The deal, valued at $35 billion, will create a large wireless service provider to compete with wireless rivals Cingular and Verizon.
Sprint Corp. on Wednesday said it will merge with mobile phone company Nextel Communications in a deal valued at more than $35 billion. The move continues the consolidation of the wireless industry and creates a third competitor in the wireless-communications market.
The combination of Sprint, the nation's third-largest wireless carrier, and Nextel, the fifth largest, creates a company called Sprint Nextel that will be better positioned to compete with Cingular Wireless and Verizon Wireless, the industry's two largest wireless carriers. Sprint Nextel will have around 40 million subscribers. Cingular, the industry leader, has about 47 million subscribers.
The two companies had combined revenue of around $40 billion for the 12 months ending Sept. 30 and expect they will be able to cut around $12 billion in annual costs by combining operations.
"This merger positions Sprint Nextel for greater success than either company could have achieved alone," said Sprint chairman and CEO Gary Forsee in a statement. Forsee will be president and CEO of the merged company. "Together, we will be positioned to provide the high-value, integrated communications solutions customers increasingly demand."
"I'm shocked at how much Sprint paid for Nextel," says Suzzana Ellyn, a wireless industry analyst with research firm Current Analysis, noting that Cingular paid around $40 billion for the much larger AT&T Wireless in a deal completed earlier this year. "Sprint sees a huge amount of value in Nextel's position in the enterprise market."
Nextel has developed a strong position in the business market because of its "push-to-talk" feature, which offers capabilities similar to those provided by walkie-talkies to groups of subscribers. "Sprint has been trying to increase its share of the business market and Nextel should help it do that," Ellyn says. "They will help Sprint offer a more well-rounded package of services."
Sprint Nextel plans to spin off Sprint's local phone business into a separate company. Sprint has 7.7 million local-access lines in 18 states and reported revenue of more than $6 billion during the past year. It will be the largest non-Bell local phone company in the country.
The near-term benefits for customers may be limited since it will take time for the two companies to combine operations and standardize their wireless-infrastructure technologies. But Sprint Nextel will offer digital wireless services throughout the country and plans to deploy next-generation high-speed wireless-data services. Rivals Cingular and Verizon already have begun to deploy so-called third-generation wireless-data services.
In addition to its push-to-talk capabilities, Nextel also offers more location-based services than other wireless service providers. These will help Sprint Nextel differentiate itself in a competitive market where basic wireless voice services have become a commodity, forcing carriers to compete on price and buckets of minutes.
The merger of two of the leading wireless service providers may slow down that price competition, but it won't halt it, analyst Ellyn says: "This is still one of the most competitive industries around."
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