Sprint Corp.’s best chance for a successful merger with T-Mobile US Inc. looks more like a punch in the gut to Kansas City.
It may mean throwing the Sprint brand under the bus. It may put T-Mobile’s top executive in charge.
It would be the opposite of what we expect in Kansas City — where the business formed as US Sprint in 1986, where thousands of Sprint employees work, and where the company holds a prominent civic role.
“For all intents and purposes, it’s T-Mo taking over Sprint,” said Kevin Smithen, an industry analyst at Macquarie Research.
The two companies have contemplated a merger for years but remain silent about published reports of a $32 billion deal on the horizon. That leaves open the debate about how a combination could work.
In a traditional merger, Sprint would simply absorb T-Mobile, capturing its subscribers and employees but remaining Sprint for all practical purposes. Or the companies could try to be partners and preserve their identities as brands for different audiences.
But those options may not be available. This deal needs a sales pitch because Washington regulators have been openly wary of a merger, preferring four national carriers to ensure robust competition. Regulators specifically preserved T-Mobile when they blocked an AT&T deal to buy the smaller carrier nearly three years ago.
Putting T-Mobile out front in a merger would allow regulators to preserve its edge as the more aggressive, “maverick” competitor. Smithen said selling a merger this way would give it a 70 percent chance of winning approval. Most estimates struggle to give it half a chance.
As a business decision, it would capitalize on the momentum that T-Mobile’s “Un-carrier” marketing campaign has garnered. Looking strategically, T-Mobile also holds an apparent edge over Sprint as merger planners ask which company has a better brand, a stronger management team and an innovative culture.
“Whether that’s fair or not, I think the answers to those questions would be T-Mobile over Sprint,” said Paul de Sa, an analyst at Bernstein Research. “So that’s probably the horse you’d want to ride.”
In that case, Sprint would take on not only T-Mobile’s subscribers but also its brand, its boss, even its identity.
Sprint chief executive Dan Hesse already accepts the idea that T-Mobile chief executive John Legere could end up leading the combined company. Hesse, who declined requests for an interview, has said publicly he could find other worthwhile things to do should a merger prompt him to step aside.
For Kansas City, the highly public choices of brand name and CEO would come on top of the usual community angst that accompanies corporate mergers.
Where will the headquarters be? How many jobs will disappear? Will the city lose another civic leader?
Washington regulators have made clear that they see T-Mobile as a successful industry disruptor that they are keen on keeping in the game. And that’s why a T-Mobile-first merger may be the best way to get them to sign off on the deal.
In 2011, the Federal Communications Commission and the U.S. Department of Justice blocked AT&T’s $39 billion buyout of T-Mobile. Calling the deal anti-competitive, regulators cut T-Mobile loose to fend for itself as an industry innovator.
T-Mobile made good on the opportunity and made regulators look smart.
“You’ve got T-Mobile showing they’re an effective maverick,” said analyst Donna Jaegers of D.A. Davidson & Co.
Re-energized in part by a $3 billion breakup fee from AT&T, T-Mobile rolled out a high speed wireless network that is running faster than AT&T’s and, in some places, even Verizon’s. Sprint’s, by comparison, lags the field.
It also is gaining customers faster than any of its bigger rivals. T-Mobile started this year by adding 2.4 million subscribers in three months — its first-ever gain of more than 2 million — and it did so in a notoriously slow post-holiday market. Sprint, alone among the big four, lost customers.
Legere, who came aboard to lead T-Mobile after the aborted AT&T deal, is feeling his oats.
“Everything we do is forever,” Legere said last month to launch the company’s latest promotions. “Everything we do is to change the industry.”
Legere’s mark on the industry has been T-Mobile’s disruptive Un-carrier campaign.
T-Mobile also was first with an early phone upgrade plan called Jump, and AT&T followed with Next, Verizon with Edge and Sprint with One Up. T-Mobile embraced installment plans to buy cellphones separately from wireless service contracts, and others followed. T-Mobile offered to cover the early termination fees of rival companies’ customers who move to the magenta network.
