Sprint's Clearwire buy: Another dud in the making?

(MoneyWatch) Sprint Nextel (S) plans to buy the remaining shares of Clearwire, the wireless broadband company, for $2.2 billion. As the New York Times points out, that's a 128 percent premium over the stock price in October before rumors of a Sprint takeover fueled a jump in price.

Oddly enough, this is almost to the day the eighth anniversary of the announcement of the merger between Sprint and Nextel. Perhaps the company's current management might want to meditate on that coincidence, because the current move doesn't seem significantly more promising than the previous one.

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The most succinct summation of the Nextel acquisition comes from current Sprint CEO Dan Hesse, who joined the company five years ago today, after the deal was struck. He said the following in an interview with GigaOM:

With 20/20 hindsight, the Nextel merger was a mistake. The synergies, if you will, that we had hoped for and planned for didn't materialize.

In 2008, the company wrote down $29.7 billion of the $36 billion it paid for Nextel.

Merger misery

It isn't surprising that a mega-merger didn't work out. Some estimates put the portion of mergers that never realize the value they were supposed to at three-quarters. According to management consultancy McKinsey, in the period from 1990 to 1997, almost 90 percent of large mergers saw revenue slowdowns within three quarters of completing the deal. There are many reasons: Higher costs than anticipated, less synergy than touted, poor performance, distracted employees and unsettled customers.

Executives often pursue mergers for personal reasons. Ego can drive the desire to run a bigger operations and there may be financial incentives, including the increased amount of compensation a chief executive might argue for because of the newly swollen organizational size.

That doesn't seem to be quite the situation for the Clearwire acquisition. The purchase would give Sprint complete control over Clearwire's high-speed spectrum. More spectrum translates into faster performance for consumers and the ability to support more customers. And a $2.2 billion price tag might not seem too high, particularly when underwritten by the recent cash infusion from Japan's SoftBank.

Technical incompatibilities

Just one problem. Clearwire uses a technology called time division duplex, or TDD, to run its LTE network. Sprint uses frequency division, or FD. These two technologies are incompatible. The only way to make them work together is to get handsets with chips that can handle both approaches. In other words, there will be no intrinsic integration of these two systems, and only customers who get handsets at some point in the future that support both will be able to move between them.

Now for another echo of the past. One of the big problems of integrating Sprint and Nextel was -- yes, you guessed it -- was incompatible technologies that made the "synergies ... that we had hoped for and planned for" a no show. Maybe things will be different this time, but it sure sounds like a repeat performance at the onset.

[Herb1969]

So far there is no indication the FCC will not approve Softbank's majority ownership of Sprint, but for whatever reason the stock price still sits in the $5 range. As far as phones running on 2 technologies, there was a time when phones were only single band. The Sprint Nextel hybrid phones tried to give Nextel subscribers a pathway to experience 3G data but it seems that at the time it was too expensive or not possible to allow hybrid phones to access iDen as well as CDMA for making important calls where the Nextel non-hybrid phones used to because of better propagation in the lower 700mhz Nextel frequency. When customers called to complain, customer service at that time probably didn't have a clue to resolve the problem and lost lots of customers. That was then, this is now, with a different CEO.

[eriksherman]

It's more than a customer service issue. To get client devices to do the integration, you have to get the manufacturers to build those devices and then get your customers to upgrade to those. Is Apple going out of its way for Sprint? not a chance. Samsung? Probably not. A new design has to make sense for a global market, not one carrier.

[Herb1969]

China Mobile has 700 million subscribers and has been in agreement for about a year with Clearwire to jointly push to advance the emerging technologies of their common 2.5GHz spectrum for TDD-LTE. Qualcomm seems to be the leader of those technology developments and I believe has been in close contact with China Mobile prior to and since then. Here is where they seem to be at today.

http://www.scmp.com/comment/blogs/article/1108072/qualcomm-charges-china-mobile-td

Also I read that if Softbank's acquisition of Sprint succeeds (so far no indication it won't), the new Softbank will be tied for 3rd in number of global subscribers and a close 4th in global revenues.

http://www.kansascity.com/2012/10/16/3868928/sprint-softbank-merger-could-give.html

[jopocop]

Your commentary today misses the mark that Mr. Son at Japan's Softbank is now the major decider of the future of Sprint and its moves in the USA. Softbank will control 70% of Sprint for starters, and eventually buy it all up. Sprint is a great buy at the current stock price around $5.50 as holders will be paid if they want $7.25 when the Softbank deal closes, or take instead New Sprint stock.

Also the future LTE in the world will be TDD LTE, not FDD LTE that is currently available. FDD LTE is not as efficient in usage of the precious spectrum. TDD LTE will be the best for all the carriers and China has taken the lead to develop it and it is being sold to the world now as an option over FDD LTE.

Also, you exaggerate the technical issue of combining Sprint's FDD and Clearwire's TDD. They both can work together and it is software changes and chips that makes them compatible.

You would be well advised to buy Sprint stock at these low prices and then decide later if you want $7.25 guaranteed or the New Sprint stock. Can't miss.

[eriksherman]

There is no such thing as "can't miss" in investing. Whether TDD or FDD will make the most sense (and remember, the cellular world has seen the competing CDMA and GSM around for years), Sprint will acquire Clearwire for spectrum, but can't directly integrate the two systems. I'm hardly exaggerating the technical issues. There is no way that they can afford the money to retrofit Clearwire. They will depend on integration only at the handset end, which will freeze out many millions of customers for an extended period of time. There are also the issues of administration and maintenance, because they will have to run parallel systems indefinitely.

It doesn't really matter that Softbank is technically in charge, as the same deal is happening.