Sprint Nextel What it Means for Sprint and for the Rest of Us

Things change. In essence the recent announcement of the Sprint Nextel merger is a story of two companies changing, scrambling to survive against giants. It is also the story of two bright, energetic executives understanding that even when change is imminent, a company still has a choice. It can choose to be the agent of change. Or it can wait around to be the victim.

On Dec. 15, 2004, the two executives, Sprint Chairman and CEO Gary Forsee and Nextel Communications Chief Executive Tim Donahue announced to the world that they would be their own agents of change. It definitely beats waiting around to be swallowed whole by a competitor.

But that is little comfort for the employees of the two companies, residents of the Kansas City metro area and of Nextel’s hometown of Reston, Va., all of whom are fretting about the ramifications of the merger. Things change. But for better or for worse? Only time will tell—and even that depends on where you’re standing.

The Deal

The merger, valued at $35 billion, would create the nation’s third largest wireless cellular telephone company and would go by the name Sprint Nextel. Officials for both companies put the combined entity’s total equity value at $70 billion.

Already Sprint is the third largest wireless communications company in the domestic market, leading some to question a deal that will move Sprint from third largest to, well, third largest. But a closer look at the numbers shows that combining Nextel’s 15 million wireless customers with Sprint’s 20 million customers will pull the combined Sprint Nextel entity to within about 7 million customers— in this case a relatively small number—of Cingular Wireless, the leader in the United States market.

Both companies’ shareholders, the U.S. Securities and Exchange Commission, the U.S. Department of Justice and state regulators still must approve the merger, but officers from both companies expect the deal to be finalized and approved sometime during the latter half of 2005.

According to the terms of the merger, Sprint Nextel will have its corporate headquarters in Nextel’s hometown of Reston, Va., while its operational headquarters will be maintained at Sprint’s sprawling campus in Overland Park, where vacancies are available. Sprint Nextel officials hope the merger will save the combined company about $12 billion over three years—a number that takes into account layoffs of redundant Sprint and Nextel employees.

Sprint’s Forsee will serve as CEO of the new entity, while Nextel’s Donahue will serve as “hands-on” chairman, both of them working out of the Reston office. While it’s been reported that each will receive about $5 million upon completion of the merger, Sprint will not confirm that figure nor is it detailed in the SEC filings.

Significantly, the proposed merger includes plans to spin off Sprint’s local telephone business into a standalone, publicly traded telecommunications company headquartered in the Kansas City metro area.

For Better or Worse?

It’s been an interesting few years for Sprint. A series of layoffs, a reputation for poor customer service and the resignations of two top executives over alleged financial misconduct. Editor’s Note: Sprint has asked Ingram’s to clarify that no misappropriation of Sprint’s corporate finances were involved in the events which resulted in the resignations of former Sprint CEO William Esrey and former Sprint President Ronald LeMay.

If this recent merger announcement wasn’t exactly a shock to the public at large, the identity of the players involved did generate a measure of surprise. There have long been rumors that late some night number two wireless player Verizon Wireless would come pounding on Sprint’s door.

But Forsee and Donahue began formal merger discussions in November 2004. In hindsight perhaps it’s not all that surprising that something would be done. As the cellular market has exploded, the number of industry players has contracted (so long AT&T wireless, we hardly knew ye.) And, of course, it was only six years ago that Sprint was well on its way to being a division of MCI WorldCom. Things may have been tough for Sprint over the last few years, but what’s that WorldCom stock trading at these days?

Many questions are brought up by the announcement of this planned “merger of equals” (even Sprint’s own internal communications department couldn’t resist placing ironic quote marks around the words in Forsee’s letter to employees). First and foremost: Is this a good deal for Kansas City?

Conventional wisdom holds that it is never good to lose a corporate headquarters and certainly not that of a Fortune 100 company. For their part and with a measure of validation, Forsee and Donahue have spun it as trading the corporate headquarters of a shaky company for the operational headquarters of a stable one.

But stability isn’t something going around currently in the wireless communications business. Already rumors have floated that Verizon is licking its chops at the thought of sinking its considerable teeth into a Sprint Nextel combination plate. Sprint officials downplay that possibility and rightly so it would seem: A clause in the merger plan stipulates a payment of $1 billion going to the spurned party should either Sprint or Nextel break this engagement to succumb to another suitor, according to documents filed with the SEC.

 

« January 2005 Edition