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    Case of Deutsche Telekom

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    UJJWAL
    Deutsche Telekom realized it needed massive investments to modernize its infrastructure for competition after the planned 1998 deregulation of the European telecom industry. It decided to partially privatize through an IPO to raise the necessary funds, as financing solely from Germany would be difficult given budget constraints. However, the German stock market was too small to absorb the large offering, so Deutsche Telekom listed shares simultaneously in Frankfurt, London, New York, and Tokyo to attract global investors. This unprecedented $13 billion IPO was the largest in Europe and second largest in the world at the time.

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    Case of Deutsche Telekom

    Uploaded by

    UJJWAL
    122 views1 page
    Deutsche Telekom realized it needed massive investments to modernize its infrastructure for competition after the planned 1998 deregulation of the European telecom industry. It decided to partially privatize through an IPO to raise the necessary funds, as financing solely from Germany would be difficult given budget constraints. However, the German stock market was too small to absorb the large offering, so Deutsche Telekom listed shares simultaneously in Frankfurt, London, New York, and Tokyo to attract global investors. This unprecedented $13 billion IPO was the largest in Europe and second largest in the world at the time.

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    Deutsche Telekom realized it needed massive investments to modernize its infrastructure for competition after the planned 1998 deregulation of the European telecom industry. It decided to partially privatize through an IPO to raise the necessary funds, as financing solely from Germany would be difficult given budget constraints. However, the German stock market was too small to absorb the large offering, so Deutsche Telekom listed shares simultaneously in Frankfurt, London, New York, and Tokyo to attract global investors. This unprecedented $13 billion IPO was the largest in Europe and second largest in the world at the time.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    122 views1 page

    Case of Deutsche Telekom

    Uploaded by

    UJJWAL
    Deutsche Telekom realized it needed massive investments to modernize its infrastructure for competition after the planned 1998 deregulation of the European telecom industry. It decided to partially privatize through an IPO to raise the necessary funds, as financing solely from Germany would be difficult given budget constraints. However, the German stock market was too small to absorb the large offering, so Deutsche Telekom listed shares simultaneously in Frankfurt, London, New York, and Tokyo to attract global investors. This unprecedented $13 billion IPO was the largest in Europe and second largest in the world at the time.

    Copyright:

    © All Rights Reserved
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    of 1

    Deutsche Telekom Taps the Global Capital Market

    Based in the world's third-largest industrial economy, citizens owned shares, compared with 1 in every 4 or 5
    Deutsche Telekom is one of the world's largest tele­ in the United States and Britain. This lack of retail interest
    phone companies. Until late 1996, the company was in stock ownership makes for a relatively illiquid stock
    wholly owned by the German government. However, in market. Nor did banks, the traditional investors in com­
    the mid-1990s, the German government formulated pany stocks in Germany, seem enthused about under­
    plans to privatize the utility, selling shares to the public. writing such a massive privatization effort. A further
    T he privatization effort was driven by two factors: (1) a problem was that a wave of privatizations was already
    realization that state-owned enterprises tend to be inher­ sweeping through Germany and the rest of Europe, so
    ently inefficient, and (2) the impending deregulation of Deutsche Telekom would have to compete with many
    the European Union telecommunications industry in other state-owned enterprises for investors' attention.
    1998, which promised to expose Deutsche Telekom to Given these factors, probably the only way that Deutsche
    foreign competition for the first time. Deutsche Telekom Telekom could raise $60 billion through the German capi­
    realized that, to become more competitive, it needed tal market would have been by promising investors a
    massive investments in new telecommunications infra­ dividend yield that would raise the company's cost of
    structure, including fiber optics and wireless, lest it start capital above levels that could be serviced profitably.
    losing share in its home market to more efficient com­ Deutsche Telekom managers concluded they had to
    petitors such as AT&T and British Telecom after 1998. Fi­ privatize the company in stages and sell a substantial
    nancing such investments from state sources would portion of Deutsche Telekom stock to foreign investors.
    have been difficult even under the best of circumstances T he company's plans called for an initial public offering
    and almost impossible in the late 1990s, when the (IPO) of 713 million shares of Deutsche Telekom stock,
    German government was trying to limit its budget deficit representing 25 percent of the company's total value, for
    to meet the criteria for membership in the European about $18.50 per share. With a total projected value in
    monetary union. With the active encouragement of the excess of $13 billion, even this "limited" sale of Deutsche
    government. Deutsche Telekom hoped to finance its in­ Telekom represented the largest IPO in European history
    vestments in capital equipment through the sale of and the second largest in the world after the 1987 sale of
    shares to the public. shares in Japan's telephone monopoly, NTT. for $15.6 bil­
    From a financial perspective, the privatization looked lion. Concluding there was no way the German capital
    anything but easy. In 1996, Deutsche Telekom was val­ market could absorb even this partial sale of Deutsche
    ued at about $60 billion. If it maintained this valuation as Telekom equity, the managers of the company decided
    a private company, it would dwarf all others listed on the to simultaneously list shares and offer them for sale in
    German stock market. However, many analysts doubted Frankfurt (where the German stock exchange is located).
    there was anything close to $60 billion available in London, New York, and Tokyo, attracting investors from
    Germany for investment in Deutsche Telekom stock. One all over the world. T he IPO was successfully executed in
    problem was that there was no tradition of retail stock November 1996 and raised $13.3 billion for the
    investing in Germany. In 1996, only 1 in 20 German company.2

    Problems of limited liquidity are not restricted to less developed nations, which natu­
    rally tend to have smaller domestic capital markets. In recent decades, even very large
    enterprises based in some of the world's most advanced industrialized nations have
    tapped the international capital markets in their search for greater liquidity and a lower
    cost of capital, such as Germany's Deutsche Telekom.3

    The Investor's Perspective: Portfolio Diversification

    By using the global capital market, investors have a much wider range of investment op­
    portunities than in a purely domestic capital market. T he most significant consequence

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