Its latest offers included a seven-day free test drive of T-Mobile’s network: Here’s a free iPhone 5s, bring it back in a week and there’s no charge.
Sprint countered a week later with a 30-day guarantee: Sign up and either you’re completely satisfied or you’ll get your money back.
Sprint also is working to overcome its lagging network, subscriber losses and dented reputation in the marketplace.
Improvements to its network have led to a national marketing campaign around its Framily discount plans and an “America’s Newest Network” message. Deals to deliver streaming music from Spotify and fitness help from Under Armour and MapMyFitness further its appeal to consumers.
Some also argue that to get the deal approved, a merger doesn’t have to be a choice between brands. Sprint already sells service under different Sprint, Boost and Virgin Mobile labels. It could simply add one more, T-Mobile.
“If you want to maintain one of them to be the upstart brand, the un-cola, you can still sell Coke Classic,” said Berge Ayvazian, an industry analyst at Heavy Reading.
Sprint’s challenge, however, is to convince regulators that T-Mobile’s aggressive competitiveness will survive the merger.
Sprint chairman Masayoshi Son has been selling that message in repeated public appearances. He’s the billionaire head of Tokyo-based SoftBank Corp., which bought 80 percent of Sprint last year.
He has promised a price war and network improvements — if only regulators would give Sprint the scale it needs by folding in T-Mobile’s 49.1 million subscribers.
Most assessments of Washington’s mood show he has yet to win the debate.
T-Mobile needs Sprint
As much as Sprint wants a merger, T-Mobile would benefit, too.
For starters, those lauded Un-carrier promotions have been expensive and hurt T-Mobile’s finances. Winning new customers and paying all those early termination fees ate up a lot of cash. T-Mobile lost money in the first quarter even though its revenues were almost $1 billion higher than a year earlier.
In short, T-Mobile can buy customers only so long, and analysts say its pricing has edged up.
While Bernstein analyst de Sa credits T-Mobile with changing the rules between wireless carriers and their customers, he’s not convinced it can challenge Verizon’s and AT&T’s dominance on its own.
“If Edge and Next copy Jump, that’s a good impact that T-Mobile has had on the industry,” de Sa said. “But if everyone’s doing it, you haven’t got much of an advantage.”
Despite the chill in Washington, there are some signs that the merger’s reception could be warmer than expected.
Two other big deals already being considered by the FCC — Comcast merging with Time Warner Cable and AT&T purchasing DirecTV — could provide cover for a Sprint bid for T-Mobile.
Furthermore, reports in March said Jessica Rosenworcel, one of the FCC commissioners who would review a merger application, had expressed doubts that Sprint or T-Mobile could remain viable as separate companies.
Along those lines, Smithen says T-Mobile will need a lot of money to broaden its network coverage. Sprint, seen as weaker now, at least has a stronger collection of network resources.
He makes the argument that while T-Mobile has the competitive edge, but that if Washington really wants to save it, regulators should also recognize that T-Mobile needs Sprint’s 54.9 million subscribers and SoftBank’s deep pockets to keep delivering.
“That’s really their best chance of getting this through the regulators,” Smithen said.
CEOs and jobs
Regardless of how the companies pitch their plans to regulators, the Kansas City area will feel the effects of a merger.
Hesse, for one, has cleared the way for his departure after six and a half years in the CEO job.
“Basically, I would be happy either way,” he told The Kansas City Star’s Steve Kraske on his KCUR program in June. “I might end up staying at Sprint.… If it was better for the company that it be someone else, I have a lot of alternatives.”
Hesse told Kraske no decisions had been made.
Once they are, Legere would be the likely someone else. He personifies disruption as the brash, foul-mouthed face of T-Mobile’s customer-winning Un-carrier marketing campaign.
Son “likes having a disruptor,” Ayvazian said.
A Sprint/T-Mobile merger also puts the company headquarters into play. There are three geographic interests to triangulate: Sprint’s headquarters in Overland Park, T-Mobile’s in Bellevue, Wash., and SoftBank’s U.S. base in California’s Silicon Valley.
