Chapter 11 Outline

Deutsche Telekom Taps the Global Capital Market

Introduction

Benefits of the Global Capital Market

The Functions of a Generic Capital Market

Attractions of the Global Capital Market

Growth of the Global Capital Market

Information Technology

Deregulation

Global Capital Market Risks

The Eurocurrency Market

Genesis and Growth of the Market

Attractions of the Eurocurrency Market

Drawbacks of the Eurocurrency Market

The Global Bond Market

Attractions of the Eurobond Market

The Global Equity Market

Foreign Exchange Risk and the Cost of Capital

Implications for Business

Chapter Summary

Critical Discussion Questions

The Search for Capitalin the Czech Republic

Notes

Deutsche Telekom Taps the Global Capital Market

Based in the world's third largest industrial economy, Deutsche Telekom is one of the world's largest telephone companies. Until late 1996, the company was wholly owned by the German government. However, in the mid-1990s, the German government formulated plans to privatize the utility, selling shares to the public. The privatization effort was driven by two factors: (1) a realization that state-owned enterprises tend to be inherently inefficient, and (2) the impending deregulation of the European Union telecommunications industry in 1998, which promised to expose Deutsche Telekom to foreign competition for the first time. Deutsche Telekom realized that, to become more competitive, it needed massive investments in new telecommunications infrastructure, including fiber optics and wireless, lest it start losing share in its home market to more efficient competitors such as AT&T and British Telecom after 1998. Financing such investments from state sources would have been difficult even under the best of circumstances and almost impossible in the late 1990s, when the German government was trying to limit its budget deficit to meet the criteria for membership in the European monetary union. With the active encouragement of the government, Deutsche Telekom hoped to finance its investments in capital equipment through the sale of shares to the public.

From a financial perspective, the privatization looked anything but easy. In 1996, Deutsche Telekom was valued at about $60 billion. If it maintained this valuation as a private company, it would dwarf all others listed on the German stock market. However, many analysts doubted there was anything close to $60 billion available in Germany for investment in Deutsche Telekom stock. One problem was that there was no tradition of retail stock investing in Germany. In 1996, only 1 in 20 German citizens owned shares, compared with 1 in every 4 or 5 in the United States and Britain. This lack of retail interest in stock ownership makes for a relatively illiquid stock market. Nor did banks, the traditional investors in company stocks in Germany, seem enthused about underwriting such a massive privatization effort. A further problem was that a wave of privatizations was already sweeping through Germany and the rest of Europe, so Deutsche Telekom would have to compete with many other state-owned enterprises for investors' attention. Given these factors, probably the only way that Deutsche Telekom could raise $60 billion through the German capital market would have been by promising investors a dividend yield that would raise the company's cost of capital above levels that could be serviced profitably.

Deutsche Telekom managers concluded they had to privatize the company in stages and sell a substantial portion of Deutsche Telekom stock to foreign investors. The company's plans called for an initial public offering (IPO) of 713 million shares of Deutsche Telekom stock, representing 25 percent of the company's total value, for about $18.50 per share. With a total projected value in excess of $13 billion, even this "limited" sale of Deutsche Telekom represented the largest IPO in European history and the second largest in the world after the 1987 sale of shares in Japan's telephone monopoly, NTT, for $15.6 billion. Concluding there was no way the German capital market could absorb even this partial sale of Deutsche Telekom equity, the managers of the company decided to simultaneously list shares and offer them for sale in Frankfurt (where the German stock exchange is located), London, New York, and Tokyo, attracting investors from all over the world. The IPO was successfully executed in November 1996 and raised $13.3 billion for the company.

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Source: J. O. Jackson, "The Selling of the Big Pink," Time, December 2, 1996, p. 46; S. Ascarelli, "Privatization Is Worrying Deutsche Telekom," The Wall Street Journal, February 3, 1995, p. A1; "Plunging into Foreign Markets, The Economist, September 17, 1994, pp. 86 - 87; and A. Raghavan and M. R. Sesit, "Financing Boom: Foreign Firms Raise More and More Money in the U.S. Market," The Wall Street Journal, October 5, 1993, p. A1.