The board of SoftBank, the Japanese internet and telecommunications company, surprised the industry by voting to abandon a proposed merger of Sprint and T-Mobile U.S.
Sprint, which is the smaller company, had sought to be acquired by T-Mobile in a stock swap with Deutsche Telekom, the German telecom giant that owns T-Mobile. Sprint needed the merger to stem significant losses.
Instead, the SoftBank board has decided to invest heavily in Sprint’s network as a way to get ready for an impending move to 5G services. Sprint has been losing market share and subscribers to T-Mobile as well as the larger carriers, AT&T and Verizon.
According to a story in the Wall Street Journal SoftBank's board decided it didn’t want to give up control of Sprint, despite the fact that Deutsche Telekom was buying controlling interest in Sprint, which it planned to make part of T-Mobile. After the merger T-Mobile would be the surviving entity with its CEO, John Legere, at the helm of the surviving corporation.
According to reports, SoftBank CEO Masayoshi Son had agreed in principle to give up control, but apparently changed his mind, believing that artificially intelligent robots would need Sprint's network in the future, according to reports from the board meeting. Normal business practice is that when a larger company merges with a smaller company, the larger company assumes control.
In some mergers, other arrangements are made in which operations and control are shared between the merged corporations, resulting in a combined organization that retained separate operations from each company. A good example of such a merger can be seen when United Airlines merged with Continental Airlines, resulting in a corporation that includes part of each airline.
In this case, however, Deutsche Telekom wanted to have controlling interest in the surviving corporation. This desire was based on multiple factors, including the fact that T-Mobile has dramatically out performed Sprint in recent years to the point that it went from being the smallest of the major U.S. carriers to third place. Sprint, meanwhile, has been losing customers, bleeding cash and falling ever farther behind the rest of the industry.
Furthermore, the international accounting rules that Deutsche Telekom uses include a provision that only allows the earnings of a subsidiary to be counted in overall earnings if the subsidiary is controlled by the company doing the reporting.
Until SoftBank pulled the plug, the merger between the two companies was set to be announced around the end of October 2017 or the beginning of the November.
There’s some speculation in the financial press that Son is actually putting the T-Mobile merger on hold in an effort to get a better deal. However, his efforts to find other merger partners have reportedly been rebuffed. There’s also a certain amount of pride at work, because Son considers himself a skilled deal-maker, thus losing control of the merged corporation would be a failure in his eyes.
It’s worth noting that Son has a checkered history in acquiring and operating his U.S. corporate holdings. His stewardship of Sprint has driven the once number 3 carrier into a debt-ridden slide that shows no signs of ending.
Previously, Son had taken control of the technology trade show Comdex, which at the time was highly successful. There under his leadership, the show quickly diminished until it was broken up and eventually folded.
Had the merger gone through, the surviving T-Mobile would have rivaled AT&T and Verizon Wireless in the number of subscribers and in revenue. Unlike Sprint, T-Mobile has grown rapidly since a failed merger between the two companies in 2014, surpassing the rest of the industry in the rate of subscriber growth. T-Mobile accomplished its growth by doing something radical—giving its customers services that they really want, such as unlimited data.
T-Mobile’s aggressive tactics have forced the rest of the industry to change to match it. AT&T and Verizon were forced to offer mobile service plans with unlimited data as well. T-Mobile started offering free Netflix subscriptions to customers in October and now AT&T has just started offering free HBO to customers with unlimited data plans.
Considering T-Mobile’s track record of innovation along with its consistently growing market share and revenue, it’s probably not surprising that Deutsche Telekom is reluctant to give up control to Son, with his checkered track record and the lack of market innovation at Sprint.
Since the Sprint and T-Mobile merger appears dead, at least for now Sprint will continue to burn cash at a spectacular rate, soaking up another round of investment from SoftBank as revenue falls and customers flee.
Without a merger of some sort that will inject a level of sanity, not to mention fiscal responsibility, into Sprint, it seems likely that the only real chance at salvation for Sprint will be Son’s robots. Unfortunately, those robots don’t seem to be appearing on Sprint’s horizon so far. Since they are intelligent machines, perhaps they would prefer a more reliable network partner.