A grey market in the shares was promptly established, and the price jumped as high as DM39. Even yesterday, with the price drifting back to DM33-DM34, it looked as if the advisers to the issue had not been sufficiently aggressive.
It may not be that simple. As discussed below, the fundamental valuation of Telekom is highly complex. Not all potential investors in the stock have the same priorities, and different valuation techniques give different answers.
The grey market premium seems mainly due to two factors. First, a technical quibble means there may be a temporary shortage of stock. This is because some European stock indices may weight Telekom according to the 1bn shares which it plans to sell eventually, rather than the 500-m odd it is selling now. If so, there will be inflated demand at the outset from indexed funds.
More basically, it begins to look as if Telekom has overdone its marketing to the German public. Indications are that half the entire issue could go to German private investors.
Traditionally, Germans prefers bonds to equities. It therefore seems possible that a large part of the stock will be dumped on to the institutions in early dealings, depressing the price.
Some analysts including the FTs Lex column gave the view that the shares would be worth buying at DM25, but not at DM30. If that seems too gloomy, there are reasons to support it on a longer view. At the most basic level, it is worth asking how high a priority Telekom will assign to shareholders interests. The company has a distinguished record in technology. It is less good at keeping its customers happy. As for pleasing shareholders, its experience is obviously nil.
Mr Ron Sommer, the chief executive, comes with an impressive commercial reputation. His years with Sony will have taught him all about satisfying customers expectations. But Japanese companies, like German ones, are not best known for their focus on shareholder value.
More From This Section
There is perhaps a clue to this effect in Telekoms prospectus. In coming years, the prospectus says, Telekom has five objectives. First is to strengthen its position further in the German telecoms market. Second is to grow abroad. Third is to increase sales, cash flow and earnings. Fourth is to strengthen the balance sheet. The final goal is to generate attractive returns for its shareholders.
Then there is the question of the workforce. Telekom has very high wage costs, and is not particularly productive in terms on lines per employee. The workforce has fallen from 230,000 at the end of 1994 to 207,000, and is due to fall to 170,000 by the end of the year 2000. However, the squeeze on employee numbers at telecoms companies world-wide is remorseless and continuing. This is due as much to new technology as to the pressures of deregulation.
It is therefore an open question whether Telekom can get its costs down sufficiently in the new world of competition. Its task is made no easier by the fact that half of its employees are civil servants; nor by the fact that until the end of 2000, its controlling shareholder will be the government.
The nature of the competitive world which Telekom is entering cannot be clearly discerned. The ending of a monopoly always has unpredictable effects on pricing and volume. As for the competition, the alliances which will confront Telekom in its domestic market are still taking shape.
It is important to recall that the changes following deregulation are not always bad news. In the US, the breaking up of AT&T in the early 1980s and the introduction of competition in long-distance telephony coincided with startling growth in this market. In the event, there was room for everyone.
It is also worth recalling that Telekom has ambitious plans for markets outside basic German telephony. Its overseas plans are described elsewhere. Its domestic operations outside telephony have attracted criticism, not always fairly.
It is blamed for the fact that its dominant business in German cable TV has never made a profit. But cable TV companies are often unprofitable, because of high depreciation charges. What matters is their cash flow; and in the US, lack of earnings has not stopped cable companies being very profitable investments. Similarly, Telekom is criticised for its lowness in developing multimedia services such as video-on-demand. Again, comparison with the US suggests this may be simple prudence. The technology is proving problematic, and the market uncertain. Several US phone companies have scaled down or delayed their multimedia ambitions.
The main inference for investors to draw from all this is one of caution. Telekoms past will be a poor guide to the future. It will certainly face reductions in prices and market share. While it will be at least partly compensated by growth in market volume, this can scarcely be quantified.
But there is a final point to be made in the other direction. While Telekom is unlikely to be a growth stock, the downside risk is correspondingly limited. Germany remains the economic powerhouse of Europe, and its appetite for communications will certainly increase. Experience also suggests that embedded monopolies are remarkably hard to shift.
As a result, Telekom will certainly be a core holding for institutions internationally. While the flotation may or may not be a steal, it will scarcely be a flop either.