Good Call

By William Boston

In 2001, the former German telephone monopoly Deutsche Telekom took a leap of faith across the Atlantic and bought an upstart U.S. mobile-phone company called VoiceStream Wireless for $46.5 billion. Telekom's management was excoriated for paying an exorbitant price for the smallest operator in a crowded market, dwarfed by giants Cingular, Verizon and Sprint. But the bet paid off. Today, the U.S. arm of T-Mobile, the German mother ship's wireless unit, is still ranked fourth, but it is the fastest-growing part of the $75 billion company and well on its way to becoming Telekom's largest revenue source. In the first half of 2006, T-Mobile USA accounted for 22% of Telekom's sales and nearly half its global mobile sales.

That's why Telekom's CEO Kai-Uwe Ricke just opened his wallet again and spent $4.2 billion to span a high-speed 3G wireless network across the U.S. "We want to maximize our sales in the U.S. and expand T-Mobile USA into the largest single unit in the group," Ricke told reporters in New York City on Oct. 6.

But the American operation's success might not be enough to save Ricke's job. In Germany, where Telekom still generates more than half its sales, the company is bleeding, and its biggest U.S. shareholder, the Blackstone Group, is agitating for Ricke to take an American-style ax to expenses. Telekom's sales outside Germany surged 13.5%, to $17.2 billion, in the first half of this year. But in the same period, sales at home plunged 4%, to $20.6 billion, as customers abandon fixed lines for mobile and Internet-based services.

Once a state phone and mail monopoly, the sprawling Bundespost had more employees than the German army had soldiers. In the 1990s, the government split it into three companies--Deutsche Telekom, Deutsche Post and the Postbank--and floated them on the stock market. The most successful, Deutsche Post, grew into a global logistics company. Again, the critical expansion was in the U.S., where it bought freight company DHL.

Telekom's top shareholders--the German government, which holds 33% of the company, and Blackstone, which has 4.5%--have become unlikely allies in activism. Previously the government has been more concerned with preserving jobs.

When Blackstone bought Telekom shares last April, it committed to holding them for two years. So at the current price, neither the German government nor Blackstone is prepared to exit, a circumstance that is fueling rumors that Ricke could be replaced in December with a CEO with global chops who would aggressively cut costs and implement a viable strategy. A Blackstone spokesman confirmed that the company is unhappy with Telekom's share price, but declined to comment on Ricke's performance. Still, Ricke doesn't appreciate the interference, and his relationship with Blackstone boss Stephen Schwarzman has chilled so much that Ricke refused to pay him a visit in New York last month when he was in town. After issuing a profit warning in August, though, Ricke presented the supervisory board with a plan to cut 67,000 jobs, boost revenues and make Telekom the most profitable European carrier by 2010. Clearly, he is getting the message.