Business valuation consists of considerations of various factors. Financial as well as managerial performances are all important traits that determine the value of a business. Analysis of a business should take account of its past as well as present performances in order to develop a thorough understanding of the nature of the business. Furthermore, a comprehensive observation of past and current performance is required to understand corporate culture and its ability to face future challenges and sustain growth.
Within this paper, we will evaluate Sprint Nextel Corporation, a US-based telecommunication company that holds a large share of the world’s wireless telecommunication market. As suggested above, first we will evaluate corporate background, including history and the nature of the industry. Afterwards, there will be analysis on the corporation’s current performance and their recent strategies.
II. Corporate Background
II.1. Business Activities and the Industry
II.1.1 Business Activities
Sprint Nextel Corporation is one of the three largest wireless companies in United States based on the number of wireless subscribers. It is a global communications company offering wireless and wireline communication products and services. Corporate operations are divided into three lines: wireless, long distance and local and corporate customers are divided into two types, individuals and business and government agencies (‘Sprint Annual Report 05’, 2006).
The company has extensive wireless networks and a global long distance, Tier 1 internet backbone. The company provides regulated local exchange telephone services to more than 7 million access line around 18 states in America. It provides local and long distance voice and data services, including DSL, services and other telecommunication-related services to customers in the mentioned service areas. Together with third-party affiliates, the company also offers wireless service in all 50 states, Puerto Rico and US Virgin Islands (‘Sprint Annual Report 05’, 2006).
.II.1.2. Industry Characteristics
Telecommunications has become one of the fastest-growing businesses in the world today. In the 20th century, development that related to communication and communication businesses has been simply overwhelming. Prior to the new millennium, total telecommunication revenues in United States alone were in excess of $260 billion. This revealed a 10% industry growth compare to the previous 4 years. As we enter the new millennium, there were more than 100 million mobile wireless subscribers in the United States alone. The growth was not only supported by growth of population and consumer’s interest, but also furled by new technologies and applications such as the wireless telephone and the internet (Mun, 2002).
Another characteristic of the industry is its capital intensive nature. It has been recorded that to generate revenue of $56 billion, the largest telecommunication company, AT&T invested $ 234 billion in the form of capital assets. The capital intensive nature is also related with the existence of new technologies and applications. In order to be successful within this industry, players must make the right decision in investing sizeable capital to the right direction of development. Sometimes, investing to an unproven technology can result great future benefits as the technology become the new platform of future communication products and services. The right choice of technology will create sustainable competitive advantage, first-to-market benefits, operational efficiencies, industry recognition, etc. On the contrary, the wrong choice of technology with no strategic alternatives will lead to lasting weak competitive advantage because the dead-end technology already tool considerable financial and operational resources (Mun, 2002).
The company was discovered by Cleyson Leroy brown as a Brown Telephone Company. The company was a landline telephone company that operated as a competitor to the bell system. The company experienced a time of bankruptcy and emerged as a new company called United Utilities. After periods of steady growth, the company changed its name again to United Telecommunications in 1972. The name Sprint was derived from Switched Private Network Telecommunications a new service offered by the company the late 70’s (‘History’, 2006).
In 1986, the US Sprint was formed as a result of merger between GTE Telenet, UR telephone, Uninet and ISACOMM. In 1989, the United Telecom purchased controlling interest in US Sprint and in 1991, United Telecom changed its name to Sprint. The company acquired Centel and became provide of local service in 18 states. It was not until 1995 that the company started t offer wireless service under the Sprint PCS Brand. There are several other acquisitions performed by the company since 1995, however, the most notable is the merger with Nextel in 2004. It was a merger between the number 3 and number 5 greatest players of US mobile phone industry (‘History’, 2006).
During the 21st century, the company displayed stable increase of their stock value. During 2003, revenue was reported to experience a small downturn, but the stock prices continue to go up nonetheless. However, for Sprint’s employees, the company might have performed poorly as it laid-off more than 22,000 workers in 2003 alone. The lay-off was a part of a multi-year financial restructuring that continued through 2004 (‘Sprint Corp’, 2006).
III. Sprint’s Current Condition
III.1. Progress and Profitability
From 2003 to 2005, the company experienced a positive sign of continuous growth. Revenues increased 4% from $26.2 billion to $27.4 billion during 2004, while during 2005, revenues increased by 26% from $27,4 billion to $34.6 billion. In 2004 however, the company experienced a loss instead of profit as displayed in 2003 and 2005. Nevertheless, this did not decrease investor’s expectations because the loss was due to significant acquisition for future expansion. The wireless division accounted for more than 50% of Sprint’s revenues for fiscal 2004. The division has been the only factor that causes revenue growth over the last three years (‘Sprint Annual Report 05’, 2006).
For instance, the local division accounted for only 21% of Sprint’s revenue in 2004. The division reported a $6 billion revenues in 2004, which is 1.8% lower compare to 2003. 2002 also displayed a decreasing performance of the local division. This division is considered the weakest among others (‘Sprint Annual Report 05’, 2006).
The long distance division on the other hand, accounted for 27% of Sprint’s revenues in the financial period of 2004. The high competition resulted a 148% increase in loss during 2003. However, the division displays apparent prospects of growth by obtaining contracts and plans to focus on making its operations profitable. Compare to the local division, this division displayed better future possibilities of profit (‘Sprint Annual Report 05’, 2006).
III.2. Analysts Opinion
III.2.1 Industry Development
Analysts also indicated that Sprint Nextel Corporation will still experience considerable growth in the future because the industry can sustain further growth. Jeffry Bartash (2006) from Marketwatch indicated that the industry still has plenty room to expand despite the constant predictions of slowdown. The reason for such comment is the emerging new technologies like movie or video downloads that can function as the new market niches to explore. Analysts also mentioned that competition will continue to become stronger resulting tighter margins and more widespread market share.
