Deutsche Telekom seeks new suitors

The news that Olivetti had won a majority stake in Telecom Italia was not only bad news for Telecom Italia's board, which resigned en masse on Tuesday. It was also a catastrophe for Deutsche Telekom's chairman, Mr Ron Sommer, who had been boasting only a few weeks earlier that his company's planned merger with Telecom Italia was the start of a new, global strategy for the German company.

In the immediate aftermath of last weekend's news that the German giant had been vanquished by an Italian company less than a tenth of its size, Mr Sommer remained defiant.

"I will continue to pursue Deutsche Telekom's international strategy. The proposed merger between Deutsche Telekom and Telecom Italia has a persuasive logic which offers numerous advantages," he said.

The stock market took a different view, however, and Deutsche Telekom's shares lost more than 5 per cent of their value during trading on Tuesday.

By the time Mr Sommer went into a meeting of shareholders yesterday, he knew that he had a lot of explaining to do - not least about what went wrong with Deutsche Telekom's Italian courtship.

Despite Mr Sommer's brave talk, the collapse of the Italian deal represents a major setback for Deutsche Telekom's entire global strategy. In the course of his wooing of Telecom Italia, Mr Sommer unceremoniously abandoned an existing liaison with France Telecom - and there is little sign of forgiveness on the French side.

He also dumped Deutsche Telekom's previous Italian partner, Enel, at a potential cost of millions in legal damages. As a result of this decoupling, Deutsche Telekom's chief German rival, Mannesmann, secured a lucrative share in an Enel subsidiary at a knock-down price.

Part of Mr Sommer's problem lies in his excessive reliance on Mr Franco Bernabe, Telecom Italia's outgoing chairman. But some of the blame for the present shambles must lie at the door of the German government, which owns 72 per cent of the shares in Deutsche Telekom.

German government officials went along with the Deutsche Telekom view that Mr Bernabe would succeed in pushing the merger through, despite the fact that many leading Italian figures opposed it.

By last week, Mr Bernabe had few remaining friends in high places in Italy, chiefly because he had pushed the country's politicians into an exceedingly uncomfortable position.

Officially, the government wished to remain neutral on Telecom Italia's merger plans. But it came under pressure to block the proposed merger with Deutsche Telekom when it became clear that the Italian conditions were not being fulfilled.

Primary among these was parity with the Germans and the full privatisation of Deutsche Telekom.

Mr Sommer insisted that his company remained utterly free from political interference despite the German government's majority stake but his protestations had little effect in Italy.

Mr Sommer is now faced with the challenge of looking elsewhere for global partners. Although Deutsche Telekom dismisses French accusations of betrayal as "an emotional reaction", there is little prospect of a revived partnership with France Telecom.

The Germans are more likely to look towards Britain and the US in their drive to become world leaders in the telecommunications industry.

Deutsche Telekom has already bid an estimated €16 billion (£12.6 billion) for the British mobile phone company One-2-One and the German firm has long been eyeing Cable & Wireless, in which it already holds a 10 per cent stake.

In the US, Bell South and SBC are seen as the most likely targets for a German takeover bid.

But Mr Sommer may be considering a more daring option - a takeover of the newly merged Olivetti and Telecom Italia. Olivetti's chairman, Mr Roberto Colaninno, says he is prepared to talk to Deutsche Telekom - but only as one of a number of potential partners.

Unlike Mr Bernabe, Mr Colaninno would enter such negotiations from a position of strength, ensuring that any new deal would be less beneficial than the old one for Deutsche Telekom. Time is running out for Mr Sommer, as he plans to float €10 billion in Deutsche Telekom shares at the end of next month.

Analysts have already been predicting that a fall in profits caused by competitive price cuts could sabotage the share sell-off.

Unless he discovers an inspired exit route from Deutsche Telekom's current mess, Mr Sommer's meteoric career as one of Germany's top managers may very soon come crashing down to earth.