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Technology > Tech Biz
Behind the Sprint/Nextel merger
This one's hot and moving fast. Don't expect it to be a smooth hitch.
December 15, 2004: 3:05 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - What is it with big tech deals always happening right around the year-end holidays? Don't the tech titans realize we business journalists have vacations to attend to?

Looks like this year won't be any different, winding down as it is with some pretty notable deals taking place. Last week IBM confirmed the sale of its PC unit, and on Wednesday, Sprint made official its intention to merge with Nextel.

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Anytime you mash together two 10,000-plus-employee companies, it's a big, painful, complicated process, and investors shouldn't expect a smooth ride. So far, the Street has reacted with a fairly level head, sending Nextel up about 7 percent and Sprint about 9 percent in the week since speculation of the deal began. [On news of the deal, both stocks fell a little more than 2 percent].

I believe a combined Sprint/Nextel company would generate positive results. On paper, these two companies look like star-crossed lovers, and one wonders why it took so long for them to get hit with Cupid's arrow.

The two companies generate the highest average revenue per user (ARPU) -- the ne plus ultra performance measurement in the cellular service space -- with Nextel around $69 and Sprint in the mid-60s.

What's more, Nextel's success is almost wholly due to its remarkable acumen in selling to the lucrative corporate market. "Sprint needs to focus on getting enterprise customers," says Albert Lin, an analyst with American Technology Research.

Sprint, on the other hand, has seen early success with its data efforts, something Nextel has struggled with, in part because of the technology standard on which its phones are based.

There are some risks

That's the good news. The downside risks, however, are significant. Unfortunately, to understand the first concern requires a sampling of telecom alphabet soup -- never a fun meal.

Simply put, Nextel's and Sprint's networks are incompatible. Nextel primarily uses a technology called iDen, while Sprint favors Qualcomm-produced CDMA. Some analysts believe that this incompatibility can be overcome.

"Throw enough time and money at a technology problem, and it can be overcome," says Keith Waryas, an analyst with IDC.

But there's not much time in the fast-moving cellular space, especially with the Cingular/ATT Wireless merger now complete. When the Sprint/Nextel deal is announced, investors will want to listen closely during the webcast to the combined entity's plans for technology migration.

If the combined company is going with an all-CDMA approach, that will mean physically replacing Nextel phones, a huge capital expenditure. Supporting both CDMA and iDen for any significant amount of time will carry high overhead costs that also reduce profits.

And finally, investors should listen to executives' plans to preserve Nextel's strong point: its "Push to Talk" feature, which hasn't been tested on the CDMA network.

With all these variables, it's difficult to estimate when this deal will become accretive. Until executives address these significant issues, investors should be wary of anyone promising an easy marriage.

Culture clash

The second concern is a form of culture clash: how these two companies' sales strategies will mesh. Sprint's billing infrastructure is very enterprise-friendly because the company packages its billing options by combining landline and cellular programs.

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But Nextel takes the approach that different industries have different telecom needs.

"Nextel has had a vertical approach to sales," says IDC's Waryas. "They've been very targeted in which opportunities to pursue."

Protecting key corporate accounts that were catered to by Nextel must be a top priority for Sprint, and some analysts are concerned that Sprint's one-size-fits-all approach may not go over well with Nextel accounts.

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