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Deutsche Telekom and Telecom Italia Confirm Plans for Merger

By Carol J. Williams

Deutsche Telekom and Telecom Italia confirmed Thursday they will merge into the world’s second-largest telecommunications group, but analysts voiced doubts about their ambitious plans to take on the rest of the world.

Despite their vow to take aim at industry giants in the United States, experts here say the two companies won’t be in shape to compete for a commanding position in the global market any time soon.

The biggest corporate marriage in history is also far from consummation. Wary stockholders have yet to be convinced that there are real prospects for cost-cutting synergies from the merger, and European regulators might fear the elephants’ wedding will stifle competition on the continent.

The deal would create a European behemoth with $173 billion in market capitalization and $64 billion in annual sales. Together, they already serve 100 million phone customers, about one-third of the European population.

The venture also must win approval of both the German and Italian governments -- a hurdle seemingly cleared by Bonn’s assurances to Rome late Wednesday that the joint company’s management would be a parity partnership.

But two Italian ministers complained they still were unsatisfied by the “generic indications” that Bonn will not take advantage of its 72 percent stake in Deutsche Telekom to control the joint company.

At a news conference in London to announce the merger that had been rumored to be imminent for nearly a week -- driving down Deutsche Telekom stock by 8 percent in the confusion -- Deutsche Telekom chief Ron Sommer and Telecom Italia’s Franco Bernabe disclosed plans to forge into markets beyond Europe.

“This is the first step in creating a European telecom powerhouse. We intend to increase market share in Europe and to compete with the U.S.,” Bernabe told reporters, conceding that neither company currently has much business beyond Europe. “We need global reach.”

Sommer declined to comment when asked if the new team would pursue the takeover of U.S.-based Sprint Corp. Deutsche Telekom already holds a 10 percent stake in Sprint and Sommer a seat on the board .

But some analysts see the pairing of Deutsche Telekom and Telecom Italia as hampering both companies’ efforts to range further afield, confronting them with time-consuming challenges to cut costs and integrate operations.

Economists fear managers will be under pressure from both Bonn and Rome to preserve jobs amid already double-digit unemployment.

“It’s not possible to change the whole culture and philosophy of managers who were running a state monopoly only a few years ago,” said Hans-Joachim Frank, analyst at Deutsche Bank. “There is a need for good new managers at both companies to face the hard decisions that managers who come from the state sector are reluctant to deal with.”

Economics Professor Mario Baldassari of the University of Rome-La Sapienza sees the partnership as lacking in dynamism and detail on its plans for the future. “I have been hoping for years that Italy would become more European, but I’m afraid Europe is becoming more Italian,” he said.

Both companies are in dire need of streamlining, with at least 30,000 excess employees at Telecom Italia and 80,000 at Deutsche Telekom, Baldassari estimated.