Analysis of a Failed Merger Sprint-Nextel Case.pdf

Celiktas et al. (2016) Analysis of a Failed Merger: Sprint-Nextel Case
Analysis of a Failed Merger: Sprint-Nextel Case
By:
Mehmet Celiktas*
Greg Grayson
Nick Mireles
Travis Reid
9 March 2016
* Corresponding Author

1
Introduction
This paper analyzes the failed merger between Sprint and Nextel. Mergers and
acquisitions occur when the acquiring firm believes it can accomplish its objectives more
efficiently. Growth and control opportunities are the two primary motivations to merge. If a
merger goes well, the new company should realize increased value through higher revenue,
lower marginal costs, and other improved financial metrics. Most important, stock price should
increase. However, all does not always go according to plan. Underestimating important
considerations such as cultural differences can make integration difficult and quickly erode
shareholder value.
Background and Rationale
In 2005, Sprint and Nextel executed a statutory consolidation. The two companies
combined to form the third largest telecommunications provider behind AT&T and Verizon.
Prior to the merger, Sprint provided traditional local and long distance as well as some wireless
options to households and businesses. Nextel provided a comprehensive suite of advanced
wireless services. The walkie talkie-like feature of its phones particularly appealed to the
infrastructure, transportation, and logistics markets. (Dumon, 2008)
Sprint’s CEO, Gary Forsee, was the primary influencer of the deal. He was motivated to
capitalize on each company’s competitive advantage. The companies’ complimentary products
and services were seen as a persuasive argument for the merger. Sprint was turning its focus
toward consumer wireless services and wanted to include Nextel's successful strategy in its
business model. Meanwhile, Nextel was close to maxing its market share, so getting access to
Sprint's larger customer base seemed like a logical move. (Hart, 2007) The rationale of the deal
was simple: the merger would give each company access to the other’s customer base, thereby

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setting the conditions for revenue growth by way of cross-selling products and services. The
goal was to secure a number of strategic and financial benefits, including:
• Gain operating efficiencies that neither company could achieve on its own.
• Increase revenue by cross selling products
• Accelerate pace of bringing new products to market
• Reduce capital spending by leveraging existing networks and cell sites
• Reduce expenses from consolidated customer care, billing, marketing, and other SG&A
There were additional factors that could have influenced motivation. In 1998, MCI
merged with WorldCom. (DOJ, 1998) In 2000, Sprint and MCI WorldCom agreed to a merger;
however, the U.S. Department of Justice raised monopoly concerns and the deal was not seen to
completion. (DOJ, 2000) Had the deal been completed, it would have been the largest corporate
merger in history. In 2004, AT&T Wireless merged with Cingular Wireless, thus strengthening
AT&T’s number one position in the competitive telecom market. (AT&T, 2004) Finally, in
February 2005, Verizon acquired MCI. (CNN Money, 2005) Considering these chain of events
and the economic boom at the time, it is possible that Sprint was anxious to complete any
reasonable deal to remain competitive.
Initial Reactions to Announcement
Initial reactions were mixed. Many analysts viewed the merger as favorable in theory;
however, other critics felt the deal was risky because the companies were too large to operate
successfully as one single entity. This section evaluates initial reactions to the merger
announcement by covering stock market reactions, financial press and analyst evaluations, and
oppositions to the merger.
Stock Market Reactions
On December 15, 2004, the day of the merger’s announcement, stock prices for Sprint
and Nextel were $24.02 and $29.44, respectively. Markets reacted negatively soon after the

3
announcement and both prices fell slightly. However, trends improved after May 2005. On
August 12, 2005, the day of acquisition, individual stock prices of Sprint and Nextel were $26.15
and $33.32, respectively. (Schwab, 2005)
Financial Press and Analysts’ Evaluation
Initial reaction by financial media to the merger was neutral to positive. The media and
analysts valued the merger, but did not regard it as the most important event in the industry.
Moreover, a number of analysts predicted that the cultural differences between the two
companies would be problematic for the new entity. Some significant press analyses are:
Bloomberg. Bloomberg reported that since Sprint-Nextel would be a “distant No. 3
among wireless outfits, the merger was not an industry transforming event--and hardly reason for
panic among the giants.” The report also said the new company could possibly become
America’s dominant telecom provider. (Rosenbush, 2004)
The Economist. The Economist forecasted the new company would “have greater
economies of scale and more bargaining power with handset and equipment suppliers.” The
magazine also suggested that the merger would help Sprint-Nextel catch up with Verizon and
Cingular, the 3G giants at the time. (Economist, 2004)
CNN. Greg Gorbatenko, a telecom analyst, stated in a CNN report that “the ‘buy’ rating
for the Sprint stock would maintain since the merger was a great deal for Sprint.” Gorbatenko
also stated that “the two companies are not the best of fits with each other, with very different
customer bases and business models.” (CNN Money, 2004)
Oppositions to the Consolidation
After the announcement, Sprint and Nextel experienced opposition from regional
affiliates who provided wireless services on behalf of the companies. These regional affiliates

