Mergers & Acquisitions. Sprint-T-Mobile - Term Paper Example

?Mergers & Acquisitions The potential Sprint-T-Mobile merger is one of most discussed topic in the US telecom industry. More than the merger between the two, the cause of concern is the future of T-Mobile which will have to merge with either of other service providers for survival. A short analysis of the potential merger form various perspectives have shown that it is far better for Sprint to operate individually than to merge with T-Mobile. But for T-Mobile, a merger with AT&T would make more sense than with Sprint. The prospective merger between T-Mobile and Sprint has evoked mixed opinions among the shareholders of both the companies. T-Mobile USA is a subsidiary of German based Deutsche Telekom AG (DTE). The intention of DTE is to sell off the entity to Sprint and own a major stake in the combined entity. (Saitto et.al., 2011) The merger will be positive for both the companies in terms of the market presence. As of now both the companies are the third and the fourth largest operators. This deal would be beneficial for the shareholders of T-Mobile. The shareholders of T-Mobile are already worried with the recent drop in its share price due to drop in quarter-on-quarter profits. Therefore, any possible merger is an opportunity for the shareholders to sell the shares on a price better that a market price. Moreover, for those shareholders who are not selling off the shares, it is an opportunity for them to get more shares allotted in the new entity. The situation is slightly different in terms of the shareholders of Sprint. Sprint has a strong technology back up to compete with all the competitors in the market. “Sprint Nextel has partnered with Clearwire to build a 4G wireless network using a technology called WiMax, which is now available in 43 markets.” (ABMN, 2010) Sprint is already committed to pay Clearwire Corporation for building 4G wireless technology. Sprint is bound to pay Clearwire a minimum amount of $850 million in two years. This can even go up based on the growth in data usage. This deal though was spread over for 2 to 3 years will raise the debt level of the company. A potential merger with T-Mobile will further raise the debt level of Sprint. This will be threatening for the financial position of the company. Eventually this can lead to loss for the shareholders. At this point, it is important to look at the financial position of both the companies. T-Mobile has been facing serious decline in its customer base and profitability for some quarters now. All other players in the market are well equipped with sufficient technologies to capitalize the future market. It is difficult for T-Mobile to capture additional customers as they lack the technology strength to do so. Therefore, the customer and profit erosion for T-Mobile will be much faster in the coming years. “During the first quarter of 2011, T-Mobile saw its revenue hit $4.63 billion, putting it in line with the first quarter of 2010. However, the company’s profit fell over $200 million year over year from $362 million last year to $135 million in the first quarter of 2011.” (Reisinger, 2011) The total customer loss in 2010 alone was 56,000. The second quarter results of the company have shown a decrease in the total assets to $46,291 million from that of $46,299 million. Cash and equivalents have decreased to $109 million from that of $344 million. There is an increase in the total liabilities of the company. Sprint Nextel is better positioned than T-mobile in terms of the financial position. Unlike T-Mobile, Sprint reported first quarterly revenue after 3 years. Sprint was also undergoing a loss of revenue since 2007. (Bloomberg, 2011) The net incomes were on the negative side year on year. The first quarterly revenue was in fact a positive sign that the financial position of the company will pick up. But then the second quarter results were again on the negative side for the company. (Sprint, 2011) These negative revenues have taken a tall on the cash flow of the company. Especially at this stage when the Sprint is already committed to pay for 4G technology. But Sprint had seen a positive increase in the subscriber base from that of the previous quarters. This can lead to a potential increase of profits in the coming quarters. In the light of financial position of the two corporations and the market scenario, let us look into whether the merger is feasible or not. There are various reasons in support that the combined entity will make more profits than operating individually. As mentioned earlier, Sprint and T-Mobile occupies the third and fourth position in the market after AT&T and Verizon. AT&T and Verizon are leading the market with growing subscriber base and increased technology platform. T-Mobile will have no option left behind than to merge with either of any players in the market. In fact, talks have been on between T-Mobile and AT&T for a potential merger. This has worried Sprint who had also filed a suit against the same. The financial and market position of T-Mobile is such that it cannot survive individually in the market. Moreover, a merged entity will make Sprint a strong contender for AT&T and Verizon. Sprint has already built up its 4G platform though not the LTE 4G as that of Verizon. A combined entity will provide additional capacity and technology. This will give T-Mobile an entry into the 4G technology. These are the factors that are beneficial for a potential merger between T-Mobile and Sprint. The arguments against a potential merger between both the companies are as strong as that of the arguments for it. The primary factor that acts as a hindrance is the fact that Sprint & T-Mobile uses two incompatible networks. “Sprint uses CDMA and EVDO on its network and T-Mobile makes use of HSPA and GSM on its networks.” (ABMN, 2010) Merging the two platforms is a very costly affair for both the companies which are already facing cash flow problems due to reduced profitability. The second argument against the potential merger is the loss of customers. T-Mobile is already facing huge loss in its customer base quarter-on-quarter. For Sprint, there is an increase in the subscriber base. But a merger would probably be a confusing situation for most customers. This can lead to the customers shifting from their current network to other providers. Therefore, players like Verizon, Vodafone & AT&T will benefit by an addition in the customer base. Financial issue is the next biggest problem for the potential merger. Sprint is already committed to pay more than $800 million to Clearwire Corporation for the 4G technology. Considering the fact that both the corporations are facing profit erosion, the merged company can be pushed towards a financial burden for a longer period. Any such crisis situation would affect the industry as a whole. Also, as mentioned earlier, both the companies operate on two different platforms. Merging the two is a costly affair. The merged entity will have to raise more debt for the venture. This will make the financial position worse for longer years. Since Sprint has got sufficient technology and an increasing customer base, it is more profitable to operate alone. For T-Mobile, a merger with AT&T seems to be a profitable venture. But both Sprint & T-Mobile can definitely think about a network sharing agreement. References Saitto, S., Simmons, J., McCracken, J., (2011). Sprint, Deutsche Telekom Said to Discuss T-Mobile USA Deal. Retrieved September 8, 2011. From: http://www.bloomberg.com/news/2011-03-08/deutsche-telekom-is-said-to-discuss-sale-of-t-mobile-usa-to-sprint-nextel.html ABMN (2010). Sprint Nextel (NYSE:S) and T-Mobile Merger Rumors Return After Comments from Sprint CEO. Retrieved September 8, 2011. From: http://www.americanbankingnews.com/2010/07/15/sprint-nextel-nyse-s-and-t-mobile-merger-rumors-return-after-comments-from-sprint-ceo/ Reisinger, Don (2011). T-Mobile profit and subscriber tally slide. Retrieved September 9, 2011. From: http://news.cnet.com/8301-13506_3-20060353-17.html Businessweek, (2011). Sprint Nextel Corp. Retrieved September 9, 2011. From: http://investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?ticker=S:US Read More