The Sprint and Softbank merger was a surprise to many people. When the Japanese based mobile operator announced its intention to acquire the American company, there were debates about the feasibility of this move. Sprint Nextel is a first class internet service provider in America and it is the third longest serving internet provider in the country. It originated from the Brown Telephone Company that was founded in 1899 and the company was charged with the task of installing telephone services to the rural areas (Duncan, 2012).
The company has experienced a number of economic challenges in the past. It has also gone through a number of mergers before it adopted its current name in 1983 (Duncan, 2012). Softbank on the other hand is based in Japan and it is an internet service provider among other functions such as telecommunications (Duncan, 2012). The company mainly operates in broadband, fixed-landline telecommunications, e-Commerce, broad media, finance, marketing, and media among other functions (Duncan, 2012).
Softbank made an ambitious bid to acquire 70% of Sprint Corporation, a move that left many people amazed. The company placed its bid of $20.1 billion to purchase Sprint. The company however expects to receive $8 billion as new investment capital, which it intends to use to strengthen its 4G LTE service (Whittaker, 2013). The move has surprised many economist and business analyst who see it as a risky path to follow. The doubt is informed by the financial trend recorded by the Sprint Corporation in the last few years.
Since 2007, Sprint has been losing money and it has been underperforming compared to its competitors Verizon Wireless and AT & T. Sprint has been lagging behind in rolling out its 4G LTE (Whittaker, 2013). Generally, the company has been performing dismally and getting into bad debts of about $15 billion while losing subscribers in the market (Whittaker, 2013).
The Sprint corporation is still recovering from another merger with Nextel that was detrimental to its survival (Whittaker, 2013). Observers warn that this may not be the best move for the Softbank to make since the takeover does not seem to offer a viable financial and market advantage. The financial and market threats notwithstanding, the Softbank management sees things differently from everybody else.
The CEO Masayoshi Son is one of the few risk takers in the world and he is not afraid of taking a risk based on an idea he believes will be beneficial in the long run. The CEO is known for this considering he did the same thing in 2006 when the company invested in Vodafone and acquired the Japanese unit at a price of $15.5 billion (Whittaker, 2013). Even then, most observers had a similar opinion as they do today that the amount was not worth the risk.
Due to debts, the company was not involved in investments but the CEO says that since the debt has been reduced to manageable levels, the move is justifiable. The pursuit of the new acquisition is therefore a calculated and affordable move. The company wants to roll out the LTE services in Japan and the acquisition of the Sprint Corporation is a good starting point. The benefit of taking over the Sprint Corporation is that the Softbank company is interested in the time division Long –term Evolution, TD-LTE (Whittaker, 2013).
Apparently, Sprint is rolling out the same technology through its partner Clearwire (Whittaker, 2013). However, this may not be as easy as it sounds because of the geographical difference between Japan and the United States of America. The infrastructural settings in Japan are different from the United States. The challenge is mainly experienced in network management as well as providing differentiated services (Whittaker, 2013).
This acquisition is very similar to what happened seven years ago when the Softbank Company took over Vodafone. However, it beats logic that a company with better telecommunication infrastructure is purchasing a company that lags behind in this technology. American companies are still grappling with learning what offering high-bandwidth service is all about while on the other hand, Softbank has been doing this for a long time in Japan (Duncan, 2012). Nonetheless, the Softbank management acknowledges that the mobile phone market in Japan is almost at a standstill. The growth prospects of the market are arguably dismal compared to the United States’ market.
Population growth is partly to blame since the rate is almost at zero in Japan, hence the reduced demand (Duncan, 2012). This leaves the Japanese company with only one option if the company intends to grow which is through acquisitions. Although the company was interested in a Japanese mobile provider eAccess, the CEO sees Sprint to be more covetous than the local company does.
The future of Softbank is in the United States’ market where the demand is still not halfway exploited (Whittaker, 2013). The company knows that half of the American population does not own Smartphones, which is a great opportunity for their products. The other incentive that can be attributed to the relentless push for the acquisition of Sprint is based on the local economic situation. The interest rates in Japan are declining at a record high rate.
This makes it necessary for the company to exploit other markets to diversify its prospects. This is a great opportunity for the Japanese company to obtain a great entry into the American market since the Yen is performing well against the major world currencies g it giving the Japanese an advantage. However, just like in any other business venture, the Softbank acquisition of Sprint is faced with numerous risks. One of the greatest misgivings with regard to this particular acquisition includes Softbank’s lack of experience in the American market.
There are doubts about how well the company is prepared to develop a working strategy that conforms to the American market in order to foster growth. Most business observers feel that the company is taking more burdens than it can handle. Having just acquired eAccess, Softbank is becoming over ambitious with the Sprint acquisition and this might prove to be more than the company can control (Whittaker, 2013). Taking over the Sprint Corporation means inheriting its debts as well.
Currently, Sprint has $15 billion in outstanding debts while the Softbank has a 10million debt. In such a situation, the debt to capital ratio of the Softbank company will be greatly affected and reduced to critical levels (Duncan, 2012). Evidently, Softbank can own Sprint but it does not make economic sense to own a company that you can do very little with. This condition will be worse if the global economic situation takes the anticipated downward turn. The $8 billion will definitely be a boost to Sprint and it will help it get its operations back on track. However, the risks posed by the uncertain world economic shifts are something that can change the expected positive results in an instance.
References
Duncan, G. (2012). Softbank’s $20 bln Sprint takeover: Everything you need to know. Web.
Whittaker, Z. (2013). Softbank, Sprint, Clearwire, Dish: Figuring out this merger mess. Web.