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were scared that the new company would violate non-compete agreements between the former
companies and them. (“Sprint Corporation,” n.d.) However, Sprint and Nextel customers had no
opposition towards the merger because the deal increased cell range.
Terms of the Deal
On August 12, 2005, Sprint acquired 100% of Nextel’s outstanding common shares. In
connection with the merger, the company changed its name to the Sprint-Nextel Corporation.
Basis of the Deal
The transaction was technically a statutory consolidation, which occurs when a new
entity is formed to acquire both the investor and the investee, such that the new corporation
absorbs both companies. Sprint Corporation was treated as the acquiring entity for accounting
purposes. The aggregate consideration paid for the merger was $37.8 billion. This amount
included payment to Nextel shareholders in cash and stock, stock based awards, and direct
acquisition costs. (Sprint Nextel Corp., 2006) Table-1 summarizes the cost.
Table-1: Aggregate Consideration Paid for the Sprint-Nextel Merger
First, the merger agreement ensured that “former Nextel shareholders would own slightly
less than 50% of the equity interests of Sprint-Nextel.” Nextel shareholders, therefore, received
$969 million in cash and 1.452 billion shares of Sprint-Nextel stock worth $35,645 million.
With the consolidation, authorized shares of common stock increased to 6.5 billion. Next,
Nextel’s stock-based awards—employee stock option plan and deferred shares—were converted

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to $1.1 billion in Sprint-Nextel stock-based awards at fair value. Finally, Sprint-Nextel
Corporation incurred $78 million in acquisition costs. (Sprint Nextel Corp., 2006)
Allocation of Purchase Price
Nextel’s assets and liabilities were recorded at their respective fair values as of the date
of the merger. As of August 12, 2005, fair value of acquired net assets were recorded at $37,808
million, including a premium (i.e., goodwill) of $15,549 million above the fair value of Nextel’s
net tangible and identified intangible assets. (Goodwill was determined using the strategic goals
and benefits outlined above in the rationale section.) After making correction entries in the
fourth quarter 2005 to the initial acquisition price, the fair value of acquired net assets were
adjusted to $37,816 million. Table-2 summarizes the estimated fair values at acquisition, plus
adjustments made during the third quarter of 2005. (Sprint Nextel Corp, 2006)
Table-2: Allocation of Purchase Price
Reactions & Impact After Merger
On 12 August 2005, the day of the merger, Sprint-Nextel’s new stock price was $26.15.
The market’s reaction for the remainder of 2005 was minimal; the average daily price was
$24.81 with only slight fluctuations. However, prior to the official merger date, reactions were
numerous and highly measurable. Negative impacts began internally with employee relations.

6
Subsequent impacts involved customer service and retention. All reactions adversely affected
the investor’s bottom line.
Employees Relations
The merger directly impacted all of the new company’s 80,000 employees as Kim Hart
describes in the flowing quote, “Two sharply different corporate cultures have resulted in clashes
in everything from advertising strategy to cellphone technologies, preventing Sprint-Nextel from
becoming the merger of equals envisioned.” The dichotomy of business practices began at the
top, with leadership’s decision to maintain two headquarters. This decision demonstrated a lack
of unity of command which ultimately impacted cohesion and integration. (Hart, 2007)
Furthering the divide, the merger identified duplicate jobs. To resolve staffing issues,
executives decided “to put all of the positions up for grabs and let the workers from both firms
duke it out. Employees would compete for jobs they currently held. Interviewing for ‘new’ jobs
began at the top, from senior vice president…down through directors and mid-tier managers”.
(McCarthy, 2005) This approach caused discord and suspicion throughout the company. The
new entity focused internally instead of on the customer as a result. Many executives from both
sides even left the company. Additionally, many of Nextel’s network experts departed, causing
its aging infrastructure to decline further. (Hart, 2007) The interview process was exhausting,
divided the ranks, and severely degraded morale.
Finally, Sprint’s decision making process frustrated Nextel employees. Nextel
employees, accustomed to rapid decision making, thought Sprint counterparts were too slow to
act. Sprint employees were accustomed to sending new ideas up the chain of command and
comfortable waiting on approval to make its way back down (Hart, 2007).

