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Global players may target U.S. telcos

Analysts say the collapse of Deutsche Telekom's bid for Telecom Italia may lead big European telco players to look for merger partners in the United States.

The collapse of Deutsche Telekom's bid for Telecom Italia may lead big European telco players to look for merger partners in the United States, analysts say.

Deutsche Telekom launched an ambitious bid to merge with Italy's former state-owned telephone company last month, in what would have been the largest telecom merger in European history. But last weekend, rival telecom firm Olivetti managed to gain control of the Italian company in a successful hostile bid, derailing Deutsche Telecom's merger plans.

The development leaves Deutsche Telecom with unfulfilled expansion plans, which could eventually lead the European giant to look at U.S. companies for partnerships, analysts said.

"In order to be global competitors like they say they want to be when they grow up, they have to expand," said Jeffrey Kagen, an independent telecommunications analyst. "Partnerships and mergers between international players is the next step in the wave of consolidation."

And in Deutsche Telekom's case, analysts most often point to a deal with long distance firm Sprint, a link-up that would create a powerful transatlantic data and long distance player.

"Deutsche Telekom is definitely going to enter an acquisition mode, and Sprint makes a premier partner for them in the U.S.," said Sands Brothers financial analyst Alan Feldman.

One goal for many big telephone companies is to carry as much voice and data traffic on their networks as possible. MCI WorldCom and AT&T have led the pack in this regard, creating vast local and international networks.

Deutsche Telekom had hoped to use the Telecom Italia to create a pan-European network to compete with the U.S. players overseas. The company will now likely turn to acquiring smaller European players to complete that goal, analysts say. But once this "defensive" strategy is completed--or perhaps even before--U.S. players like Sprint may also be considered as potential merger partners, analysts said.

Deutsche Telekom and Sprint, along with France Telecom, already have a joint venture dubbed Global One, which links the companies' transatlantic operations.

But that venture has struggled to make a dent in the marketplace, and has been marked by rumors of discord between the participants. Deutsche Telekom's bid for the Italian company also angered France Telecom, which bitterly criticized its partner's merger plans.

"Alliances are always messy," Kagen said. "You have competing agendas with the different players. That's a recipe for chaos."

According to reports in the Wall Street Journal, the Global One partners have until June to settle their differences, but then a "buy-sell" provision would allow one of the companies to buy out the others. That discussion could take as much as six months to a year, the paper said. All three companies have recently reiterated their commitment to making the partnership work, however.

Meanwhile, a German business publication reported last month that Deutsche Telekom and Sprint have discussed a potential merger.

Shuttering or changing the Global One alliance could allow Deutsche Telekom to pursue a more aggressive expansionary strategy both at home and with U.S. partners.

"There will be a lot of consolidation in Europe, and I think they need to defend that front first," Feldman said. "But Sprint needs more of a global presence, and Deutsche Telekom needs more of a U.S. presence."