Merger Between Sprint And T-Mobile - Research Paper Example

?Running Head: MERGER BETWEEN SPRINT AND T-MOBILE In the United s, carriers’ competition has gradually increased to what can be termed as fever pitch. Concerning iphone 4 versus droid X, and maps versus application, Verizon Wireless and AT&T has collided head on head due to the competition. Sprint and T-mobile merger would therefore, make sense to the shareholders in that it would create competition by creating a carrier that effectively and efficiently competes against the two big carriers. There are reasons for Sprint and T-mobile merger because the two carriers have been struggling with the churn which has resulted to the two companies losing grounds to the Verizon Wireless and AT&T carriers. The merger will help in finding a spectrum path in succeeding. For the purposes of Deutsche Telekom to grow T-mobile, the best strategy may be to merge because as it was seen, the strategy worked for Verizon when it took over Alltel. This merger will offer T-mobile an opportunity to offer new services, gain new customers, and also present an opportunity for expansion. The financial position of Sprint reported a Q4 net loss and an operating revenues drop of 14 percent over the past years period. This issue of finance is mostly important to T-mobile parent which is Deutsche Telekom DT and thus a merger with a US carrier is the best strategy. T-mobile suffers from a lack of compelling products and services and thus it is hindered from competing in an effective manner. A merge possibly with an existing carrier is therefore the fastest way that will help T-mobile to penetrate today’s market and grow. Based on the current size, the combination of Sprint and T-mobile will accumulate a close of a total number of 82 million subscribers and annual service revenues of $11 million. There are 11 million more subscribers in Verizon wireless and 5 million more subscribers in AT&T carrier (Butcher, 2011) Due to slightly lower ARPUs, there will be much work that needs to be done on the merger so as to catch up with the carriers that are on the top two because both Sprint and T-mobile are running above twice the churn in monthly estimates of the two leading carriers. This means the carriers are operating at above 3 percent against 1.5 percent. Deutsche Telekom AG was holding talks to Sprint Nextel Corporation to sell its T-mobile USA, a major stake in the entity that is combined as the consideration. A deal might as well not be agreed upon because these negotiations have been on and off for a sometime. The T-mobile USA valuations haven’t been agreed upon by the companies because the company reported a decline in its reported profits. The merger involving Sprint and T-mobile of USA brings together, a third and fourth largest wireless provider in U.S. These companies are behind Verizon Wireless and AT&T Inc. The net worth of T-Mobile of U.S was between $ 15 and $ 20 billion. The sprint net worth was $13.6 billion. The price of Sprint, the acquirer may disappoint Deutsche Telekom because the buyer may pay less reason being customer losses. Basing on the unit’s earnings, the company may expect about $25 billion (Saitto et al, 2011) Considering Verizon wireless has 93 million subscribers, AT&T has 85 million subscribers, a combined sprint and T-mobile will put them behind a third placed carrier which is very strong with about 82 million. This puts them in a very competitive position of becoming the second positioned carrier. T-mobile has a sales price of $39 billion which is three times its net worth of $13 billion. This means that it would result to Sprint having more debts of worth billions which will increase its total leverage. Market capitalisation of sprint has ranged between $13 billion to around 16 billion since the merger was announced. Sprint will thus be required to borrow billion of dollars to fund the merger which will double its current leverage of $20 billion of long term debts. By year 2010, sprint had 138 percent debt to equity ratio meaning purchase of T-mobile would add more debts and from the aforementioned ratio, means the firm will add more debt to already intensively leveraged firm. T-mobile uses GSM for its basic network and Sprint uses CDMA based systems. It will be costly to and somehow difficult in combining the two different technologies. In the past years, Sprint has embraced plans on its CDMA network replacement with LTE for voice. They indicated that the replacement would be one of the network modernization project benefits. On the merger of Sprint and T-mobile, both the carriers could use the LTE for voice and this will end the technological and operational problems. This technical problem of incompatibility of the GSM and CDMA networks is not that trivial matter to the combined carriers but the issue of customer handsets would pose great problems to the integrated network. Despite the challenges, the merger will be of major importance to the carrier. The subscribers whom will be added after merger would create revenues which would provide T-mobile with a chance to offer to new customers new products. Taking sprint as an example, it has more enticing selective handsets and smart phone market. T-mobile has a deficiency of 3G network that is viable. The 3G network of T-mobile is facing a lot of competition and is being left behind taking note that it is small. Merging with Sprint would give T-mobile a faster way of adopting 4G