the integration map for sprint nextel

A DAY AFTER SPRINT CORP. AND NEXTEL Communications Inc. revealed plans to merge in December, Nextel’s technology partner, Motorola Inc., announced an agreement to continue supplying equipment to the wireless provider through the end of 2007.

While Sprint and Nextel eventually plan to support all their customers over one high-speed network capable of delivering new services, the Motorola deal demonstrates Nextel does not plan to move off its proprietary network overnight.

Gary Forsee will lead the new company.

The Motorola-powered Integrated Digital Enhanced Network, or iDEN, supports Nextel’s renowned walkietalkie push-to-talk service.

“Until they have a workable solution for push-to-talk, they are not going to be rushing to get these networks together,” says Chris Ambrosio, director of the wireless devices strategies service with Strategy Analytics Inc. He says Sprint has an inferior push-to-talk service compared to Nextel.

In the short-term, Sprint and Nextel are expected to use technology licensed from QUALCOMM Inc. that will allow Sprint to have better push-to-talk service and expand coverage for Nextel subscribers, says Bob Egan, president of Mobile Competency Inc., a consulting firm. QChat from QUALCOMM is a “short-term solution that is a requirement for these companies,” Egan says.

merger highlights Sprint Nextel will support about 35 million wireless customers and 5 million subscribers through affiliates and partners. That will make it the third largest mobile operator behind Cingular Wireless and Verizon Wireless. The merger will leave the top three U.S. wireless operators carrying about 75 percent of the traffic. The agreement calls for Sprint to separate its local telecom business, which has 7.7 million local access lines in 18 states and generated approximately $6 billion over the last four quarters. Sprint Chairman and CEO Gary Forsee will lead the combined company as president and CEO. Timothy Donahue, president and CEO of Nextel, will become chairman. The board will consist of six directors from each company. Sprint and Nextel are being valued equally in the merger so shareholders of each will own roughly 50 percent of the new company. The executive headquarters of Sprint Nextel will be based in Reston, Va.; operational headquarters will be in Overland Park, Kan. Common stock of the combined company will be listed on the New York Stock Exchange. The merger is expected to close in the second half of 2005.

Sprint says it plans to move Nextel services to its CDMA EV-DO network “over time.” Egan says the companies will not move to a unified next-generation network — called CDMA 1x EVDO (Rev A) — until Sprint can support unified voice and data services over wireline and wireless networks.

“That’s not going to be until 2007,” he says, adding the network also is going to be designed to deliver VoIP services to consumers and businesses over wireless and wireline infrastructure.

When Nextel does shut down iDEN, Nextel subscribers will have to replace their handsets. “The biggest challenge for Sprint Nextel will be to wean 14.5 million Nextel users away from their iDEN devices to CDMA devices, while maintaining the level of service,” writes iGillottResearch.

“Sprint Nextel has to be careful to not employ too heavy a hand in the changeover. It may damage its brand for a long time if it is not considerate of the fondness users have for Nextel’s Direct Connect — whether they be Fortune 500 or local home service workers.”

The Sprint-Nextel merger comes at a time when Nextel is facing a costly network upgrade. Nextel has agreed to cede spectrum the FCC says is worth $1.6 billion (Nextel believes the airwaves are worth more) in exchange for the rights to new airwaves in the 1.9GHz range where Sprint also operates. Adam Guy, director of the wireless practice with research firm Compete Inc., says Nextel may need Sprint’s spectrum to offer a high-speed data service comparable to its rivals.

Still, Standard & Poor’s credit analyst Eric Geil says Sprint and Nextel are not under pressure to integrate the companies immediately as if they were losing droves of customers. “It’s not that they need to do a massive integration all at once. I think they are going to have some time to do it,” Geil says. “It’s not like they have a situation that’s in dire need of any kind of a fix.”

Nextel leads the wireless industry with average revenue per user ($69) and has a loyal customer base. It posted revenue and earnings that exceeded analysts’ forecasts over the first nine months of 2004, according to Thomson Financial.

Still, Geil and other Wall Street analysts will be keeping a close watch on whether Sprint and Nextel are making progress in realizing the billions of dollars in savings they have promised through the merger. Sprint says the combination will lead to more than $12 billion in savings due to lower operating network expenses and reduced capital expenditures, among other factors.

Many analysts believe the merger puts Sprint and Nextel in a better position to go head-tohead with the two largest wireless providers, Cingular Wireless and Verizon Wireless.

Links

Cingular Wireless www.cingularwireless.com Compete Inc. www.compete.com FCC www.fcc.gov iGillottResearch www.igillottresearch.com Motorola Inc. www.motorola.com Nextel Communications Inc. www.nextel.com QUALCOMM Inc. www.qualcomm.com Sprint Corp. www.sprint.com Standard & Poor’s www.standardandpoors.com Strategy Analytics Inc. www.strategyanalytics.com Thomsan Financial www.thomsonfinancial.com Verizon Wireless www.verizonwireless.com