Restructuring Expert Deutsche Telekom to break up T-Systems after failed sale

A former IBM manager who now heads the telecom operator’s loss-making subsidiary wants to divide it into two separate units. Talks to merge part of the business with Atos Origin failed over the summer.
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Just three weeks after becoming its new CEO, Adel Al-Saleh Monday unveiled a plan to break up the IT subsidiary of Deutsche Telekom, as observers wonder if he won't put at least part of the business up for sale, as the American executive has in the past. T-Systems is Telekom's perennial problem child, accruing total losses of €3.7 billion ($4.5 billion) since 2006 even though it counts Microsoft, oil giant Shell and the Swiss railroad operator SBB among its clients. Mr. Al-Saleh hopes to quell that by carving out its business maintaining computer systems and software for corporate clients, sources told Handelsblatt, though a company spokesman confirmed the plans. The unit employs 43,700 and also sells cloud computing and phone network access services.

Mr. Al-Saleh informally began his work in September after Telekom boss Timotheus Höttges hand-picked him to lead the troubled unit, specifically because of his restructuring experience at former employer Northgage Information Solutions (NIS), a UK software company. T-Systems, a rival of British telecoms firm BT, IBM and Fujitsu, has been plagued by cost-overruns as managers underestimated the time and money to implement IT projects for customers. The rise of cloud computing has been an extra challenge for the former state monopolist as Amazon Web Services, Google and Salesforce pushed prices down. In November, Deutsche Telekom wrote down T-Systems' value by €1.2 billion because orders had been below expectations.

The numbers clearly show the need for action, something Mr. Al-Saleh apparently took on with vigor. The plan will separate the company into two legal entities, which will allow them to better focus on their individual markets, customers and rivals, according to a white paper outlining the strategy. The executive, who spent 19 years at IBM, told some T-Systems employees he did not join the company to sell off operations, a person familiar with the matter said.

However, before he started in his new job, T-Systems held talks with Atos about selling part of the business to the French IT company, sources said. Atos is no stranger to Germany, having picked up a software unit of engineering conglomerate Siemens two weeks ago as well as its IT business in 2011. The meetings between Telekom and Atos took place during the summer but did not identify sufficient synergies, leading to the cancellation of the deal. T-Systems and Atos declined to comment on any talks.

Speculation has swirled around T-Systems for years. Most recently, rumors had it merging with the IT division of UK competitor BT, which is larger globally with higher revenue. The speculation made sense because Telekom is the largest BT shareholder after it traded its stake in mobile operator EE for BT shares.

T-Systems may, however, take some time before selling some of its businesses, if at all. At Northgate, where Mr. Al-Saleh started working at the end of 2011, it took until February 2013 before the first divestment was announced.

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Peter Brors is Handelsblatt's deputy editor in chief, based in Düsseldorf. Ina Karabasz writes about telecommunications, IT and security issues for Handelsblatt. Christof Kerkmann is an editor for Handelsblatt and writes about the technology sector. Gilbert Kreijger, an editor with Handelsblatt Global, contributed to this article. To contact the authors: [email protected][email protected][email protected]