Posted on: Thursday, December 16, 2004
Sprint Nextel faces hurdles
By Ellen Simon
Associated Press
NEW YORK — Sprint Corp.'s $35 billion acquisition of Nextel Communications Inc. could challenge Cingular Wireless and Verizon Wireless for supremacy in a ruthlessly competitive business where prices are constantly dropping.
The combination, if approved, would create a company called Sprint Nextel with 35 million wireless subscribers and a combined $40 billion in annual revenue, cementing Sprint's spot as the country's third largest wireless business after Cingular and Verizon.
To succeed, the combined company must iron out vast differences in corporate culture and technology. Once that's done, consumers could benefit from even lower wireless prices, analysts say.
The downside: Job cuts are likely and Nextel's customers would eventually have to buy new phones.
The first challenge is that "Nextel's rough-and-tumble roots as an entrepreneurial taxi radio-dispatch business may not jibe with Sprint's button-down persona," CIBC World Markets analyst Timothy Horan wrote in a research note.
No problem, said Timothy Donahue, 55, president and chief executive officer of Nextel, who will be chairman of the combined company.
He said he and Gary D. Forsee, 53, the chairman and chief executive officer of Sprint, who will be the new company's CEO, will work side by side.
"He's a good guy," said Donahue. "I'll also enjoy playing golf with him and having dinner with him."
If the personality differences may be quickly resolved, meshing the two companies' technology will be more complex — and expensive — because their networks and handsets are worlds apart.
More than any other U.S. cell phone company, Sprint has invested heavily in develop-
ing multimedia capabilities such as text and photo messaging, even offering a premium TV service that allows customers to watch everything from baseball games to news on their phones. It has partnered with handset companies, including Samsung Corp., that make phones with vast data storage and fast chips.
Nextel phones, by contrast, are relatively low-tech. Produced exclusively by Motorola Inc., they feature a push-to-talk walkie-talkie function popular with landscapers and contractors. The phones run on a different type of network than Sprint's.
Nextel would have had to eventually switch to different frequencies, so its calls don't interfere with emergency radios. It had planned to spend $2 billion to $3 billion to convert its network; the merger will spare it the cost of doing it solo.
Eventually, all Nextel customers will have to switch to Sprint's network. They will be able to keep their phones for the time being, but anyone who wants the best of both companies will have to buy a new type of phone that isn't expected to be for sale until the end of 2006.
The phone, to be made only by Motorola initially, will have both companies' signature features: Nextel's push-to-talk function, and Sprint's ability to handle data-rich tasks.
What you can expect from the Sprint-Nextel deal:
• Lower wireless phone prices • Job cuts • New phones eventually for Nextel customers • Access to Nextel's push-to-talk function for Sprint customers • Sprint multimedia functions, such as text and photo messaging, for Nextel customers The average monthly bill for local wireless service dropped from $61.49 in December 1993 to $49.49 by June 2004, according to the Cellular Telecommunications & Internet Association.
"Sprint has always been pretty aggressive on wireless services prices, both business and consumer," said Forrester Research analyst Lisa Pierce. "I don't expect it to reverse course."
The two companies stressed the deal's upsides: Sprint would get access to Nextel's 15.3 million subscribers, many of whom are business customers who are more profitable than Sprint's base of consumers. The companies also estimate the merger would save them $12 billion in operating costs and network upgrades.
The merger would also put the new company in a better position than either is individually to partner with cable providers as the cable companies push to offer phone service. Analysts expect customers to increasingly demand a package of services that combines Internet access, a home phone and wireless service.
The market punished both stocks in trading yesterday, pushing Sprint's price down $1.08, or 4 percent, to $24.02 on the New York Stock Exchange and Nextel's shares down 1.29 cents, or 4 percent, to $28.70 on the Nasdaq.
Even though a deal means the three largest wireless companies will carry 75 percent of all voice traffic, analysts say prices for wireless calls should continue to drop.
What's ahead
