A German shopping spree?

Deutsche Telekom may be the next major overseas carrier to purchase a U.S. telecom firm, after its shareholders recently gave management a virtual $90 billion blank check and their blessing to make an acquisition. But analysts say political complications could thwart any effort the German telco makes in the U.S.

On May 25, Deutsche Telekom stockholders approved $90 billion in authorized capital - to be raised through the sale of 1.5 billion shares, or 50% of the company's outstanding shares - to buy a telecom interest, said Nils Paellmann, Deutsche Telekom's vice president of investor relations in New York. The shares will not be sold unless Deutsche Telekom decides to make an acquisition.

"These new shares can only be used for acquisition," Paellmann said. "It doesn't mean we will use [the authorized capital]; it means that if management sees an opportunity, it has the flexibility to act."

Any decision by Deutsche Telekom's management board to use the authorized capital will require approval from the company's executive board, Paellmann said.

Reports from the shareholder meeting quoted a Deutsche Telekom executive indicating that the money could be used to target a U.S. telecom company. Such an action would not be a surprise, Paellmann said.

"The U.S. is very important to us so we could do some acquisition in the U.S.," Paellmann said.

Although Deutsche Telekom offered no indication that it has identified a company to purchase, Paellmann hinted at the industry niche the German telco might target. Deutsche Telekom offers mobile services, consumer Internet and high-speed access, but the company probably would benefit most from a purchase to augment its fourth pillar - the company's somewhat depleted IP network, Paellmann said.

"The area where we have said in the past that we have the most need is data IP," Paellmann said. "We sold Global One to France Telecom, so we need some substitute for that to serve our global data IP customers."

Early last year, Deutsche Telekom expressed a desire to purchase Sprint, which was bought by WorldCom - a deal that is receiving scrutiny in the U.S. and Europe. If that merger is nixed, Deutsche Telekom could make another run at Sprint, said Scott Cleland, an analyst for Legg Mason Precursor Group.

"If regulators block the Sprint/WorldCom deal, they may be interested in Sprint again," Cleland said.

Or, Deutsche Telekom may consider an investment in Global Crossing to fill its data IP void, according to Eric Kintz, an analyst for Roland Berger & Consultants.

If the company does buy into the U.S. market, it will join several overseas telecom firms with a domestic presence. Last month, Terra - a division of Spain's Telefonica - bought Lycos, a U.S.-based Web portal. Another European telco, France Telecom, acknowledged its U.S. interest after buying U.K. wireless operator Orange (Telephony, June 5, page 12).

Japanese telecom giant NTT also is taking interest in the U.S. Its international arm, NTT Communications, recently purchased Verio, the Colorado-based Web-hosting company.

A U.S. investment, however, won't be simple for Deutsche Telekom or NTT, said Ron Cowles, principal analyst for Dataquest. Last week, a group of seven House Republicans asked that NTT's Verio purchase be blocked until Japan opens its market, including substantially lowering interconnection rates it charges to access its network.

While Japan/U.S. trade relations have been in the spotlight, Germany/U.S. trade relations have not in recent years, which Cowles attributes to the smaller German market and the absence of German companies trying to make inroads in the U.S. But the German telecom market also is virtually closed to U.S. companies, so a purchase by Deutsche Telekom could spur a similar political reaction, he said.

"If and when they choose to make their entry into the U.S. market in any substantial way, they are in for a bumpy ride [from federal regulators]," Cowles said. "Whatever they do, they'll face an uphill battle.... When they take that first step, their toes are going to get rolled on."