BERLIN -- Now that
has announced its
intention to buy
for a whopping $50.7 billion, DT Chairman Ron Sommer is bound to get loads of flak for the rather high cost.
Calculated from Friday's closing prices, the cash-and-stock deal represents a 30% premium for VoiceStream shareholders. They will receive 3.2 Telekom shares along with $30 for each share held. DT will issue new shares for the acquisition and will also assume $5 billion of VoiceStream's debt. On Monday, DT shares in Frankfurt fell 5.87 euros, or 10.6%, to 49.40 ($46.27) in late trading. The company's American depositary receipts, or ADRs, in New York were down 6 5/16, or 12.3%, to 45 3/16.
No one would argue that Europe's largest telco is gaining access to the key U.S. market at bargain basement prices. For Sommer, however, the question probably isn't whether DT paid too much for VoiceStream, but rather if Telekom could afford not to bid for the U.S. wireless operator.
Long frustrated in his desire to turn Telekom into a global player, Sommer likely believes the immediate costs of taking over VoiceStream are far outweighed by the massive strategic importance of establishing a beachhead in America. He has been under immense pressure to find a big international partner since DT's failed merger attempt with
just over a year ago. Plus, with mounds of cash on hand, a chance to snap up one of the last independent mobile operators in the U.S. was probably far too tempting to pass up.
And if any company can swallow a $50 billion meal with only the slightest hint of indigestion, it is DT. Should the VoiceStream deal come to fruition, Telekom's overflowing war chest would only be halved. That leaves vast sums for other acquisitions or extensive investment and expansion of VoiceStream in the U.S.
How quickly Telekom can develop its foothold in America could determine the overall logic of the deal, according to some investors. "The price is expensive," says Reinhard Pfingsten, a fund manager for
in Frankfurt. "It will only be justified if they can expand (VoiceStream's) position. We'll have to wait and see."
One thing in DT's advantage is that VoiceStream uses a technology similar to the European wireless technology, known as the global system for mobile communications (GSM), used throughout Europe and much of the rest of the world. That should ease the integration of both operations and offers Telekom and VoiceStream users the tantalizing possibility of near worldwide cellular service.
That dream could, of course, be quashed should a number of protectionist U.S. senators get their way and block the deal for fear of seeing a precious
Federal Communications Commission
license end up in a company that has a foreign government as a sizable shareholder. The German government still holds 59% of Telekom but intends eventually to unload that stake over time. The VoiceStream deal would dilute the government's holding to 45%, as DT issues 829 million new shares.
Expect Sommer to mount a big offensive to bulldoze through any political opposition to the deal, however. After the Telecom Italia debacle, another high-profile flop would be something he and the Telekom board could ill afford.
"There is definitely an inherent political risk to this deal, and it's certainly not cheap," says one analyst who is not allowed to go on the record due to his employer's recent underwriting work for Telekom. But "VoiceStream is growing much faster than its other U.S. competitors."
And that potential growth is how Sommer will try to sell the deal to his shareholders. He'll hope to spin it as the moment when Deutsche Telekom joined the world's telecommunications elite. Sure, VoiceStream may be a bit expensive, but sometimes expectations can be costlier. Under pressure for a big international deal for so long, Sommer might think $50 billion is peanuts compared to the price he'd have to pay if he failed to deliver one.