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.
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.
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