Sprint Calls Up T-Mobile, Wireless Rivals Share a Need to Get Bigger but Disagree on Price, Ownership

Merger talks are heating up, this time in the telecom space.  Strategic acquisitions are often a quick way to gain scale, reduce operating expense, and expand into geographic and client segments when organic approaches are not succeeding.  With this merger, a combined Spring/T-Mobile would be in a class with their larger competitors – Verizon and AT&T.

Some of the potential benefits from a merger include lower operating costs and replacement of Sprint’s CDMA network.  Combined, Sprint/T-Mobile could gain efficiencies from scale and better compete on price.  As Spring and T-Mobile are considered as the two providers that compete most of price, this could extend that strength.

As with many mergers, this one faces a number of hurdles.   The success depends in large part of the ability of Sprint to integrate networks and technologies, the funding is substantial, and converting existing phones to the new platform will be a hurdle.

What is forgotten is that one of the larger reasons that mergers fail is the inability to mesh two different cultures.  Bain in 2004 found that over 70% of mergers fail to increase shareholder value, and Hay Group found that 90% of European mergers fail to reach financial goals.  According to Hay Group, only 13% of business leaders site that integrating management was given high priority.  Which is in part due to the fact that 78% of target company employees oppose mergers, with 50% actively opposing.

http://online.wsj.com/article/SB10001424052748704758904576188460213670064.html?mod=

Sprint Nextel Corp. is again discussing options for combining its business with rival T-Mobile USA, as the two struggle to keep customers from defecting to larger rivals.

Sprint and Deutsche Telekom are again exploring options for combining Sprint with T-Mobile USA, but there are hurdles that make a deal unlikely in the near term. Spencer Ante and Peter Kafka discuss with Lauren Goode on digits.

A transaction would combine the third- and fourth-largest wireless carriers in the U.S., but the two sides disagree over what T-Mobile USA is worth and a quick deal is unlikely, people familiar with the matter said.

Sprint has recently stemmed subscriber losses but the carrier still lacks the size to compete for hot devices like Apple Inc.'s iPhone, which both AT&TInc. and Verizon Wireless carry. A deal would let the heavily indebted company book big savings on marketing and overhead.

T-Mobile USA, a subsidiary of Deutsche Telekom AG, is falling behind in the race to build next-generation networks. It also will soon need more spectrum. A deal could help the German parent solve those problems without heavy investments.

Any deal also would likely bring significant scrutiny from antitrust regulators. A merger would leave only three national players in the market and would combine the two that are most aggressively competing on price.

American Airlines and Disintermediation

Interesting article about how American Airlines is attempting to disintermediate the middleman, or GDS, from how airline customers purchase their tickets.  GDS had been downgrading AA content on its screens, a source of consternation for AA.

By going direct to clients, American is hoping to bypass GDS.   It's a risky strategy that could cost them customer business by limiting their distribution channels.  But the benefits of succeeding could be significant.  GDS is the 800 pound gorilla of the airline sales channel. If AA can pass on the savings to clients, it could build a pricing advantage over its competitors.

http://online.wsj.com/article/BT-CO-20110118-716678.html

American Airlines Reaches Pact With Priceline

AMR Corp.'s American Airlines signed a new distribution pact with online travel agency Priceline.com, giving the airline some traction in its high-stakes drive to overhaul how airfares are sold to U.S. consumers.
American said Tuesday that the website of Priceline.com Inc. will get the carrier's fares and schedules directly from American instead of a global distribution system, or GDS, which has long acted as a middleman between airlines and travel agencies.

The agreement with the fourth-largest U.S. online travel agency by bookings comes as American risks becoming isolated amid escalating disputes with other key intermediaries that oppose the airline's attempts to cut distribution costs and reduce the middleman role of GDSs.

American is also battling with Sabre Holdings Corp., which owns the largest GDS and Travelocity.com, the third-largest online travel agency. American secured a temporary restraining order against Sabre from a Texas court last week after Sabre began displaying American's fares less prominently than those of rival airlines. The next court hearing is in February.

American, like many other airlines, sells about two-thirds of its seats through third parties. But several other U.S. carriers are also eager to cut their distribution costs and sell more tickets directly to consumers, though they have avoided full-blown disputes with key intermediaries.