As many has suspected, growth will still come from wireless services instead of wireline services. However, according to market analysts, the future growth of the industry will not be from people who never had wireless services. The new market niche is coming from the data market. There is a good tendency that provider of wireless services will be competing to expand their networks to offer wireless internet access at faster access speed. The data market is the future ground of competition and growth for communication companies.
Analysts also stated that the increasing level of competition will create increasingly lower profit margins in several segments, however the market growth of the wireless data services is expected to offset the decline in profit margin. The most popular data services today is still email and instant messaging, however, communication companies has design platforms to offer new services like the songs and video clip download. The problem remains on how to increase the speed of access for wireless data and how to distribute them to customers with relatively low prices.
III.2.2. Sprint Nextel’s Response to New Market Niches
To address such challenges, Sprint Nextel Corporation has invested considerably in developing a $3 billion project to build a ‘WiMax’ network that will be completed in 2008. WiMAx is a technology used to make home network that could transmit more data at greater speed and over longer distances. It is an enormous investment, but the company is positive that over time, the low-cost to run such a network would decrease considerably and reduce wireless-internet access price (Bartash, 2006).
However, not all share the view of Sprint Nextel’s. Sprint’s competitors have a skeptical view of the company’s plan and they display weak intention of following Sprint’s lead. Some analysts indicated that the Sprint’s managers are encouraged to invest in such a risky project like WiMax because they cannot afford to fall further behind their competitors like AT&T Inc, Bellsouth Corp and Verizon (Bartash, 2006).
III.2.3. Sprint Nextel and its Rivals
As indicated previously, Sprint operates in a highly competitive industry. Some of its notable competitors are: Cingular, Verizon Wireless, AT$T, T-Mobile, Altel, etc. Analyst indicated that compare to its rivals, Sprint has poor credit management operations. The company signed up too many customers with poor credit histories. Competitors like Verizon and Ford on the other hand, has taken a core careful path of servicing customers. They prefer to aim at the pots-paid and high-spending customers (Bartash, 2006).
Analysts also stated that the company has a marketing team that failed to compete with the success of other companies in marketing some products. The company leaves opportunities for competitors to fill in the market niches they ignored. Nevertheless, Sprint’s managers are still confidence that the new hybrid phones from the combination of Sprint and Nextel’s technology will increase corporate performance in the last quarter of 2006.
However, as a consequence, rivals are pleased with the existing market niches. For example, Cingular (owned by AT&T) put significant emphasis on introducing the Razr, the market niche which was ignored by Sprint Nextel. The Razr turned out to be the best selling phone in the United States and contributed significant revenues for Cingular that boosted its growth. However, as competitors have taken interest on the Razr, Cingular turned to the data network, as other communication companies did (Bartash, 2006).
In comparison, Sprint Nextel has a positive working capital while larger companies in the same industry tend to have a negative working capital. Sprint also has a cash position that is much stronger than its closest competitor, Verizon. Furthermore, current position of long term debt for Sprint is 4.4% of sales while at Verizon, it is 11.9% of sales. In terms of receivables turnover, Sprint are better with 41.3 days compare to Verizon who needs 48 days. The only factor that is in favor of Verizon is the amount of net income. Sprint performs worse in terms of net income because of a $3.5 billion worth of write-down of long distance assets, which is a non-cash asset (Bartash, 2006).
III.3. Current Strategy of Competitive Advantages
With the increasing competition all over the industry, Sprint must adapt by performing novel strategies that might seem ‘brave’ for some managers. Some of those strategies are:
· Due to the lack of growth displayed by the local segments, Sprint decided to spin–off a portion of the local phone carrier to shareholders. The local segment is still contributors of 21% of Sprint’s revenues, but its declining prospects are alarming managers and owners. Some analysts even indicated that the segment is a potential source of more debt in the future. They suggested that the best thing Sprint can do now is to accelerate the process of spinning-out local segments (‘Google Answers’, 2006).
· In order to be responsive toward existing opportunities and market niches, the company strived to generate cash for further investment. For instance, by the end of the second quarter of 2005, cash and equivalents rose to $ 6.8 billion from $ 4.6 billion at year end. The increase in cash was the result of more profitable wireless towers as the company concluded leasing arrangement with Global Signal in February 2005. Sale of company’s audio conferencing business has also contributed to the increase in cash. Other ways to generate more cash is by selling portions of the business that does not fit with long-term directions (‘Google Answers’, 2006).
The overall impression taken from the analysis above is positive in nature. The company has high prospects of further growth due to the expanding industry resulted by increasing interest in more advanced wireless data transfer technology and the abundant market niches from other innovations. Thus, there are considerable reasons of why we should invest within the company. However, there are several issues that will generate problems if the company lack attention toward them, they are:
· First, due to the high investment nature of the industry, it is critical for Sprint to ensure that their decision making processes include well structured method that recognizes both the benefits and pitfalls of a particular investment. Previous experience indicated that there are several market niches that slip-away from Sprint’s attention, and on the other hand, the company seems to invest in riskier projects that competitors hesitate to invest-in. The company should develop a clearer and quicker method of gathering information in timely manner to support better and more accurate decision making.
· Second, the company should manage its financial condition better. Sprint has always been recognized as a fast-growing company making bold investments and large development projects. Investors generally invest their money because they have faith in Sprint’s ability to take advantage of opportunities, as it has always did. However, the company has a weak financial structure that could strike some investor as incapable of fulfilling corporate responsibilities. Recently, the company has deployed strategies to increase the amount of cash available, however, those strategies should be supported with better management of receivables and better capital structure. Investors should take better watch of the financial structure in case of a sudden change of market prospects.