Misery Loves (a Telecom) Company

Henry M. Paulson, head of the US bank Goldman, Sachs and advisor to the German telecom giant, wrote a letter to the chairman of Telekom’s supervisory board, Hans-Dietrich Winkhaus on Friday. Paulson wrote that sacking Ron Sommer, a distinct possibility at a Telekom supervisory board meeting on Tuesday, would have "negative consequences" on the company’s business.

It might be hard to see at first glance how business could get any more negative at Telekom. The company is choking under $67 billion (66.5 euro) in debt after a series of acquisitions like the loss-making VoiceStream, an American mobile phone provider. It says it expects to post a record loss this year of $6.57 billion (6.7 billion euro).

The Bonn-based giant, Europe’s largest telecommunications company, added to the misery not long ago by announcing it is cutting some 22,000 jobs. And the price of "T-shares," stocks sold to some 3 million Germans during Telekom’s 1996 partial privatization, is down in the basement, off 89% from its peak in March 2000.

Join the club, the Americans seem to be saying.

Deutsche Telekom’s sob story is no different that that of the telecom companies on both sides of the Atlantic who went into a buying and merger frenzy in the late 1990s and then watched as that expanding bubble burst dramatically in 2001, leaving many just shadows of their former selves, saddled with debt and sitting on top of a massive glut of equipment and infrastructure.

Overeager Beavers

In the late 1990’s, the words "telecom" and "merger and acquisition" could have passed for synonyms. Telecom executives seemed to have nothing else in mind but buying up companies. The number of deals catapulted from 215 in 1995 to 2,371 during its frenzied climax in 2000. Five of the largest mergers or acquisitions in history involved telecommunications companies during the boom.

Telecoms also extended their spending sprees to equipment and services, shelling out more than $4 trillion in Europe and the US between 1997 and 2001, according to the European Information Technology Observatory. The reason behind the mania was the belief that the Internet explosion would create almost infinite demand for telecoms capacity.

But it didn’t happen. The transformation of business and home communication into a high-bandwidth virtual environment remained a pipe-dream. The dot.coms went bust and demand failed to meet the sky-high expectations. After five years of telecom wheeling and dealing, trillions of dollars in investments evaporated, thousand of jobs were slashed and healthy US powerhouses like MCI, AT&T and US West either disappeared or withered under huge debt loads.

Another legacy of all that money is a massive oversupply of products and services. Thousands of miles of fiber optic cable now lay dormant and dark under Europe and North America, only 1 or 2 percent of the existing lines have even been activated. Networks were built that were never used, resulting in a glut of capacity so great that if the world’s 6 billion people were to talk non-stop on the telephone for the next year, their words could be transmittted over the potential capacity within a few hours.

In Good Company

Deutsche Telekom, of course, has not been immune to the global trends. While German politicians and shareholders might be out for blood because of the company’s poor performance, they might want look at how other telecoms are faring. Falling revenue and high-debt is simply the name of the telecoms game in 2002.

Deutsche Telekom’s debt-burden of $67 billion (66.5 billion euro) may be back breaking, but the company is not struggling alone. US-based Verizon, one company which managed to ride out the storm of 2001 better than most, is in the red to the tune of $52 billion. American giant AT&T ran up debts peaked at $65 billion with cable company acquisitions in the 1990s. To get that debt down, it is now having to turn around and sell them off.

Plummeting stock prices are also nothing unique to Telekom. Over the past five years, AT&T has watched its share price decline 63 percent. Others have followed. Shares in star-crossed WorldCom have plunged 95 percent since 2000, France Telecom lost 45.7 percent in the first five months of this year. Overall, the stock market value of all telecommunications operators and manufacturers has fallen by a breathtaking $3.8 trillion, according to the Financial Times.

The cutting of 22,000 Telekom jobs is painful, but other players have having to cut even deeper. Lucent Technologies has slashed nearly 45,000 jobs, Motorola has handed out 32,000 pink slips, and France’s Alcatel has told 25,300 employees to clear out their desks.

Hit Bottom?

The jury is still out whether the telecoms have seen the worst of their troubles. Many analysts say it will take some time before fortunes start to improve, since lenders are still extremely hostile to telecom companies. The President of the US Federal Communications Commission described the industry on Monday as being in a state of "utter crisis" and said some major consolidations might be required to remedy its broader ills.

Telekom seems to be considering that strategy as well. It has said it would open to a merger of its acquisition VoiceStream with another provider.

Henry M. Paulson of Goldman, Sachs said in his letter to the chairman of the board that Telekom was in the process of solving its problems. But with the expected record loss this year, along with the dour industry prognoses, it looks like fortunes could continue travelling southward somewhat before making a turn north. By that time, Ron Sommer may well have been forced to give up his driver’s seat.