Introduction
This paper discusses the T-Mobile and Sprint merger in terms of adding value to shareholders of both firms. In first part, NPV is calculated for a project in which T-mobile is considering to make investment. Second part of this paper is related to the impact of merger on both companies’ shareholders. This paper also provided some recommendations to the shareholders of both companies regarding this merger.
Part 1: Calculation of NPV
An investment proposal’s net present value (NPV) can be defined as the difference between the present value (PV) of future cash inflows and the present value of cash outflows discounted at the firm’s cost of capital (Booker 2006). NPV can be calculated through the use of three different steps such as determination of minimum required rate of return, computation of present value of cash inflows and outflows and calculation of net present value. Calculation of NPV for T-Mobile’s project is as below:
Cost of capital or minimum required rate of return for T-mobile’s project is 4%. At the same time, PV of cash inflows can be calculated with the use of following formula:
NPV
= 350,000/1.04 + 939,000/(1.04)2 + 1,122,000/(1.04)3 + 500,000/(1.04)4 + 400,000/(1.04)5
= [336538+868158+997333+427350+328677]
= $2,958,056
After calculating of PV of cash inflows, NPV can be calculated through following formula:
Formula = Total PV of CF-Initial Cash Outflow (Baker and Powell 2005).
= $2,958,056 – $3,219,000
= -$260944
On the basis of calculated NPV, it is recommended to executives and the shareholders of T-Mobile Corporation that they should not accept the project. It is because as the NPV of the project is negative, they should reject the project (Booker 2006).
T-Mobile and Sprint Merger
Merger of T-Mobile and Sprint will add value to the shareholders of both companies. It is because as in current situation, both companies are not in strong financial position and to attract more customers and to compete with wireless technologies, it is necessary that both companies merge together to attain the benefits of post merger.
Impact on T-Mobile’s Shareholders
Due to economic crisis, T-mobile is facing pressure on margins and also it is difficult to encourage greater spending like LTE 4G technologies for the company (Company Monitor 2012). At the same time, to become competitive in the market, to update the business with current technologies and to increase the shareholders value, it is necessary that company invest in 4G technologies. Thus, if company merges with Sprint, it will help the firm to enhance shareholders value by improving the market shares, sales volume as well as profit margin. Different financial analysts have found that merger impact on the stock market value of the firm and improve shareholders’ gain (Gugler and Yurto?lu 2008). It shows that merger will help T-mobile to increase shareholders’ return.
Impact on Sprint’s Shareholder
Sprint is operating three networks including CDMA, iDEN and WiMax that are causing high operating cost in the organization. At that time, if Sprint thinks for investing in LTE 4G networking technology, it is possible that its shareholders would not go for it, as for company, it will be difficult to handle such an investment (Zeman 2010). In such situation, merger with T-Mobile can be beneficial to influence the behavior of shareholders towards investment in LTE. It is because merger will help the company, to enhance the shareholders’ value. If both companies merge together on LTE for their 4G networks, it would be easy for them to make such a high capital investment. In current situation, T-Mobile uses GSM based technology for its voice/data network that is also incompatible with Sprint’s CDMA voice/data network. Thus, merger will help Sprint to enhance its shareholders value with investment in 4G technology.
Future market will be based on LTE wireless technologies and it is the reason that if Sprint wants to sustain its business and gain competitive advantage in the wireless network market, it is necessary that company along with T-mobile invest in 4G technologies to provide more returns to their shareholders.
Profitable Combination of T-Mobile and Sprint
Merger of T-Mobile with Sprint will be beneficial for both companies for several reasons. For T-Mobile, merger will be significant due to the nature of wireless networks and the current business landscape. It is because to build out high-speed wireless broadband networks, there is requirement of high capital investment. At the same time, for each mobile organization it is necessary that it build out high-speed wireless broadband networks in order to support different devices such as tablets and smart-phone (Gahran 2011). Individually, for both companies, it is not possible to arrange high capital investment requirement. Thus, it seems that this merger will benefit both organizations.
Similarly, companies that have a huge customer base and competitive advantage in the market over their competitors are in better financial situation to build out their 4G networks. It is the reason that Verizon and AT&T can turn U.S. wireless market into duopoly market conditions due to their strong financial position (ABMN Staff 2010). If it happens, it will be difficult for T-Mobile and Sprint to gain significant market shares for their wireless networks as they are smaller than their chief competitors. At the same time, they have also not other advanced products like iPhone that can strengthen their sales. It is the reason that to face completion with big competitors and to make business profitable, it will be better option that Sprint and T-Mobile merge together.
