It's easy to get caught up in the euphoria of a big merger - especially one as tantalizing as the speculation of marriage between Deutsche Telekom (ADR:NYSE:DT) and Sprint Nextel (NYSE:S). But I'm not buying it.
Deutsche Telekom, the German owner of U.S. wireless operator T-Mobile, is considering a bid for rival Sprint Nextel, according to the Wall Street Journal. A deal would create the biggest U.S. wireless carrier. Together, industry No.3 Sprint and No.4 T-Mobile had 82.7 million subscribers at the end of 2007, more than either No.1 AT&T (NYSE:T) and No.2 Verizon Wireless, a joint venture from Verizon (NYSE:VZ) and Vodafone (ADR: NYSE:VOD).
With Sprint shares up 9% Monday morning on word of a merger, the deal may spell a short-term trading opportunity. But long-term investors please ask yourselves, should Deutsche Telekom be paying for what is still a weak business and the challenge of thorny integration issues? I'm not convinced the merger makes good sense.
The Pieces Don't Fit
Sprint's business is a mess. Subscriber numbers continue to fall at an alarming rate. The company expects it will lose 1.2 million post-paid subscribers in the first quarter this year, or more than its total subscriber loss all of last year. At the same time, the German telcom will have to assume a whopping $20 billion of debt that's weighing down on Sprint's balance sheet. If it chooses to do a deal with Sprint, Deutsche Telekom will have a big clean up job ahead of it.
If that weren't enough to worry about, Sprint and T-Mobile run their businesses on two very different network technologies. Sprint uses CDMA for its cellular network and iDEN for its Nextel walkie-talkie system. T-Mobile, on the other hand, uses GSM, the system of choice for most wireless carriers.
Meanwhile, Sprint has bet its future on WiMax network technology, while T-Mobile has chosen LTE for its next generation systems. Judging by the two companies' wildly different approaches to technology, wireless network integration will be, at best, slow and very costly. (For more on this industry, see The Industry Handbook - The Telecommunications Industry.)
A merger could easily distract both Deutsche Telekom and Sprint and open the door for competitors to sneak in while they're working out all the kinks. AT&T and Verizon must be rubbing their hands in glee at the thought of the integration hurdles facing the merger. What's more, any deal between big players could face stringent regulatory scrutiny.
Bottom Line
To be fair, Deutsche Telekom would be getting the shares while they are down. Even with their recent run up to $8.22, Sprint shares are down more than 65% since June 2007. There is always the possibility that Deutsche Telekom may be able to fix Sprint's problems. Even so, a turnaround will be a tough slog, even under the guidance of a new owner. In my view investors are best steering clear of this deal.
For further reading on mergers, check out The Wacky World of M&As and Why do some mergers and acquisitions fall through?