Executive Summary
T-Mobile US Inc. (T-Mobile) and Sprint Corp (Sprint) have are entering a merger two years after the merger was announced. T-Mobile initiated the merger with the aim to create the most extensive 5G mobile network with the highest transmission capacity. This business plan examines the merger between T-Mobile and Sprint, the impact of the merger, and financial analysis using performance measure based on the companies’ annual reports. The two companies agreed to an all shares deal valued at US$26 billion while the combined company will be valued at US$146 billion and over 140 million customers.
Financial Position from Analysis of Financial Statements
The merger between T-Mobile and Sprint will involve a restructuring of initiatives to realize cost efficiencies. Major activities concerning the merger include contract termination costs regarding duplicative network, distribution channels, and backhaul services, severance costs about redundant processes reduction, and distribution of antenna systems to attain synergies in network costs. From the financial statements, the merger is expected to bring in total revenues increase of US$352 million in the first quarter and US$11.3 billion as of the end of September 2021. The components of the changes include an increase in postpaid revenues of US$595 million for the first quarter and US$5.5 billion of nine months. Strong net income of US$691 million and diluted earnings per share of US$0.55 are evident in the merger-related costs with the adjusted earnings before interest, tax and dividend and amortization being US$6.8 billion.
The increase in revenue results from higher average postpaid accounts with prepaid revenues totaling US$98 million and US$192 million for the three months and nine months, respectively. Service revenues decreased US$124 million and increased US$342 million for the nine months. Higher lifeline revenues associated with operations acquired in the partnership between T-Mobile and Sprint. However, a decrease in equipment revenue was evident during the same period. The statements show a consistent and profitable customer growth with postpaid net additions totaling 1.3 million. A strong financial result drive is evident in the statements as record-high service revenues amounting to US$14.7 billion are evident from the post-paid service revenues.
Collated Financial Ethics Plan for the New Merger
The merger between T-Mobile and Sprint follows various financial ethics providing advice for the companies to navigate the process. The companies follow due diligence during pre-closing and post-closing, especially in the evaluation of each partner. The companies, in pre-closing activities, have evaluated the environment where each conducts its business and found it to be of moderate risk. They have also performed an assessment of current compliance culture, as well as vetted the third parties associated with each company. The post-closing activities included conducting ethics and compliance training to employees to address the relevant risk areas. T-Mobile and Sprint have also ensured that all workers are aware of the mechanisms in place for reporting any misconduct.
Another financial ethics plan involves independence and objectivity where T-Mobile as the successor firm will review whether independence standards are satisfied to avert independence impairments. Issues of financial accounting after the merger will be guided by the AICPA Code of Professional Conduct. The plan has also followed competence and due professional care where the two companies indicated that they have the necessary knowledge and skills to complete an engagement. The merger has exercised due diligence concerning the two companies’ differences and similarities, as well as types of clients and operations in the telecommunications industry (Garcia, 2018).
Conflict of interests has also been addressed during the merger process. These conflicts may stem from the trusts and beneficiaries of the companies. As such, solid client termination process has been put in place. The companies have also agreed to strictly enforce confidentiality agreements as T-Mobile and Sprint have exchanged trade secrets and sensitive employee and customer data. Training of employees will be done to ensure that they are aware of their responsibilities and implications of violating the confidentiality agreement (Manne et al., 2018).
New Financial Strategy to Enhance the “One Company” After the Merger
T-Mobile and Sprint understand that merger deals stumble after the integration phase due to improper planning. The new strategy to enhance the “one company” involves cost savings versus revenue enhancements. The new company will analyze the balance sheet and income statement data to ensure they comply with the generally accepted accounting principles. The consistency in data obtained from Sprint and T-Mobile will be evaluated to ascertain the total value of each company’s assets. The company will inspect the zero values for all variables and replace any missing values of the underlying ration components and the unjustified value of zero. The accounting department will scrutinize the company’s Return on Assets, non-interest income, loan on equity, and loan loss provisions over net interest revenue (Basha, 2016).
The merger between T-Mobile and Sprint indicates a net present value of US$43.6 billion in cost savings. The company leverages on building a better 5G network than either T-Mobile or Sprint would have on their own. The cost-saving strategy will end duplicative spending to provide the merger with an economic benefit. It will save the companies US$25.7 billion from elimination of duplication of Sprint’s and T-Mobile’s existing networks and US$11.2 billion from sales, services, and marketing costs while back office synergies from general and administrative synergies, as well as, IT and billing improvements are set to save US$6.1 billion. The strategy will, therefore, integrate the finance and operations teams and drive and track synergies.
