¶ … Mobile-Sprint Merger A merger between T-Mobile and Sprint could produce shareholder value for both companies because both companies are underperforming as stocks and both companies' fortunes rest on the prepaid smartphone market. Both corporations trail market share leaders AT&T and Verizon, with Sprint 3rd and T-Mobile 4th.

Many believe that if these companies do not make a major move soon, they could be squeezed out of the market. Deutsche Telekom has recently ruled out an outright sale of T-Mobile USA, but has indicated possible interest in a partnership.

Reasons to Merge

Both Sprint and T-Mobile have been left out of the iPhone bonanza are being squeezed into lower end of the market, despite their recent technological investments. However, the smartphone market is set for astronomical growth and each company must survive until the smartphone pie gets significantly bigger.

Aside from smartphones, the most promising growth opportunities right now are in the prepaid market, which is being aggressively pursued by T-Mobile, Sprint, and Verizon, along with a number of smaller prepaid specialist carriers. The best entree into smartphone contendership is through the prepaid smartphones. Largely directionless since the arrival of the smartphone, their best shot now is to concentrate their resources towards an area which the market leaders are too tied up to pursue in force.

Synergies

Sprint has technology to spare while T-Mobile has failed to prepare its infrastructure for smartphones and high-volume data transfers.

Sprint and T-Mobile have common goals in the prepaid smartphone market. Sprint has already bet on the prepaid smartphone market as the next area of major growth and it has the technological infrastructure to handle major growth.

T-Mobile has significant experience in the prepaid phone market and discount phone market.

Both companies have relationships to Android smartphone manufacturers, such as HTC, Samsung, and Research In Motion.

Their merger might give them the leverage to land more exclusive carrier deals for certain phones. Also, T-Mobile has a long-standing relationship with phone manufacturer Nokia and could capitalize on opportunities presented by Nokia's new agreement to produce Windows 7 smartphones exclusively.

Landing an exclusive-carrier agreement for some or all of Nokia's Windows 7 phones would provide T-Mobile-Sprint with a customer base and product differentiation.

Sprint's impressive reputation for customer service would synergize with T-Mobile's own reputation for customer care and will help T-Mobile in dealing with traditional perceptions of poor coverage and its recent spectrum challenges.

Operation Cost Reductions

T-Mobile, which already has a reputation for poor service, is undergoing continued service challenges, including inadequate infrastructure to sufficiently handle smartphone data transfer. T-Mobile does not have enough spectrum to accommodate the growing demands of smartphone users and will need to buy more spectrum from a 3rd party, such as Clearwire, which is owned by Sprint.

T-Mobile's Recent Performance

T-Mobile is a subsidiary of Deutsche Telekom AG, which saw a 0.08% decrease in share value from $13.30 in Sep. 2010 to $13.29 in Mar. 2011. DT's loss for the 4th Quarter 2010 ending Dec. 31 increased to €582 million ($800.1 million) from a $4.1 million loss a year ago. Total sales in the quarter fell 4.5% to $21.4 billion.

T-Mobile USA may have harmed DT's performance. In the 4th Qtr 2010, T-Mobile has lost 318,000 contract customers.

T-Mobile's fourth-quarter profits fell 12.4% to $268 million, while its service revenue rose less than 1% to $4.7 billion. T-Mobile finished 2010 with revenue of $5.36 billion -- down just one percent from 2009 -- but the fourth quarter was particularly hard on the company, with net income down to $268 million -- a 12% decline compared to a year ago.

T-Mobile's Strengths

T-Mobile can offer proven 4G-level speed immediately with its HSPA+ technology. Many phones branded as 4G, such as the iPhone, fell well short of 4G-level speed. Although HSPA+ technology is not true 4G technology, it has achieved the closest performance to true 4G speed so far.

T-Mobile carries cheaper smartphones and is considered the most affordable carrier among all of the major carriers. This is an opportune position because of the emergence of low to mid-range Android-operated smartphones, which are cheaper than iPhones but offer similar appeal.

T-Mobile has natural strengths in the prepaid market through its significant customer base and proven pricing strategies.

T-Mobile's Weaknesses

Infrastructure Issues -- Inadequate spectrum

T-Mobile holds the smallest market share of the major carriers: 4th place behind AT&T, Verizon, and Sprint.

T-Mobile, a late entrant into the smartphone market, is lagging behind its competitors in the smartphone market.

Sprint's current stock performance

Sprint saw a 1.69% increase in stock value from $4.14 in Sep. 2010 to $4.21 Mar. 2011.

Sprint's strengths

Sprint continues to invest heavily in new technologies and is well positioned for the next generation of wireless technology. Sprint chose WiMax as its 4G technology whereas AT&T and Verizon have chosen LTE. However, Sprint has not ruled out a possible adoption of the LTE standard or the WiMax2 standard.

Sprint owns 54% of broadband WiMax provider Clearwire, which gives it great capacity for expansion and leverage against competitors/partners.

Sprint is making rapid gains in the prepaid market, increasing its share from about 1% in 2008 to 4% in 2009 through its acquisition of Virgin Mobile.

Sprint could...

It has recently caught up to leader Verizon in customer service satisfaction.
Customer service should not be underestimated considering the increasingly complex nature of smartphones and high-volume data transfers.

