Getting bigger is no assurance of getting better. Just look at Sprint Corp.
Echoes of its botched 2005 merger with Nextel Communications raise critical questions as the Overland Park-based wireless company pursues a deal with T-Mobile US Inc.
Are the companies’ wireless networks compatible? Can their distinct cultures work together? How quickly do cost savings materialize? Will customers stick around?
The Sprint-Nextel merger produced a bigger wireless company but still came up with the wrong answers to those questions. The companies’ networks were irreconcilable, managements never jelled, costs mounted and customers defected in droves.
Even if a T-Mobile merger avoids becoming Nextel 2.0, there will be challenges.
However a Sprint and T-Mobile merger plays out — whether one brand or the other survives or they both do — the companies will need to combine subscribers under one network. They’ll need to get behind one business plan. They’ll need to manage higher debt burdens from financing the merger. And they will need to keep service strong and customers happy.
The prospective merger has one leg up on the Sprint-Nextel deal, says Chetan Sharma, a technology and strategy consultant for the wireless industry.
“The difference is going to be Masayoshi Son,” Sharma said.
Son is the billionaire head of SoftBank Corp. that bought 80 percent of Sprint last year.
Son, he said, “is very driven and doesn’t have much patience for inefficiencies and infighting.”
National wireless networks are expensive to build, maintain and operate. Budgets for the latest technologies are measured in billions of dollars.
Now, Sprint has to cover all those costs with the money it collects from its 54.9 million subscribers. T-Mobile has to get by on what it collects from 49.1 million customers.
As one company, they would refocus on one network and have more than 100 million paying customers.
It would allow them to shut off redundant cell towers, reconfigure the network for better coverage and use their combined wireless resources more effectively.
At least, that’s the idea. It never happened with the Nextel merger, and Sprint shouldered the costs of running two networks until finally shutting down the old Nextel system last summer.
Sprint and T-Mobile built their networks using different technologies, and that would pose problems.
Each, however, has been updating to LTE technology, or Long Term Evolution, to provide faster Internet speeds and even improve voice calls. Sprint also is completing an extensive replacement of its network equipment that has made it particularly open to adding wireless resources from other companies.
“It won’t be the issue you had with Sprint and Nextel,” said Dave Novosel, who tracks both companies at Gimmecredit.com in New York.
But savings from migrating customers to one network, deciding which towers to dismantle and other changes will take time.
Same with the savings from expected job cuts. Managers will be told to eliminate duplicate jobs in personnel, legal, finance, accounting, information technology and other departments. The layoffs will trigger severance payments and boost short-term costs.
Novosel said that in other telecom industry mergers, cost savings typically didn’t materialize for a year or two.
At the same time, Sprint is expected to borrow perhaps half of the potential $32 billion price tag on a merger, and the interest costs will start immediately.
Once savings begin to show up, the extra cash on hand amounts to a war chest for battling AT&T and Verizon. Nomura analyst Adam Ilkowitz says the savings, before those added costs, would come to $3 billion a year.
Any merger between rivals means the new company faces a cultural challenge. And it’s a big one for Sprint and T-Mobile.
John Legere, T-Mobile’s chief executive officer, misses few chances to diss the competition when he speaks publicly.
Often, he pokes at Sprint’s slower wireless network and its willingness to copy some of the marketing changes T-Mobile introduced.
Legere also is a study in contrast to Sprint CEO Dan Hesse.
Hesse comes off as a laid-back executive who kept his cool even when battling AT&T’s bid to buy T-Mobile.
Legere is a high-energy presenter who routinely swears in public. He recently apologized for some of his comments, including one that compared rivals’ prices to rape.
Industry watcher Bill Ho at 556 Ventures LLC said Legere’s radical style is reflected in T-Mobile’s customers, too. He sees social media posts opposing a merger.
“The hardcore T-Mobile guys probably feel that we don’t need them, that the introduction of Sprint will kill the culture and kill the whole momentum,” Ho said.
Sharma said he sees differences that could become strengths in a merger if the right choices are made.
T-Mobile’s aggressive marketing has been a proven winner over Sprint’s, which has been subdued while it improved its network.
Sprint, however, had a stronger tradition of innovation that suffered as Sprint’s business declined following the Nextel merger. Sharma said it is coming back.
The company, for example, opens its technology centers to app developers, and it started a business accelerator program in Kansas City that graduated its first class in June.
Sprint’s Nextel merger failed, Sharma said, in part because differing viewpoints were left unresolved. He sees SoftBank chief Son as a forceful personality who will avoid that mistake.
“He’s calling the shots on most of the major decisions. He’s very involved,” Sharma said.