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In November 1996, Deutsche Telekom AG, the government-owned German telephone company, sold common stock representing approximately 25 percent of the company in a global stock offering that raised approximately DM 20 billion ($13 billion), the largest equity offering ever in Europe. In selling off this equity stake, the German government (i.e., the Federal Republic) had a number of motives. First, the sale was an important step in converting a government-run telephone monopoly into a nimble competitor in the emerging European and world telecommunications market. In anticipation of a fully competitive European telecommunications regime in 1998, Deutsche Telekom ("DT") had been separated from Deutsche Bundespost – Germany's postal, telephone, and telegraph authority – as a private law stock corporation owned 100 percent by the government. Sale of the initial 25 percent tranche was the first stage of an eventual privatization of the entire company. At the time of the offering, DT's outstanding debt was approximately DM 110 billion ($73 billion), and a significant objective of the sale was to recapitalize the company. During the 15 months following October 1996, approximately DM 16 billion of debt comes due, bearing an average interest of 6.6 percent, that management intends to replace with the new equity.

Second, the sale was part of an effort to establish an entrepreneurial culture at DT. This means downsizing the workforce, from 230,000 at year-end 1994 to a targeted 170,000 by 2000 (through traditional German means of attrition and early retirement rather than layoffs), and reorganizing the business on functional lines. In addition, approximately 3.3 percent of the offering, nearly one percent of the company's equity, was sold to employees under various preferential arrangements designed to "increase employee identification" with the company, a particular challenge since nearly half the workforce are tenured civil service employees whose salaries and benefits are set by government regulation.

This paper argues that the Telekom offering does not take the idea of a shareholding culture very far. The key idea is that finance and governance are jointly determined, and that so long as the capital structures of German firms are heavily leveraged (about which there may be factual uncertainty), bank monitoring of managerial performance with a creditor twist will persist. However, the previous success of German "stakeholder capitalism," as opposed to Anglo-American "shareholder capitalism," raises questions about the introduction of a shareholding culture. Perhaps a shareholding culture is a second best solution to a more fundamental problem of an inflexible labor regime within which firms must maximize; a superior solution would find a satisfactory way to address the transition costs of labor market change. Even without change to a shareholding culture, or resolution of even harder issues of political economy, however, it is possible to pursue a modest corporate governance reform agenda that would use the threat of shareholder damage proceedings to elicit more diligent monitoring from the banks.


Banking and Finance Law | Business Organizations Law | Law