Nextel, Sprint discuss merger

Companies reportedly weighing deal to compete against Cingular, Verizon

Experts warn of big obstacles

December 10, 2004|By THE DALLAS MORNING NEWS

DALLAS -- Like the beach warriors of Survivor, the wireless industry may be readying to vote another player off the island.

Less than two months after Cingular Wireless bought AT&T Wireless Services in one of the year's biggest mergers, Sprint Corp. and Nextel Communications Inc. executives are reportedly contemplating a deal that would shrink the industry by one major player.

The Wall Street Journal, citing unnamed sources, said yesterday on its Web site that the two companies are discussing a "merger of equals" to gain sufficient heft to compete with Cingular and Verizon Wireless.

A Sprint spokesman declined to comment, and Nextel officials could not be reached for comment.

Analysts said Nextel, with 15.3 million customers, and Sprint, with 23.2 million, are attracted to each other's respective business and consumer customer bases as they think about how to compete with the two industry giants.

But experts caution that a deal would face numerous obstacles, including a tough antitrust review, incompatible technologies and clashing executive personalities.

"It could work well," said Arthur Kurtze, a former Sprint PCS chief operating officer. But, he added, "it's not one of those things where there are obvious benefits to combining these two forces like it was with AT&T Wireless and Cingular."

Antitrust regulators cleared Cingular's $41 billion purchase of AT&T Wireless in eight months, faster than even the companies expected. Analysts said that Sprint and Nextel would face a much longer review.

The Cingular-AT&T Wireless combination raised the market-concentration index in many markets. To answer those concerns, the U.S. Justice Department forced Cingular to sell off spectrum capacity, customers or facilities in a number of markets.

Sprint-Nextel would increase market concentration across the country, said Roger Entner, an analyst at the Yankee Group.

"This does not rule out that the Justice Department will approve it," Entner said. "It just has to do a much more thorough investigation. So the approval will take longer."

Sprint and Nextel could be helped by their relatively smaller size, said Will Power, an analyst at Robert W. Baird & Co. in Dallas.

"Even with the combination, it'd still be smaller than Verizon and Cingular," Power said. "Any combination involving Verizon or Cingular at this point would be much more difficult, given the size they already bring to the table."

Entner said customers would see some benefits, including the smoother transition for Nextel customers onto the higher-speed data services and possibly more price competition.

"I don't think it will be worse on customers," he said.

The other big question is how Sprint and Nextel would combine their wireless networks. Nextel uses a proprietary technology developed by Motorola Inc.

Like Verizon, Sprint uses CDMA technology developed by Qualcomm Inc.

A merger with Sprint would simplify Nextel's choice for a technology to provide higher-speed data services. Nextel has been looking at CDMA and another technology and has said it wants to make a choice by the first quarter of 2005 and have it installed nationwide by the end of 2007, Power said.

"By potentially linking up with Sprint, they accelerate their ability to be in the marketplace with a higher-speed data network by almost two years, in theory," he said.

Entner said one attractive element of such a merger is that each company is strong in different markets. Sprint's greatest strength is in the consumer markets, while Nextel shines in the business market that likes the walkie-talkie, push-to-talk feature of its phones, he said.

Sprint, which also operates local and long-distance businesses, has placed a greater emphasis on expanding its wireless business because of the drastic fall in long-distance revenue.

Wall Street seemed to like the idea of a merger. Sprint closed up $1.78 to $24.28 -- its highest close since early 2001 -- and Nextel was up $2.01 to $29.98.

But a deal may not be a slam-dunk. In an interview in March in Dallas, Sprint chief executive Gary Forsee said the company was not disadvantaged in the wireless battle against Verizon and Cingular.

"Our view is that you can get very distracted by thinking M&A [mergers and acquisitions] is the only way to achieve shareholder value," he said.

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