Individually, both Sprint and T-Mobile are losing customers against their rivals including Verizon and AT&T and it shows that merger of both companies will be beneficial to compete in the market.
Financial Conditions of Both Firms
Sprint’s Financial Performance:
Sprint’s consolidated revenues are US $8.333 billion in Q3 of the year 2011. Mobile revenues increased with 4.8% and wireless revenues fell 14% (Company Monitor 2012). In the Q311, company had a net loss of US$301 million in comparison of a loss US$847 million in last quarter.
T-Mobile Financial Performance:
T-Mobile posted revenues of US$5.228 billion at the end of Q311 that is decrease of 1.5% from the same quarter in the year 2010. Company’s EBITDA decrease 14.2% and capital expenditure grew 2.6% in the same quarter (Company Monitor 2012).
It shows that financial position of both companies has not so strong. From the year 2010, in the year 2011, revenue in both companies has decreased. At the same time, T-Mobile Company is also considering to invest in a project of $3,219,000. Company has assumed cash inflow for five year $350000, $939000, $1122000, $500000 and $400000 respectively. At the same time, cost of capital is assumed as 4% for this project. As the calculated net present value of this project is negative $260944. It shows that T-mobile should not accept this project as it has negative NPV.
Potential Pitfalls
This merger can also be associated with some potential risks such as less profitable in comparison of current situation of both companies. At the same time, it is also possible that merger reduce the shareholders value due to failure of launching of 4G technologies. To avoid these pitfalls, both organizations should build effective strategies regarding merger.
Recommendations
After the analysis of both parts, it is recommended to the shareholders of both corporations that they should work for the merger of both companies. It is because as individually both companies are not performing well in the market and their customer base is also regularly decreasing. At the same time, to remain competitive in the market, it is necessary that both companies merge together. It will also help both companies to enhance the shareholders value due to more profits in the business and increased market share. T-Mobile should not invest in the new project as the net present value for this project is negative. In contrary to this, it should invest in some other projects that will help the company to improve its financial position and build merger with Sprint profitable.
Conclusion
Thus, it can be stated that T-Mobile and Sprint merger (Successful launching of 4G technologies) will help in adding more value to shareholders.
Reflection
Through this module, I have learnt about the concept merger. I have learnt that how merger can add value to the shareholders of companies involved in the merger. I have also learnt about the potential pitfalls that can arise due to merger of two organizations. In addition to this, I have also learnt about the concept of net present value. I have learnt that NPV is an important method while evaluating different capital budgeting decisions. I have learnt that when the present value of cash inflows is more than cash outflows, project should be accepted by the company or vice versa. Thus, this module helped me to increase my knowledge related to NPV and merger.
References
ABMN Staff (2010) Sprint Nextel (NYSE: S) and T-Mobile Merger Rumors Return After Comments from Sprint CEO. [Online]. Available at: http://www.americanbankingnews.com/2010/07/15/sprint-nextel-nyse-s-and-t-mobile-merger-rumors-return-after-comments-from-sprint-ceo/ [Accessed: 19, March, 2012].
Baker, H. K. and Powell, G. E. (2005) Understanding financial management: a practical guide. USA: John Wiley & Sons.
Booker, J. (2006) Financial Planning Fundamentals. Canada: CCH Canadian Limited.
Company Monitor (2012) USA Telecommunications Report (1), p 63-72.
Gahran, A (2011) What a Sprint-T-Mobile merger could mean for wireless users. [Online]. Available at: http://articles.cnn.com/2011-03-18/tech/sprint.tmobile.gahran_1_wireless-broadband-t-mobile-usa-wireless-carriers?_s=PM:TECH [Accessed: 19, March, 2012].
Gugler, K. and Yurto?lu, B. B. (2008) The economics of corporate governance and mergers. UK: Edward Elgar Publishing.
Zeman, E. (2010) Sprint Might Build LTE Network, Merge With T-Mobile. [Online]. Available at: http://www.informationweek.com/news/mobility/smart_phones/225800029 [Accessed: 19, March, 2012].