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Customer Service & Retention
The new company expected to, as CEO Gary Forsee put it, “…build strength on strength”
by leveraging Sprint’s high quality fiber optic network and large customer base and Nextel’s
wireless networks and high customer retention. Adding to the frustrations of an already stressed
workforce, Forsee boasted to investors in September 2005 that the merger would reduce costs by
$14 billion. This announcement required the company to aggressively look for ways to cut costs.
Customer call centers became the target. A “numbers-driven management approach” was
instituted which monitored everything from call service times to bathroom breaks. Customer
service representative were no longer evaluated on the number of issues they resolved, but on the
number of calls they serviced instead. Outcome was no longer relevant, thus beginning an
extended period of customer service decline that devastated customer retention.
In January 2006, leadership attempted to combine two different billing systems. This
action deteriorated customer service further by causing billing errors that customer service
representatives were not able to resolve. Additionally, Nextel’s aging infrastructure was not
compatible with Sprint’s infrastructure and phone quality suffered as a result. By the third
quarter of 2006, churn rose to 2.4% - the highest rate in the industry. “Churn” is the industry
term for customer turnover. As customers began to defect for better service, quotas to retain
customers became the focus of the call centers. If quotas to renew or extend contracts were met,
the incentive was $2,000-$3,000 a month. Consequently, representatives began to illegally
renew or extend contracts without customer consent. In 2007, due to financial hardship and the
desire to save, management directed to cut all customer incentives - no more free phones,
minutes, or credits. This decision caused customers to exit in mass. By the end of 2007, Sprint-
Nextel had lost more than 1.2 million prepaid customers. (Ante, 2008)

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Investor Bottom Line
As mentioned earlier, the market’s initial reaction was minimal through 2005. However,
the 2006 market reacted negatively from customer turnover. By September 2006, Sprint-
Nextel’s stock priced dropped to $17.00 per share, a 36% downturn since the merger. Stock
prices continued on a volatile, downward trend throughout 2007 and ended the year at $13.13 per
share. In 2007, Sprint-Nextel tested Goodwill for impairment by comparing the fair value of
discounted future cash with the net book value. Goodwill was found to be impaired by $29.7
billion ($15.6B Nextel purchase + $10.7B following affiliate acquisitions), or nearly 80% of the
original acquisition price of $37.8 billion, thus wiping out the entire amount of goodwill
associated with the merger. (Sprint, 2007) This finding devastated equity values. Stock prices
plummeted to $6.00 per share by the end of second quarter 2008 and to just $1.91 by the end of
2008, a 93% decrease since the merger. Sprint-Nextel has not recovered from the financial
downturn. Average stock price today is $5.00 per share. (S Historical Prices)
Positive Impacts
Although most impacts were negative, some stakeholders benefited from the merger. For
example, some former personal carrier service affiliates filed lawsuits against Sprint citing the
merger would violate regional carrier agreements. These lawsuits forced buy-outs costing
Sprint-Nextel approximately $11.9 billion by the end of 2006, which was $10.7 billion over fair
value. (Sprint, 2007) Additionally, Verizon and AT&T increased their customer base by gaining
Sprint-Nextel’s dissatisfied customers. (Statista, n.d.) Finally, all of Sprint-Nextel’s financial
woes made it a target for takeover. In July 2013, Softbank purchased 72% of Sprint-Nextel
shares for $7.65 per share in cash, with the remaining to be converted to a new entity called
Sprint Corporation. (Newsroom, 2013)

