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Sprint (NYSE:S) and Clearwire (CLWR) are often discussed as being great values. Either these assessments are wrong or something else is at work defeating economics. In this case, it is Sprint's board of directors and corporate governance that creates the issue. Within this there are two issues, Sprint's executive compensation incentives and its near complete control over Clearwire. We think it will take an overhaul of Sprint to rectify the situation. While not the topic of this article, we tend to agree with the many value proponents behind Sprint and Clearwire.

Like many large businesses, Sprint's executive compensation program rewards executives for the company achieving specific targets. The problem here is the tactical nature of the targets. This is well illustrated in the table below, which was gathered from Sprint's annual proxies. From looking at this, Dan Hesse's somewhat unusual approach to the business became clear -- he is rewarded handsomely for "just following orders."

Year

Short Term Criteria

weight

Long Term Criteria

weight

2011

Adj OIBDA

20%

Free Cash Flow

50%

PostPaid Churn

20%

Net Service Revenue

50%

Net Service Revenue

20%

Postpaid Net Additions

20%

Prepaid Net Addition

20%

2010

Net Service Revenue

43%

Free Cash Flow

50%

Adj OIBDA

23%

Net Service Revenue

50%

Postpaid Churn

20%

4G Subs Growth

15%

2009

“Unusual year – overall dropped by 15%”

ADJ OIBDA

40%

Free Cash Flow

50%

Postpaid Churn

20%

Net Service Revenue

50%

Postpaid Net Additions

30%

Calls to Customer Care

10%

2008

“Turn around year”.

Adj OIBDA

23%

Post-Paid Churn

33%

50%

Calls to Customer Care

23%

Improved Customer Experience

33%

Post-Paid Churn

34%

Free Cash Flow

33%

iDEN Net Additions

5%

Free Cash Flow

15%

Adj OIBDA

23%

50%

Calls to Customer Care

23%

Post-Paid Churn

34%

Free Cash Flow

15%

Post-Paid Churn

33%

2007

Adjusted OIBDA

30%

Adjusted OIBDA margin 2009

50%

Post-Paid Churn

30%

Cum Free Cash Flow 2007-2009

50%

Net Service Revenue

20%

Individual

20%

2006

Adjusted OIBDA

50%

Adjusted OIBDA

50%

Net Subscriber Additions

30%

Net Subscriber Additions

30%

Post-Paid Churn

20%

Post-Paid Churn

20%

2005

Sprint EVA pre merger

80%

EVA Performance through July 31

Customer Satisfaction

20%

Source: Janco Partners

Now the argument can be made that because the longer term incentives are paid in stock, Hesse and his team should be motivated to drive the stock price up. Again two factors dampen this fairly logical thought process. First is that the board has repriced "some options." Second is that Sprint stock has underperformed for so long we would not be surprised if many on the top team just threw in the towel.

Taking this a step further, Sprint knows it must merge or be acquired. Not only is the stock price low, the company is pretty much out of spectrum. We are confident that Sprint wanted to acquire T-Mobile and leverage it into a 4G operator. Unfortunately AT&T (NYSE:T) hit the bid ahead of Sprint.

Sprint Controls Clearwire

Despite its frequent protestations to the contrary, Sprint has near complete control over Clearwire and its operations. It achieves this by having 7 seats on Clearwire's board and through 10 of 13 votes to approve (among other things):

  • Funding
  • Joint Ventures
  • non-US operations
  • "any action not in accordance with the business purpose of the Company

Certainly Sprint has had sufficient power to prevent Clearwire from:

  • transactions with T-Mobile
  • entering prepaid wireless
  • expanding its Retail operations
  • selling 4G handsets
  • remaining in the 3G business despite April's pricing agreement
  • selling its services on an economic basis to strategic investors like, Google (NASDAQ:GOOG), Comcast (NASDAQ:CMCSA), Time Warner Cable etc. (NYSE:TWC)
  • Providing competitive terms to MVNOs like MetroPCS, LEAP wireless or Wal-Mart (NYSE:WMT).

Sprint's management is killing Clearwire but that is what they are paid to do. With both Clearwire and Sprint stocks so far down if Sprint's board does not clean up its act, someone else likely will.

Disclaimer: I am a securities analyst working for Janco Partners in Denver. Janco pays me to analyze stocks and provide some macro work. Nothing in my employment mandates that I cover specific companies, sectors, or themes. Janco is an independent research firm that receives no compensation to write about any specific stocks, sectors, or themes.

Source: Sprint And Clearwire: Nothing Better Governance Cannot Cure