space since Sprint has a very good 3G network and has already started its way to 4G network. While considering its loss of more than 400,000 subscribers, it may be the cheapest sprint to merge with T-mobile and due to the loss, it is clear that it is the right time for the merge and also Sprint has the advantage. DT wants up to around $25 billion for T-mobile and this is much higher by $5 to $10 billion. Considering the Nextel merger six years ago, there was little synergy, Nextel had the best customer service which was most geared to business and Sprint on the other hand lacked sufficient customer service and was a consumer brand. With the blueprints of Sprints and marketing of T-mobile, the merger will be a success. There are specific gains to a merger which will also be of benefit to the shareholders of both corporations. These includes, a merger does not require cash in consideration and in turn may require consideration of shareholding, a merger can be achieved free of tax for both of the parties involved which will assist in saving of the revenues of the corporations involved, a merger increases the net worth of the shareholders of the smaller entity to own a share of the combined carrier thereby giving the smaller entity the benefit of growth for example in the case of Sprint and T-mobile merger has the benefit of large subscribers and growth in 4G space (glgroup.com, 2011). The merger of sprint and t-mobile will help in avoiding most of the costly asset purchasing undertakings which is time consuming an example being the assignment of leases and also notifications of the sales that are bulk. This merger will also make it of importance particularly on the presence of the minority stakeholders the fact that upon obtaining the minimum require number of votes proposing the merger, the transactions becomes easy, effective and the shareholders who dissent are obliged to go along. There are however, some of the disadvantages that may arise as a result of the merger between Sprint and T-mobile. Diseconomies of scale may arise since the combined business will become too large and this will definitely lead to higher unit costs. There may exist clashes of culture which may be between the combined types of business undertaking. The integration effectiveness may thus be hindered by the merger if this case arises. These challenges will arise in Sprint, T-mobile merger but it does not mean a merger is not sensible to the value of the shareholders. With the merger between Sprint and T-mobile, it means that some of the workers may be laid off or declared redundant. This is especially at the management levels and it may have major impacts on the motivation of the workers. Conflicts of the objectives may also arise making it difficult for the decisions to be made and this in turn causes disruption in the learning of the business affairs. According to Tsukayama, (2011) this merger could raise a lower concern than it can be anticipated. The government could agree to give a go ahead to the merger in order to provide a counter weigh to Verizon and AT&T which are so much ahead of Sprint and T-mobile. There is a likelihood of unexpected consequences some being that Verizon and AT&T may benefit most likely from the merger between Sprint and T- mobile may be because of the confusion and the unavoidable problems arising from the merger driving more customers. A sprint, T-mobile merger will definitely raise concerns about a carrier that is domestic having foreign ownership. This merger would result to three large carriers by increasing its subscribers close to AT&T and this could lead to the carriers raising the prices. In conclusion, the shareholders of the acquired company will always benefit the most in a merger. The acquiring firm pays more than it should pay. In order for the shareholders of the acquired firm foregoes the shares, the acquirer has to offer an amount more than the actual price and this means more than the market price. Such transactions have always proved to be beneficial to the economy. The acquiring firm shareholders are mostly affected. This is because they will bear the debt load which accompanies a possible merger. The opportunity of Sprint merging with t-mobile is a good chance for DT to expand in the US market. The merge will therefore, add value to the shareholders of the two corporations and this merger will indicate how Deutsche views the markets in the United States. Sprint offers strength in some products and also a wide sized customer base. This merger thus will be of significance to the shareholders value. References Butcher Dan (2011). Would Sprint/T-Mobile merger create a solid footprint to rival carriers Retrieved:14th June, 2011 http://www.mobilemarketer.com/cms/news/carrier-networks/6826.html glgroup.com (2011) Despite Difficulties T-Mobile/Sprint Merger May Be Worth It to Deutsche Telekom Retrieved: 14th June, 2011 http://www.glgroup.com/News/Despite-Difficulties-T-Mobile-Sprint-Merger-May-Be- Worth-It-to-Deutsche-Telekom-38249.html Saitto Serena, Simmons Jacqueline and McCracken Jeffrey (2011) Sprint, Deutsche Telekom Said to Discuss T-Mobile USA Deal. Retrieved: 14th June, 2011 http://www.businessweek.com/news/2011-03-08/sprint-deutsche-telekom-said-to-discuss-t- mobile-usa-deal.html Tsukayama Hayley (2011)Analysts weigh in on Sprint, T-Mobile merger. Retrieved 14th June, 2011 http://voices.washingtonpost.com/posttech/2011/03/analysts_weigh_in_on_sprint_t-.html Read More