Analysis: T-Systems faces tough search for int'l partner

Deutsche Telekom AG's (DT) search for an international partner to rescue its struggling IT outsourcing unit, T-Systems International GmbH, is going nowhere fast.

The German telecommunications company has approached several large, international IT service providers, including Hewlett-Packard Co., IBM Corp. and Gap Gemini Ernst & Young, but has yet to find an interested party, according to sources familiar with the situation.

At the group's financial news conference in November, newly appointed Chief Executive Officer (CEO) Kai-Uwe Ricke said the group could no longer finance T-System's international expansion and would thus seek one or more partners to help the unit remain competitive.

One of the favored candidates for the partnership is Gap Gemini Ernst & Young, a Paris-based provider of IT services with ties to the German carrier, according to Christophe Chalons, managing director at the Munich office of the Paris-based consultancy Pierre Audoin Consultants. "The two companies are a good match, with T-Systems strong in Germany, Austria and Switzerland, and Gap Gemini Ernst & Young strong in other European countries and the U.S., " he said. "And the two already have a history."

T-Systems consists largely of Debis Systemhaus GmbH, which DT acquired from car manufacturer DaimlerChrysler AG. Debis once held a stake in Gap Gemini.

In December, hopes of a partnership arose after DT named Konrad Reiss as the new head of T-Systems. Reiss is a former executive of Gap Gemini in Germany.

On Monday, however, the Financial Times reported a breakdown in talks between DT and Gap Gemini Ernst & Young.

A Gap Gemini Ernst & Young spokesman declined to comment on the media report, saying only that the company "is continuously talking with interested parties of which T-Systems is one."

Chalons was unaware of an end to talks between the two companies. The alternatives, he said, are difficult; IBM, which already has a strong presence in Germany, would likely encounter problems with antitrust officials if it tried to link up with DT. The same would apply to Hewlett-Packard, another candidate, he said.

A key requirement for the international partner, said Chalons, is to be "strong in the U.S. and the U.K." where T-Systems is not.

If talks between DT and Gap Gemini Ernst & Young have indeed ended, Julian Hewett, chief researcher at the London consultancy Ovum Ltd., wouldn't be surprised. "Telcos have a history of failure in the area of IT services, and Deutsche Telekom is no exception," Hewett said. "IT outsourcing isn't a core business for them; they're good at running networks but terrible at providing applications. For many of them, it's been a license to lose money."

Even if the track record of telcos in the IT service sector hasn't been the best, Chalons believes they shouldn't pull out. With telecom becoming a commodity business, operators can tap new revenue streams and differentiate themselves from the competition by offering IT services, he said.

"IT is a real asset for Deutsche Telekom; it's a trump card," he said.

The big question now is how DT will play it out.

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