By Stephanie N. Mehta

(FORTUNE Magazine) – A FEW YEARS AGO, A SPRINT/NEXTEL merger would have seemed like something out of a Raymond Carver short story: Two down-on-their-luck losers hooking up out of loneliness and despair. After the telecom industry went bust, Sprint seemed adrift. A planned acquisition by WorldCom had fallen apart (at the time, no one realized this was a good thing), its core long-distance business was collapsing, and investors worried the company wouldn't be able to service its debt. Nextel was in even worse shape. It, too, had been jilted by WorldCom, and investors doubted that the then-tiny company could make it in the competitive wireless world on its own. Nextel stock dipped below $3 a share in summer 2002.

Today investors are heralding the $35 billion proposed merger of these companies as a marriage of winners--or at least survivors. Indeed, both have recovered nicely: Sprint sold some assets, cut costs, and wrote down its long-distance network. Nextel, meanwhile, proved to be a gem; its users pay more per month than any other carrier's, and the company's stock is up tenfold from its near-death experience.

That doesn't mean they don't need each other. Sprint, whose wireless business has reached mainly consumers, benefits from Nextel's strong standing among business and government customers. Nextel, which has to figure out a way to turn its narrowband voice network into data-friendly broadband, benefits from Sprint's system, which already is making the leap to so-called 3G service. (Other winners in the deal: Lucent and Nortel, which provide the gear for Sprint's 3G network, and chipmaker Qualcomm.)

Is this combination powerful enough to alter the telecommunications landscape? Yes--eventually. Raul Katz, CEO of telecom consultancy Adventis, says the Sprint/Nextel deal could instigate more consolidation. He thinks the new company will emerge as the go-to wholesaler of wireless and Internet-phone services for the cable operators, which are itching to sell their customers a bundle of video, data, and phone services--including wireless, now dominated by the likes of Verizon, SBC, and BellSouth. If a Sprint/Nextel--cable company consortium succeeds, Katz suggests, the phone companies may then be forced to consider merging to maintain their earnings growth. (Some analysts say an SBC-BellSouth combination--they jointly own No. 1 wireless operator Cingular--makes sense.) Or the Bells might seek to diversify their customers by going after AT&T or MCI, which serve the big corporate users they covet.

It's also possible that Sprint/Nextel could become a target. One potential buyer: Vodafone, the British wireless carrier that currently owns part of Verizon Wireless. Vodafone wants to own a U.S. carrier outright (last year it tried to buy AT&T Wireless, now part of Cingular), and it is unlikely to make a deal with T-Mobile, owned by rival Deutsche Telekom. Verizon, which reportedly was interested in Sprint, could also emerge as a buyer, though the nation's largest phone company would probably run into antitrust problems trying to buy a merged Sprint/Nextel.

If Sprint and Nextel executives are open to another deal, they're not letting on. Instead, they're basking in all the good ink the deal is getting. "We're both used to being underdogs, not being respected by the press and analysts," says Len Lauer, Sprint's president. Adds Paul Saleh, Nextel's chief financial officer: "The combination is formidable, unrivaled in the industry." Guess they're not feeling like lonely losers anymore. -- Stephanie N. Mehta