With confirmation of the merger between T-Mobile, owned by Deutsche Telekom AG and MetroPCS (PCS), Sprint (NYSE:S) must now work even harder to maintain its status as the third largest U.S. wireless carrier. Riding the heels of AT&T (NYSE:T) and Verizon (NYSE:VZ) has taken its toll on the company in recent years, but with plans to move ahead, Sprint has shown promise by investing in upgrading its network and slowly rebounding from bad business choices that include merging with Nextel to become profitable again.
The result of this merger means more spectrum for T-Mobile (the company will retain this brand after completing the merger), which means faster download speeds in key cities including New York City and San Francisco. To expand their networks, wireless carriers providers rely on radio waves called spectrum.
With limited amounts of spectrum available, companies purchase additional spectrum from other companies or engage in mergers to expand their networks. With additional spectrum, T-Mobile can start building its LTE network to complete with AT&T and Verizon.
Even though Sprint has continued to roll its 4G LTE network, the work has been slow. Add more competitors to the marketplace and Sprint may never be able to gain a competitive edge.
This merger represents more than just the acquisition of spectrum or an expanded customer base. For Sprint, this means making decisions the company may have wanted to postpone until it had the financial or technological resources to handle them - decisions such as completing an acquisition or merger of its own, increasing the speed of its network upgrade, or purchasing additional spectrum from another company. Each of these scenarios may prove too expensive for the company at the moment.
Learning from the Past
Going forward, Sprint may turn more cautious when considering a merger with another telecom company. In 2005, Sprint merged with Nextel. Unfortunately, technology changed so rapidly that Nextel's network became obsolete before Sprint could turn much profit. As a result, the company will shut down the operating system currently supporting Nextel products and move existing customers to its new network. In the end, the merger turned into quite a loss for Sprint. Making the same mistake could take a serious toll on Sprint's cash flow and squash investor confidence.
After talks of a possible merger between Sprint and MetroPCS failed earlier this year (Sprint also tried a possible merger with T-Mobile in 2011), Sprint has worked steadily to upgrade and expand its network. So far, the company has done well. With plans to expand its 4G LTE network into 100 cities by the end of 2012, it would seem the company has a clear plan moving into next year. But with confirmation of the latest merger between T-Mobile and MetroPCS, Sprint, unfortunately, may have to rethink its plans and make adjustments to accommodate an increase in competition.
On the other hand, Sprint has hopefully learned some important lessons from past mistakes when juggling with the idea of merging with an outfit to benefit the company over the long term. A possible merger with Leap Wireless (LEAP), which owns wireless carrier, Cricket for example, could provide Sprint with increased spectrum and an increased customer base.
Sprint could also attempt to steal MetroPCS away from T-Mobile by providing a counteroffer. However unlikely this scenario would be, it's not something that's completely off the table.
Over the Next Few Months
With the holiday season quickly approaching, Sprint needs to continue expanding its network so it can support the latest mobile devices and apps. Current fiber networks will become obsolete as more and more people choose to operate wireless devices, so Sprint needs to update as quickly as possible to prevent customers from leaving the company and going elsewhere. And after the Nextel merger, which left Sprint with obsolete and unpopular technology to deal with, the best plan seems to just keep moving forward by upgrading its current network.
If the company makes any rash decisions, it may lose more than it bargained for. I think keeping a level head, but still observing what the competition is up to, is the best way for the company to proceed for now. Considering that Sprint just paid off debts attached the Nextel merger this past quarter, taking on another acquisition could cause the company to lose the small foothold it has financially. Second quarter balance sheets show the company has $20.96 billion in long-term debt with free cash flow of $249 million. Any larger purchases right now or increased debt could cause the company to lose any ground it has made this year.
If Sprint wants to secure its place in the phone service industry, maybe investing in additional spectrum instead of merging with an entire company would be a better strategy. Companies like Verizon and Dish Network (NASDAQ:DISH) have spectrum to sell - Sprint could then use the spectrum to finish its LTE network earlier than scheduled. By then, the company would have the network needed to compete with up-and-coming companies as well as established competitors.
Having a solid network that's compatible with all mobile devices will also help the company prepare for a new wave of competition as the merger between T-Mobile and MetroPCS certainly won't be the last.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.