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Accusations
Sprint and Nextel were not above accusing each other for the failure. Nextel employees
felt their aggressive, entrepreneurial style that fueled early success was marginalized by Sprint's
bureaucratic approach. Sprint employees felt deceived by Nextel's deteriorating network, which
was the source of the company's largest customer losses. Further, as longtime Nextel employees
with the expertise to repair the network took lucrative exit packages, Sprint workers felt
abandoned and blamed the ailing network for the company's financial decline. Nextel
employees, meanwhile, felt their brand and technology had been unfairly tarnished. (Hart, 2007)
This section analyses the many reasons why the acquisition failed.
Integrating Cultural Differences
The inability of Sprint and Nextel to recognize and accommodate their different cultures
was the primary reason the consolidation failed. The vastly different cultures impacted
integration from the start. The following excerpt from the Washington Post is a powerful
description:
“The discord was on display almost immediately. At a Nextel managers meeting held just
after the merger was announced in December 2004, chief executive Tim Donahue revved
up the crowd with a pep-rally-style speech. Donahue, dressed in a sweater vest and
khakis, drew cheers by chanting, "Let's go stick it to Verizon!" He then introduced a
special guest -- Gary Forsee, Sprint's chief executive and the architect of the merger, who
had flown in from Sprint's Kansas City headquarters. Forsee walked onto the stage
wearing a suit and proceeded to outline his expectations for the combined company in a
PowerPoint presentation. The room fell silent.” (Hart, 2007)
Sprint was a century-old telecommunication titan from the American Midwest. Sprint’s
orientation was on controlling for the sake of efficiency. Sprint was bureaucratic in nature with
centralized planning and decision making. Sprint’s managers where accustomed to waiting on
decisions from the top. Nextel was an entrepreneurial technology firm from the Washington,
D.C. area. Nextel’s orientation focused on creativity for the sake of innovation and vision.

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Nextel boasted an entrepreneurial spirit, delegated decision making, and fostered initiative.
Nextel’s managers were comfortable making decisions in a rapidly changing environment.
(Cameron & Quinn, 2011)
The tension was immediate, but mostly ignored by the architects of the consolidation.
The following figure clearly illustrates the organizational differences:
(Haryanto, 2008)
Mismanaged Talent
The executives at Sprint-Nextel recognized the need to structure their integration plan
around their people. CEO Forsee stated repeatedly that “you can never overemphasize the
people aspect of a merger.” (Pomeroy, 2007) However, as cultural differences emerged, both
firms began hemorrhaging talented employees at all levels. For example, many of the senior
Nextel infrastructure technicians took lucrative severance packages just as their expertise was

11
desperately needed to upgrade the network for expansion and technological evolution. (Hart,
2007) Both firms offered generous retention incentives, but were not successful.
During integration, it is natural for the firms to find ways to eliminate excess structure.
However, this generated an unhealthy competition among Sprint-Nextel employees who feared
their jobs were at risk. This type of competition cannot last long before becoming a toxic
workplace where employee sabotage and undercutting are more of a focus that the firm’s
mission. Managers believed this competition would be the fairest method of determining which
employees should remain, but they grossly underestimated its negative impact on morale.
After several dismal quarters, Len Lauer, a Sprint executive since 2000, stepped down as
Chief Operating Officer. Tim Donahue, Nextel’s former chief executive, stayed on as the Sprint-
Nextel Executive Chairman, but he chose to delegate all decision-making authority to the CEO,
Gary Forsee. Following Lauer’s departure, Forsee assumed COO duties as well. (Hill, 2006)
This structure proved critical to the merger’s failure. Although Forsee was an experienced
executive, Donahue was the creative force behind Nextel’s success. Donahue was recognized as
the 2003 Ernst & Young Networking and Communications Entrepreneur of the Year. Donahue
retired as Executive Chairman in late 2006 and Forsee stepped down as CEO and President in
October 2007 following a tumultuous two-year merger process. (Haryanto, 2008)
Underestimated Challenges
Both firms underestimated several challenges. First, they underestimated how difficult it
would be to provide a dual-band service to the entire Sprint-Nextel customer base (Sprint’s
CDMA and Nextel’s iDEN). Next, they had to simultaneously meet the FCC’s 2004
requirement to reband frequencies in order to stop interference with public safety networks.
Third, they misjudged how much maintenance was required to update Nextel’s infrastructure to

