The euphoria for Deutsche Telekom’s ‘people’s share’ ended in disaster

‘Whoever buys Telekom shares buys a secure future’ – this slogan sparked the first stock frenzy among the very cautious Germans in the autumn of 2006 when it came to financial innovations and experimenting with money.

Marketed as safe, Telekom’s shares were intended to lure distrustful Germans to invest their hard-earned marks into a better future. Amid the New Economy boom, traditionally conservative Germans decided to introduce a bit of global flair into the financial lives of the German masses, who until then had only known savings books or, at best, home savings. Trading in shares had been reserved for yuppies from Frankfurt skyscrapers. However, the euphoria surrounding the rise of the New Economy and the realization that a comfortable old age could be secured with a few good ideas or marks invested in internet company shares led many to start thinking of shares as a safe deposit for retirement. This was further aided by the late realization of German politics that pensions in their current form were anything but secure. The news of the listing of one of the last dinosaurs of the public sector – Deutsche Telekom – on the stock exchange came just in time.

The ‘people’s share’ of Telekom was also the government’s attempt to encourage inert Germans, following the example of Americans and European neighbors like Danes or Dutch, for whom owning shares is one of the usual forms of retirement planning, to participate more actively in the financial market. Marketed as safe, Telekom’s shares were intended to lure distrustful Germans to invest their hard-earned marks into a better future. Through an unprecedented media campaign, for which Telekom spent an incredible 460 million euros, and with the blessing of politics, small investors were offered 713 million shares of Deutsche Telekom at 14.32 euros in the first issue, which debuted on the Frankfurt Stock Exchange on November 18, 1996. A few hours after the historic stock market debut, the first champagne was opened: the price rose to 16.97 euros in just a few hours, and the once chronic loser became richer by 10 billion euros.

Euphoria among small shareholders

The dizzying rise in the value of Telekom shares accelerated even further in 1999, when another 218 million shares were offered at 39.90 euros in the second issue, bringing Telekom another 10 billion euros. The third and final issue was executed a year later, when the government sold another 200 million shares at 60 euros. The euphoria among small shareholders knew no bounds: on March 6, 2000, the price of Telekom shares reached an incredible 30.50 euros. Some stock traders predicted a rise to 200 euros. The number of small shareholders increased by more than a million in a short time. Many believed that trading in shares would provide them with an additional source of income, and the dizzying rise in the value of the ‘people’s share’ even led many into professional brokerage waters. Suddenly, there was a feeling that one could not lose on shares, and those who did not succumb to the euphoria were labeled eternal losers. Even the traditionally skeptical and cautious German stock market guru Andre Kostolany recommended buying Telekom shares without fear of loss. This euphoric atmosphere was greatly contributed to by the active and omnipresent new head of Deutsche Telekom, Ron Sommer, whose name, however, is also associated with the beginning of the end of the Telekom shares fairy tale.

UMTS – the beginning of the end

The first in a series of ominous harbingers of the dark end is today the legendary auction of licenses for the UMTS mobile telephony standard. This auction brought the state an incredible 100 billion euros, which allowed then-Chancellor Gerhard Schröder to initiate social reforms, but it left telecommunications companies, including Deutsche Telekom, begging for scraps. However, Telekom’s head Ron Sommer, still carried away by the billions from the sale of shares, was consumed by expansion fever. At the top of the list of expensive and misguided investments was the faltering American Voice Stream. The straw that broke the camel’s back was the assessment by independent analysts in 2001 that Deutsche Telekom had overvalued its real estate by several billion euros while preparing for its stock market debut.

A combination of poor assessments and numerous financial disasters related to big names in the New Economy, such as Infineon or WorldCom, caused an unprecedented drop in the value of Deutsche Telekom shares. In the spring of 2002, their value fell below the initial price, and after Ron Sommer’s resignation and the even deeper crisis into which the now rudderless Telekom fell, the value in June 2002 dropped to 8.42 euros, nearly six euros lower than the initial value. Those who were the first to acquire shares can still consider themselves lucky, as their loss compared to those who bought the ‘people’s share’ in later issues is catastrophic. Along with the financial collapse that occurred for hundreds of thousands of Telekom shareholders, this segment of the population became the subject of scorn from a good part of the public, especially those who had warned from the beginning of the euphoria about traditional German virtues such as hard work and frugality.

After the arrival of new leadership, Deutsche Telekom somewhat stabilized, and the value of shares, although slightly, increased. It is now worth three euros less than at the beginning of its dizzying career, and most Germans behave reservedly towards new ‘people’s shares’, such as those of the German Railways if they were to go public in the foreseeable future. Since the German economy is booming again, and the population once again believes that hard work can achieve something, the number of those turning to stock trading has also diminished. The bitter taste left by the experience with Telekom shares has returned the so-called ‘little man’ to traditional savings measures. (Nenad Kreizer)