Sprint and T-Mobile Merger

Final Project:  Sprint & T-Mobile Merger

Matthew Prescia

Merging of two companies could be a way to “expand a company’s reach, expand into new segments, or gain market share.  These are done to please shareholders and create value,” (“Mergers,” n.d.).  A merger is defined as a deal to unite two existing companies into one company.  What it comes down to, is that the one motive for mergers and acquisitions is to protect/improve the strength and/or profitability of the dominant company, which is maximizing shareholder’s wealth (Peavler, 2016).  The merger that I am going to look into in this project, is Sprint merging with T-Mobile.  

        T-Mobile and Sprint are both in the wireless communications industry, and are competitors.  With this being said, this merger is considered a “horizontal merger.”  A horizontal merger is when two competitors combine (Gaughan, 2015).  T-Mobile “is a national provider of wireless, voice, messaging, and data services capable of reaching over 308 million Americans where they live, work and play,” (“About T-Mobile,” n.d.). Sprint also provides wireless service, as well as wireless voice, messaging, and broadband services through subsidiaries: Boost Mobile, Virgin Mobile, and Assurance Wireless.  By merging these two companies, Sprint would give it’s competitors a tougher time in the wireless communications market (Verizon and AT&T).  T-Mobile provides “wireless communication services through a variety of service plan options.”  Also, they sell wireless devices, such as smartphones, tablets, and other mobile communication devices (T-Mobile US, Inc, 2015).  Sprint offers services that include “mobile productivity applications, such as Internet access, messaging and email services.”  Products that Sprint offers is consisted of handsets, such as cellular phones, and tablets, and hotspots, which allows the connection of multiple WiFi enabled devices to the Sprint platform (Sprint Corporation, 2016).  By merging these two companies, Sprint would be a leader in the industry in the products it sells, with the addition of the T-Mobile products that Sprint will gain with the acquisition of T-Mobile, and would make it more difficult for AT&T and Verizon to compete with them.

        When looking at and analyzing a company, it is good to look at the past 3 years, to get a good insight of how the company has been progressing in the recent years.  Table 1 below, shows the assets of Sprint and T-Mobile for the past 3 years.

Table 1 - Assets

The short/current long term debt went up from $994 MM to $4,700 MM from 2013 to 2015, respectively.  The long term debt decreased from $32,000MM to $29,300MM, which is the reason that short term debt increased.  

                        Table 2 – Net Income/(Loss)

Table 2 shows the net income of Sprint and T-Mobile from the previous 3 years.  Sprint’s net loss could be looked at as mostly due to the increased cost of depreciation, as well as a decrease in the service revenue.  Depreciation expense increased from $3,800 MM to $5,800 MM from 2014 to 2015.  The service revenue decreased from $29,542 MM in 2014, to $27,174 MM in 2015. T-Mobile on the other hand, has had increases in net income for the past 3 years.   In 2013, Sprint acquired Clearwire, as well as SoftBank.  With this being said, when looking at the income statement, this can be seen with the increase in revenues and increased expenses from 2013 to 2014.

                        Table 3 – Sprint’s Revenues & Expenses

T-Mobile has had increasing revenues over the past three years.  Revenues increased from $24,420 MM in 2013 to $29,564 MM in 2014, to $32,053 MM in 2015 (TMUS, 2016).  

        When looking at company’s financial statements and their history for the past 3 years, it is beneficial to do a trend analysis.  Included in the trend analysis, there are many financial ratios to look at to provide insight to its liquidity position as well as its profitability.  When looking at liquidity, a ratio that gives a good sense of where the company stands is the current ratio.  The formula for this ratio is current assets/current liabilities, and it shows the company’s ability to pay back its obligations.  Sprint had a current ratio of 1.22 in 2013, .89 in 2014, and .57 in 2015.  The current ratio decreased to under 1 in 2014, which is related to the acquisition of Clearwire and SoftBank.  The reasoning the current ratio decreased was because the current assets decreased due to the acquisitions.  The Clearwire acquisition totaled $3.5 billion, and Softbank totaled approximately $14.1 billion.  T-Mobile’s current ratio for years ended 2013, 2014, and 2015 were 2.1, 1.59, and 1.56, respectively.  So this shows that they can pay back their obligations with their assets.  For profitability, a good ratio to use would be profit margin.  The profit margin is calculated by net income/ net sales.  The profit margin in 2015 was -6.20%, compared to -9.69% in 2014 and -11.01% in 2013.  Although the profit margin is negative, this is deceiving because the acquisition, which a lot of cash was used to pay for, is the reason behind this negative percentage.  “Economic downturns, unfortunate ventures, and expansion expenditures can contribute to negative profit margins, which occur when your business spends more than it earns during a particular period,” (Gartenstein, n.d.).  T-Mobile had a profit margin of 2.29% in 2015, compared to .84% in 2014 and .14% in 2013.  This shows that T-Mobile is getting more of a profit each year for every dollar of revenue earned.  When it comes to the market value, it can be seen if a company is doing well by looking at the history of the company’s stock and to get a gauge on the company’s investors.  On January 7, 2013, Sprint’s market value was $5.92.  Over the course of the next couple years, it fluctuated and had a low of 2.66 on February 8, 2016, and now is currently at $7.09.  T-Mobile had a stock price of $19.08 on January 7, 2013 and throughout the next three years, has steadily gone up and is currently $52.54.   When looking at the capital structure of Sprint, on Sprint’s Form 10 K, it can be seen that Sprint has a high amount of capital expenditures each year.  In 2013, they spent $3,847 MM in capital expenditures, $1,488 MM in 2014, and $5,422 MM in 2015.  Sprint had net borrowings of $6,122 MM in 2013, $1,356 MM in 2014, and $456 MM in 2015.  T-Mobile gets most of its financing from issuing long term debt.  In 2013, they had net borrowings of $2,241 MM, $1,556 MM in 2014, and $3,498 MM in 2015.  So with this being said, T-Mobile borrowed more money than Sprint in the past three years.