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sustain their existing customer base. Significant resources were necessary to prevent service
disruptions and comply with FCC regulations. Sprint-Nextel would not only bear these costs,
but they were also were subject to their normal customer demands for reliable service. The
combination proved extremely difficult to balance, especially in the early months following the
merger. Nevertheless, experts at Sprint-Nextel felt confident they could satisfy all requirements
without sacrificing customer retention. (Hill, 2006 and 2007).
When news of the pending merger spread, Sprint’s regional network affiliates began
questioning the consolidation’s legality citing violation of standing service agreements. In order
to continue with the merger, Sprint agreed to acquire many of these service affiliates to prevent
disrupting the consolidation. Following the merger, Sprint-Nextel acquired at least 10 affiliate
firms for more than $12 billion during the next year and a half to avoid litigation and service
disruption. This additional operational and financial pressure further complicated integration.
(Rosenbush, 2005).
Poor Leadership & Communication
While Sprint and Nextel executives understood their employees were critical for
successful merger, they did not execute their strategy well. Management developed employee
transition resources, such as communication teams and ‘rumor mill’ chat rooms, to distribute
information. However, anxious employees acted on incomplete or inaccurate information to
make career decisions in a consolidated workforce that contained two sets of ‘legacy’ employees.
Sandra Price and Ron Gier served as Vice President of Human Resources and the Vice
President of HR Operations, respectively. These executives maintained a clear integration
philosophy that communication with employees was essential and that “companies must be
managed at a personal level”. Gier even understood that “while hearing from the CEO about a

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proposed merger is important, employees really want to get answers from the supervisors they
work with daily.” (Pomeroy, 2007) However, their strategy was not effective because it was not
embraced in the workforce or embodied by mid-level managers.
Dual Headquarters
Leadership decided to maintain two headquarters. The Nextel headquarters in Reston,
VA would serve as the executive HQ and the Sprint HQ in Overland Park, KS would serve as the
operational HQ. Leadership’s intent was to minimize relocations costs and disruption to
employees and their families. Forsee proclaimed the dual headquarter decision as quick win.
Gier stated that “communications is our business, so it’s not essential to have all employees in
one location.” (Pomeroy, 2007) However, two disparate corporate headquarters increased the
cultural divide and prolonged integration. Moreover, it physically separated executives from the
corporation’s operations lines, which required extensive, often daily, travel between the Midwest
and east coast. Management failed to recognize the secondary effects and additional stressors a
dual headquarters would have on integrating different labor forces. In other words, this decision
proved to be a fatal error.
Positioning for Dominance
In the highly dynamic telecom industry of 2005, Nextel’s decentralized culture was
required in order to compete. The competition was intense from AT&T and Verizon. There was
little margin for error in the industry and no margin for integration challenges. However, shortly
after the merger, Sprint made it clear that Nextel was going to fall in line with “the Sprint way”;
after all Nextel was the acquired company.
This power struggle played out through employee retention and new corporate branding.
It was also clear throughout the merger that Sprint executives had been placed or were retained

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in key positions to influence the new company’s direction. Additionally, Sprint employees were
often better prepared to navigate the highly structured and political environment that emerged
after consolidation, which also played to their advantage when competing for employment.
Sprint’s dominance was most visible in the rebranding images used for Sprint-Nextel.
The new corporate logo incorporated Nextel’s yellow and black colors, but then marginalized
their partnership by boldly stating the new company as “Sprint…together with Nextel”.
(Haryanto, 2008)
Lessons Learned
There are many lessons learned in the Sprint-Nextel merger. If this group were Chairman
and CEO there are three actions we would have taken differently. First, Sprint-Nextel focused
too much on the bottom line possibly and should have better assessed cultural compatibility.
Second, Sprint-Nextel should have collocated the headquarters to Overland Park. Maintaining
two headquarters literally and figuratively divided the company and did not enable seamless
integration. Third, Sprint CEO should have allowed each company to operate under the status
quo. While the Nextel way was different than the Sprint way, Nextel was highly effective
because of its people and its business model. If changes were necessary, the CEO should have
made them gradually and merged business models over time. The incremental approach likely
would have fostered collaboration and have been more effective. In other words, the CEO could
have better enabled and maximized their individual strengths instead of trying to force everyone
to be the same.

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Conclusion
The Sprint-Nextel merger is a classic leadership failure. Suffice it to say that Robert
Bruner’s, Dean of the School of Business at Virginia, designation of the merger as “A Deal From
Hell” is appropriate. The merger destroyed market value, impaired strategic position, and
damaged reputation. (Moore, 2008) A merger is a vulnerable period for involved companies,
employees, investors, and customers. People are fundamental to any organization and must be
led whether the environment is professional sports, business, or combat. Leadership must
simultaneously integrate cultures and maintain branding and market share. Fostering
relationships with all internal and external stakeholders cannot be overstated during a merger. A
successful merger requires a delicate balance of art and science. The deal requires as much
intuition and leadership as sound financial analysis. Sprint-Nextel overlooked important
considerations throughout the merger. They attacked each other’s weaknesses and enabled their
differences to the point of failure.

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