Analysis of Joined Company Investments and Recommends Strategies
The joined company investment between T-Mobile and Sprint would see an increase is device sales revenue of US$3.3 billion, which excludes purchased leased devices. Further, an increase in sales of accessories would be witnessed due to an increase in retail store traffic and large customer base from the merger. An increase in liquidation revenues from the increase in high-end device mix and return devices would create more revenues for the new company.
T-Mobile and Sprint understand that there is a need to make strategic decisions on the increasing volatile environment in which the telecommunications companies operate. Risk minimization and returns maximization will be affected by factors, such as technological changes, unpredicted changes in regulatory policies, recent trends in competition, network effects, and exigencies of capital markets. The new company will employ a moderate finance strategy to maximize returns and minimize risks. The moderate strategy is centered on the oscillation of the working capital around zero level and adoption of low positive values.
The strategy will consider the uncertainty estimates, for example, variability in bandwidth demand, growth rates in demand, costs of maintenance, early adoption of 5G network and other technologies, as well as the risk-free rate. These factors are important in ascertaining the optimal timing in investments to ensure maximum returns. Fixed assets financing will involve equity and long-term outside capital while allowing for moderate use of financial leverage and tax protection. Values of liquidity rations will ensure a safe liquidity level. The strategy will find a compromise between financial risk and profit.
Industry Trend Analysis for Merger’s New Financial Sustainability
Among the telecommunications industry trends include the need to roll out network in all rural areas for optimum coverage. However, concerns have been raised over Sprint’s poor network in the rural areas, which raises questions about Sprint as a merger partner. T-Mobile quality coverage in the rural areas will boost Sprint’s failures in the sector, thus attract more customers for new financial suitability. Among trends in the industry include the problems occasioned by COVID-19 related costs, which are expected to hit US$450 to US$550 million before taxes. Adjusted earnings before interest, tax, and dividend is projected at between US$6.2 to US$6.5 billion in half year after merger.
The industry faces opportunities from renewal of focus on customers’ needs through customer engagement, convergence and remixing entertainment experiences through entertainment bundles and new service offerings. There is an active repositioning to monetize advanced wireless networks using new business models and products. Companies in the industry are moving with speed to roll out the 5G wireless technology, which is also gaining traction among consumers (King, & Schriber, 2016).
The 5G network promises to provide players in the telecommunications industry with real-time visibility and unprecedented control over their products, services, and assets. It also provides a new frontier for transforming how companies operate and deliver improved services, thereby providing new financial sustainability. The 5G will likely provide opportunities for innovativeness and help enterprise customers attain first-mover advantages. 5G will provide financial benefits in areas of edge computing capabilities, especially in Internet of Things devices, for example, sensors.
Financial Risk, Cost of Capital, and Risk Tradeoffs
The merger has been analyzed and presents opportunities for financial risk reduction and risk tradeoffs concerning each working alone and working together. Risk reduction is a core reason for the merger as it will allow the new company to increase its leverage, thus take advantage of the tax shield provided by debt to a huge company. The company managers would want to reduce risk, thus reducing the chance of getting fired for poor performance. Managerial wealth is tied up in the company, managers will seek to mitigate the firm’s risk to diversify investment. Asset diversification offered by the merger as each company has its unique strengths will result in reduction of financial risk through consolidation of assets of the acquirer and target (Branch, 2019).
The risk tradeoffs stem from the notion that Sprint has poor network coverage in the rural areas, which might make some customers reluctant to embrace the new company’s products as they feel that Sprint will come in to lower the quality of services T-Mobile provides. However, a tradeoff arises as Sprint customers see an opportunity for an upgrade from T-Mobile expertise and strengths. Since Sprint is riskier than T-Mobile, the power of diversification will reduce the risk associated with the target company.
The merger-related costs of capital will be affected by restructuring and integration activities expected from the merger, increasing throughout 2021 and 2022. During the time, the new company will try to implement initiatives to meet cost efficiencies from the merger. Transaction costs, for example, professional and legal service fees for the merger and acquisition affiliates will reduce after the merger.
References
Basha, V. J. (2016). Financial performance analysis of post-merger and acquisition. International Journal of Business and Administration Research Review, 1(1), 1-21. https://ssrn.com/abstract=3874819
Branch, T. (2019). The Merger of T-Mobile and Sprint. Available at SSRN 3429281.
Garcia, J. (2018). Mobile, Sprint Finalizing Merger. UWIRE Text, 1-1.
King, D. R., & Schriber, S. (2016). Addressing competitive responses to acquisitions. California Management Review, 58(3), 109-124.
Manne, G. A., Morris, J., Stout, K., & Hurwitz, J. G. (2018). ICLE Comments in Opposition to Petition to Deny T-Mobile-Sprint Merger. Available at SSRN 3384792.
Leave a Reply