German share row intensifies

Deutsche Telekom's shares have plunged this year

The row between two of Germany's biggest companies - telephone giant Deutsche Telekom and financial powerhouse Deutsche Bank - intensified over the weekend.

In an interview with German magazine Der Spiegel, Deutsche Telekom chairman Ron Sommer accused the bank of making "serious mistakes" in its placement last week of 44 million Telekom shares on behalf of an anonymous seller.

The stock placement caused Telekom's share price to fall sharply, hitting three-year lows on Thursday, as investors feared that big shareholders were unwinding their positions in the telecoms firm.

Mr Sommer said the trust of small shareholders had been "severely damaged" and the bank must "do everything to win that trust back."

The comments prompted German opposition MPs to call on the government to compensate shareholders, possibly by granting them state-owned Telekom shares at a preferential rate.

Mr Sommer also said that the telecoms firm would be asking its lawyers to examine the sale, and confirmed that it might review its longstanding business relationship with the bank.

The Bundesaufsichtsamt fuer den Wertpapierhandel, the stock market regulator, said it was looking into the placement.

Placement peeves

Deutsche Bank's placement was particularly wounding to Telekom because the bank had reiterated its "buy" rating on the firm's shares the day before.

Deutsche Bank says it acted properly

The bank is also a key financial adviser to Telekom, having managed its initial public offering in 1996.

According to speculation in the German markets, the shares sold by Deutsche Bank were owned by Hong Kong telecoms firm Hutchison Whampoa, which has 206 million Telekom shares.

Hutchison gained its Telekom stake from the German firm's takeover of US mobile phone operator Voicestream earlier this year.

Voicestream shareholders were offered Telekom stock in exchange for their stakes.

Investors feared that other former Voicestream shareholders could start dumping their Telekom shares - a process known as "flowback".

Political calls

The spat over Telekom shares has started to spill over into the political arena.

Rainer Bruederle, deputy leader of the liberal Free Democrats, urged the government to compensate investors for their losses by offering them the Telekom shares it still holds at highly favourable conditions.

Mr Bruederle described such a move as "essential" if confidence is to be restored in Germany's fledgling share ownership culture, for which Telekom is seen as a flagship.

The government, which still holds a 33% stake in Telekom, rejected Mr Bruederle's proposal, and said it had no plans to sell any more shares.

'Chinese walls'

Deutsche Bank argued the placement did not breach investment banking regulations.

Telekom is perceived as accident-prone

The conflict between the "buy" rating and the share sale was caused by so-called "Chinese walls" between its investment banking and research operations, it said.

But according to rumours in Frankfurt, Deutsche Telekom may be seeking to dump Deutsche Bank as a financial adviser.

Telekom shares have lost almost three-quarters of their value in the past 12 months, battered not merely by global concerns over telecoms shares, but also by the perception that management has made a series of blunders.

Among other issues weighing on the share price, the firm is under investigation for allegedly falsely valuing some of its assets.