the past, Europe's clubby business atmosphere meant a consensus approach to decision making and often protected executives from being removed by their boards, which were dominated by friends.

Deutsche Telekom probably won't find a new leader until after the Sept. 22 elections because no one wants to risk being appointed by a lame duck. With opinion polls showing the CDU/CSU in the lead over Schröder's Social Democratic Party, Stoiber may get the chance to anoint his own candidate. The owners of the people's share may remain unhappy for many more months to come.

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