Anatomy of a Merger: Sprint Nextel
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Anatomy of a merger: Sprint Nextel
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The Justice Department has spoken, and although the FCC has suddenly begun to have doubts, it seems highly probable that the AT&T-BellSouth merger will follow the same path as its predecessors and receive all official blessings subject to certain not very stringent conditions. If so, the restructuring of the US mobile communications sector will, one imagines, have run its course.

As we have noted previously, this restructuring has long had a certain inevitability about it. However, as so many commentators have pointed out, takeover bids, even if they are ostensibly not hostile – the workforce almost always tends to be far less enthusiastic than top management – more often than not produce much worse results than those predicted at the time of the takeover. The AOL-Time Warner incident springs rapidly to mind in the context of US communications. So it seems a good time to examine how things are progressing at one of the new mega-telcos, namely Sprint Nextel.

The bid, made by Sprint in late 2004 and finally brought to fruition in August 2005, involved an initial $35 billion but this has subsequently been enlarged by an additional sum well in excess of $10 billion as Sprint Nextel has been forced to pick up the pieces of pre-existing arrangements by buying up most of Sprint’s affiliates – for example, Alamosa Holdings in November 2005 for $4.3 billion – and the need to make an offer of $6.5 billion to acquire full control of Nextel Partners in December 2005 (which came to fruition in mid-2006). While not quite on the scale of the AT&T bid for BellSouth, this still counts as one of the most expensive sets of related transactions in recent history. So it is rather important that it turns out to be a success. Unfortunately, the evidence so far is to the contrary.

Since the two companies were conjoined, the share price of the new operator – it is the only one of the “big four” mobile operators with a public listing – has dropped by over 30 per cent from a high of $24.40 to a recent low of $16.20. One year after Sprint Nextel was formed, in August 2006, a significant part of this reduction was accounted for by the reaction to the financial results for 2006Q2, which revealed that second-quarter profit had fallen by 38 per cent. During the quarter Sprint Nextel had added 708,000 (mostly pre-paid) new subscribers, but unfortunately Cingular Wireless had gained 1.5 million and Verizon Wireless had gained 1.8 million, and in both cases these were largely on contracts. It was noted that Sprint Nextel’s strategy of lowering prices to attract new subscribers had backfired since it had largely served to induce existing customers to switch to cheaper plans. Standard & Poor’s responded with a downgrade in its credit rating.

In August, the COO resigned after stating that the pursuit of customers with a lower credit risk was causing growth to slow, and in October he was followed into that limbo called “spending more time with the family” by the executive chairman. The results for 2006Q3 subsequently revealed that year-on-year profits had fallen by over 50 per cent, partly due to costs incurred in the spin-off of Embarq, its local fixed-wire operations, in May, but also due to the loss of 200,000 post-paid customers.

So was the takeover destined to fail from the off? The first obvious point is that telecommunications is a sector where competition is fierce, technology is evolving almost by the hour and too little is known about how customers will react to different packages. Hence, if two companies are to be joined together, their respective strengths need to be complementary and have the potential to ameliorate their respective weaknesses. But was that ever true of Sprint and Nextel?

In very recent times, the image of both companies tends to be associated with the mobile sector. However, it should not be forgotten that century-old Sprint was developed as a fixed-wire operator and hence its management had largely cut its teeth in that line of business. Nextel, in contrast, had only appeared in 1987 with a business based on the use of “walkie-talkie” handsets popular with businessmen but largely ignored by the general public. Inevitably, Sprint was perceived as plodding and risk-averse while Nextel was perceived as entrepreneurial and comfortable with risk – all very reminiscent of AOL-Time Warner.

Nevertheless, Sprint’s options were very limited. Having seen AT&T Wireless captured by Cingular Wireless and thereby roughly catch up in size with mobile market leader Verizon Wireless, its list of potential partners to achieve a similar scale was restricted to Nextel – T-Mobile USA was unavailable and anyway used GSM rather than CDMA. The problem was that Nextel did not use CDMA either, but rather a proprietary technology called iDEN. However, its business clientele meant that its ARPU was unusually high at over $60. For its part, Nextel faced problems with upgrading its network to accommodate the higher speeds associated with 3G, with which Sprint was making good progress, and hence it hoped to deal with the problem by switching to Sprint’s technology.

Hence, a coming together appeared to bring benefits to both parties. Although strictly a take-over of the smaller Nextel, the deal needed to be presented as a “merger of equals” to appease Nextel’s board. What this meant, inevitably, is that there were too many executives for the number of top jobs and this led to conflicts over who had responsibility for certain functions. The organisational challenges were also immense, not least because whereas Sprint was split into divisions according to the type of customer, Nextel was split according to business function, each covering the full range of customers. Combining these approaches as an initial compromise has not worked well, but

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Sprint Nextel And Cingular Wireless. (April 3, 2021). Retrieved from