Sprint's Weaknesses

Sprint is highly leveraged, with total debt of $20,191.00 to total equity of $14,546.00, resulting in a Debt-To-Equity Ratio of 1.388 at the end of 4th Qtr 2010, compared to a Debt-To-Equity Ratio of 1.163 a year before.

Sprint has invested heavily in WiMax, which has underachieved so far and which is currently facing regulatory scrutiny.

T-Mobile's Financials (Deutsch Telekom AG)

Q4 (Dec '10) 2010

Cash and Equivalents: 2,808.00

Total Debt: 50,546.00

Total Assets: 127,812.00

Total Equity: 38,016.00

Total Liabilities: 89,796.00

Net profit margin -4.91% 2.82%

Operating margin -1.14% 8.82%

EBITD margin - 27.74%

Return on average assets -2.39% 1.38%

Return on average equity -6.13% 4.56%

Employees - 246,777

Return on Stockholders' Equity = -582.00/38,016.00 = -0.015309343

Quick Ratio = (15,243.00 -1,310.00)=(13,933.00) / 26,452.00 = 0.526727657

Debt-to-Assets Ratio = 50,546.00/127,812.00 = 0.395471473

Debt-to-Equity Ratio = 50,546.00/38,016.00 = 1.329598063

Price-Earnings Ratio = (-582.00/4,321.32)=(-0.134681069)/(-582.00/4,351.08)=(-0.133759894)= 7.476082479

Price-Book Ratio = 13.50/127,812.00-(53,807.00+89,796.00)=(143,603.00)=(-15,791.00)= -8.549173579

Dividend Yield= (-4,003.00/4,321.32)=(-0.926337322)/(-0.134681069)= 6.878006907

Sprint's Financials

Q4 (Dec '10) 2010

Cash and Equivalents: 5,173.00

Total Debt: 20,191.00

Total Assets: 51,654.00

Total Equity: 14,546.00

Total Liabilities: 37,108.00

Net profit margin: -11.19% -10.64%

Operating margin: -1.67% -1.83%

EBITD margin: - 17.36%

Return on average assets: -7.17% -6.47%

Return on average equity -24.71% -21.23%

Employees 40,000

Return on Stockholders' Equity= -929.00/14,546.00 = -0.063866355

Quick Ratio = 9,880.00-670.00(9,210.00)/7,891.00

=1.167152452

Debt-to-Assets Ratio = 20,191.00/51,654.00=0.390889379

Debt-to-Equity Ratio = 20,191.00/14,546.00 = 1.388079197

Price-Earnings Ratio = -929.00/2,988.00 =(-0.310910307)/-929.00/2984.00=(-0.311327077) = 0.998661311

Price-Book Ratio = 4.26/51,654.00-(22,345.00+37,108.00)=(59453.00)=(-7,799.00)= -5.462238748

Dividend Yield= 0/0.310910307 = 0

Issues and Considerations

Hidden Liabilities and Toxic Assets - Sprint's ownership of Clearwire is a huge drain on its cash reserves. Also, Clearwire is currently undergoing regulatory scrutiny. T-Mobile has currently disposing of some of its towers as it switches its emphasis to smartphones.

Crucial Differences in the Nature of Companies - Sprint is traditionally an up-market, high-technology, high-investment corporation with significant landline assets. T-Mobile is a traditionally low-investment discount carrier with weak long-term strategy and flexible pricing arrangements. These differences could lead to conflicts in the area of corporate strategy and company culture.

Different Technologies - T-Mobile, Sprint, and Nextel, all use different wireless technology standards. Merging the two networks would likely be a costly and difficult endeavor.

Both Parties are Underperforming Somewhat - The T-Mobile-Orange merger in the United Kingdom Merger has encountered challenges, with the new Corporation signing 300,000 contract customers, while losing 187,000 Pre-Paid customers. This loss could be attributed to T-Mobile's weaknesses, as T-Mobile's expected strength was Pre-Paid customers.

In addition, T-Mobile has recently lost 318,000 contract customers in the United States.

Effect on Sprint's Shareholders

Sprint's share value is currently 4.25 while its 52-week H/L is 3.23-5.31. Some might conclude that Sprint's stock is performing average. However, Sprint's low never dipped below 3.23 because investors still believed that Sprint's gamble on WiMax and Clearwire would reap the promised rewards, which were expected to be huge. WiMax has already missed its chance to dominate the market and the best Sprint can hope for now is that WiMax can compete with the upcoming LTE technology for the next two years.

Now that Clearwire is in deep financial and regulatory trouble, Sprint may have to decide whether to sell some or all of Clearwire and lose Sprint has been shedding equity for 3 years straight while maintaining very high debt. 3.23 might be a false bottom for Sprint as its high total debt and unpaid gamble on Clearwire leaves it in a precarious position.

A merger with T-Mobile now would create a formidable competitor to AT&T and Verizon. If the merged corporation aggressively pursues a long-term prepaid smartphone strategy, shareholders would likely wait to see what comes of it and are unlikely to sell before seeing. Thus, share value would stay constant at worst.

Effect on T-Mobile's (Deutsch Telekom) Shareholders

Whereas Sprint's situation is precarious, T-Mobile's is utterly desparate. T-Mobile is last in market share with all arrows pointing south. It is lagging in smartphone penetration and its…