Cities value the headquarters designation for its prestige and economic value. It can become a bargaining chip as buyout terms form.
For example, Sprint formally moved its headquarters to Reston, Va., nine years ago when it merged with Nextel Communications, which was based there. Overland Park, however, remained the effective center of corporate decisions.
Hesse moved the headquarters back to Overland Park in February 2008.
Questions about Sprint’s headquarters surfaced when SoftBank opened its U.S. offices in Silicon Valley. Sprint officials said there were no plans to move the headquarters, though executives regularly meet with their SoftBank counterparts there.
“They feel much more at home in Silicon Valley than they would in Silicon Prairie. For that reason, there’s going to be a strong pull to the West Coast,” said Jan Dawson at Jackdaw Research.
Toss T-Mobile into the mix and Silicon Valley begins to look more like neutral ground between competing camps.
The merging companies will be competing for jobs. Many of the 40,000 T-Mobile employees and 36,000 Sprint employees do the same things, making them vulnerable to cost-cutting layoffs.
Banker Mark Jorgenson, president of US Bank here, likes Kansas City’s chances. The area has “a lot to offer in terms of a quality work force and lifestyle that’s good for corporate performance.”
Without a merger
And if regulators stop a merger?
Business analysts don’t expect either company to fold. Both have made strides to improve financially and to operate their networks more efficiently.
But Sprint and T-Mobile would be likely to struggle as survivors in an industry they could rattle at times but not change. They would be back to the unrewarding business of pouring money into networks that they have trouble filling up with paying customers.
It’s not a formula for long-term success. It’s a formula for cutting back in sometimes damaging ways, scrimping on networks and payrolls and marketing.
And it’s why Sprint’s new chairman is pushing so hard to get a deal.
“We have to give (it) a shot,” Son said during a Charlie Rose broadcast in March.
Expect business, civic and elected leaders in the Kansas City area to have a say in how all this shakes out.
Merging companies often turn to their home communities for support when seeking regulatory approval to merge, said Jim Heeter, whose career as a corporate merger attorney put him in the middle of many deals.
“Kansas City’s task,” said Heeter, now head of the Greater Kansas City Chamber of Commerce, “is to engage the leadership of the prospective merged companies to help achieve the best results for Kansas City.”
Of course, that means fighting against potential layoffs, a downsized role in the community and other wounds.
But Heeter stressed that it’s important to look beyond the immediate pain to weigh the possible long-term benefits of a successful merger. It would mean shrugging off problems that have kept Sprint a second-tier player. Years from now, it would mean a new company, one that would be a stronger, more vibrant competitor. And one that would still have deep Kansas City roots.
Perhaps befitting his role as head of the chamber, he takes a hopeful view: A merger “could increase the size of the company and increase job opportunities and executive opportunities in Kansas City, at least in the long run.”
Sprint’s four problems and what it’s doing about them
Sprint is small
Verizon and AT&T each have twice as many paying customers as Sprint, which gives them a big advantage in recovering the costs of running a nationwide wireless network.
This is why Sprint is expected to fight for federal approval to merge with T-Mobile, a deal that would give the combined company nearly the same scale as the two giants.
Sprint is losing ground
Aggressive marketing by T-Mobile has made it the big winner in signing up new customers while Sprint has been mostly quiet and losing subscribers. Sprint expects to curb customer defections now that a disruptive network upgrade is ending, and to attract new subscribers with its “America’s Newest Network” advertising campaign and Framily discount plan.
The Sprint network lags
Sprint has largely finished ripping out and replacing its network equipment, promising an end to an increase in blocked and dropped calls. Network data speeds, however, still lag the competition widely. Sprint is revving up its faster Sprint Spark technology and promises to leapfrog the competition by the end of next year.
Sprint’s brand is damaged
Disruptive network upgrades temporarily hurt service. National marketing campaigns aim to restore customer confidence in the Sprint brand with an “America’s Newest Network” message and to attract customers with Framily plan discounts plus streaming music deals with Spotify, fitness help from Under Armour and MapMyFitness and a 30-day satisfaction guarantee.