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Deutsche Telekom Sets Its Sights on Another Target

Investors will also focus on the euro's continuing weakness against the U.S. dollar.
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This week won't be the week that European equity markets stop focusing on telecom news: Thwarted in its attempt to merge with

Telecom Italia


, telecommunications behemoth

Deutsche Telekom

(DT) - Get Dynatrace Inc. Report

is now angling to take over Germany's benchmark stock market index, the


, instead.

The former state-run monopoly announced last month it was going to sell almost 300 million new shares for a $10 billion capital increase in order to fund foreign acquisitions, but today the company said that on June 21 it will also list the remaining government-owned stake -- which comes to 72% of the company.

The surprising move could be seen cynically as a desperate attempt to boost Deutsche Telekom's flagging share price in the wake of the Telecom Italia debacle. (Deutsche Telekom lost its chance to merge with Telecom Italia when


, a much smaller Italian rival, garnered 51.2% of Telecom Italia's stock in a hostile bid.)

The 1.74 billion shares from the German government and a state-owned development bank will increase Deutsche Telekom's current 5% Dax weighting to a whopping 13% of the index, even though Deutsche Telekom cannot sell the shares before 2000. That percentage will just edge out

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current 12.3% stake in the Dax and will have more repercussions than merely making Deutsche Telekom the index's top dog.

Although Deutsche Telekom claims it was required to list the other shares because of specific stock exchange rules, it is hard to ignore the fact that index-linked funds and portfolios will be required to buy more Deutsche Telekom shares to reflect the new weightings. The logic then follows that investors will have to buy Deutsche Telekom shares at some point, so why not during the capital increase at the end of June?

Traders on both sides of Atlantic weren't even waiting that long. In Frankfurt, Deutsche Telekom's shares surged 9.04% to close at 38 euros on Friday, and in New York, Deutsche Telekom's ADRs were also up over 9% at 39 9/16. The coming week should continue to see European market participants sizing up the implications of the Deutsche Telekom listing.

Away from the equity markets, the euro's continuing weakness against the U.S. dollar will also be in the spotlight next week. At the close of European trading on Friday, the euro was wallowing near all-time lows at $1.0415. And the new currency's weakness will likely continue to rankle the Continent's central bankers, who reiterated last week that they would not be particularly happy with a situation of dollar-euro parity.

Further fallout from Italy increasing its 1999 deficit target last Tuesday could weigh upon the euro, but some experts think the expected damage may be overblown.

"We are talking about a deficit of 2% to 2.4%; about a country waking up to the fact that it was living in cloud-cuckoo land when it first set (its)deficit target," says Alison Cottrell, chief European economist for

PaineWebber International

in London.

European Central Bank President Wim Duisenberg

will have his say on all things "euro" at a news conference on Wednesday, after the meeting of the ECB's

Governing Council

. Whether the blunt-speaking Dutchman will call anyone "cuckoo," is anybody's guess.