Loss of Telecom Italia May Be a Win for Deutsche Telekom

Losing out on its bid for Telecom Italia may turn out to be a blessing in disguise for Deutsche Telekom.
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In losing its bid to create a continental European telecom monolith,

Deutsche Telekom

(DT) - Get Report

may have actually won.

At first glance the former German phone monopolist could easily be seen as a defeated Goliath, after its white-knight bid for

Telecom Italia

(TI)

was trumped by a smaller Italian rival,

Olivetti

. Olivetti, known originally for its typewriters and calculators, won with a successful $33 billion bid, dashing Deutsche Telekom's dreams of a trans-Alpine empire and international contention.

Traders took the defeat hard. Since May 20, just as it was becoming clear Deutsche Telekom was unlikely to prevail, the company's ADRs have fallen more than 5%, a rather volatile showing for a blue-chip issue. And domestic rival

Mannesmann

has climbed amid palm-rubbing over expectations that Olivetti will sell it some operations.

The market's reaction suggests no one sees this as particularly good news for Deutsche Telekom. Left out of the discussion, however, is whether the German giant should have been looking for a partner south of the Alps in the first place. In fact, the conventional wisdom had always been that Telecom Italia -- big, bloated and in need of reform -- wasn't an ideal takeover target. Deutsche Telekom, many thought, would look past it, considering instead more advantageous acquisitions in the U.K. or the U.S.

Now they can do just that. Potential anglophone partners include the U.K.'s

Cable & Wireless

(CWP)

and U.S.-based

Sprint

(FON)

. In Europe, Spain's

Telefonica

remains a possibility. Only its alliance partner

France Telecom

(FTE)

, which felt jilted as Deutsche Telekom chased Italia, may be out of the question.

And that may be one of the unexpected benefits of the failed merger. With the French peeved, Telekom now has an excuse to distance itself from

Global One

, the Deutsche Telekom-France Telecom-Sprint joint venture. Global One, set up to service international business clients, never really performed much to anyone's liking -- making a full link-up with France Telecom unlikely. Now Deutsche Telekom can shed all of its French ties and start anew with a British or American partner.

What Deutsche Telekom's next move cannot be is a bid that looks half-baked or desperate. That's why Deutsche Telekom CEO Ron Sommer may have to justify keeping his job Thursday at the company's annual shareholders meeting; the logic of the company's bid for Telecom Italia was never very solid and the obstacles to such a link-up were grossly underestimated.

"DT's failed proposal to merge with Telecom Italia and likely split from France Telecom has highlighted strategic challenges," says Chris McFadden, an analyst for

Merrill Lynch

in London. Merrill has a long-term accumulate on Telekom and was a manager of the sale of shares for the firm in the past three years.

Foremost among those challenges was the Italian resistance to allowing Telecom Italia to effectively become controlled by the German government, since the German state still owns 72% of Deutsche Telekom. If Sommer can keep his job, he may face similar reticence from potential partners elsewhere abroad.

After the dust settles, however, Olivetti may discover it is choking on Telecom Italia's fat. If that indeed proves to be the case, Deutsche Telekom's shareholders may be happy to have been considered the losers back in May.