Why can’t telecom providers be a house of brands?

Procter and Gamble is a house of brands. Each brand is run like a business with its own P&L. There is no attempt to bring together all the brands nor is there a need to do so. When they acquired Gillette, a company by itself, it came as another brand under P&G. There were no integration hassles or costs. What can’t a telecom company be like P&G?

When AT&T acquired Cingular Wireless, the network was completely integrated and the Cingular brand was quickly subsumed under at&t brand. When Sprint bought Nextel, they rebranded themselves as Sprint Nextel but attempted to integrate the two networks. Sprint Nextel expended considerable capital trying to integrate the two networks and is reported to be in the market to sell off Nextel, an admission that the merger did not work.

Why did Sprint try to integrate Nextel’s networks and operations when the two technologies and customer segments were completely different? Why did they not attempt to let Nextel brand stand by itself and preserve the network as is? When a telecom company acquires another why can’t they keep the separate companies as is without integrating the customers, the operations, the systems, the networks and the brand?

After all the positioning of the two companies and their customer segments have little overlap.
Sprint could have been the P&G of telecom, with multiple wireless offerings (like the Pantene and Head & Shoulders).

The answer lies in the valuation of the target at the time of acquisition and the strategic rationale. If we look at Sprint’s reasoning in 2004,

  1. Combination of Sprint Nextel will create America’s premier communications company — a leading wireless carrier augmented by a global IP network that will offer consumer business and government customers compelling new broadband wireless and integrated communications services.
  2. Expected to deliver operating cost and capital investment synergies with an estimated net present value of more than $12 billion.

The answer lies in the synergy calculation, lot of things ride on the value of the combined operation. The value of Nextel depended on the $12 billion NPV of synergy which requires the complete integration of operations. Without the integration, there is no cost savings or spillover effect and the merger itself may be questionable.

So acquiring Nextel, just to run it as its own operation would have required Sprint to value the deal by at least $12 billion below the $71 billion price tag. Nextel shareholders would not have agreed to that price.

When Sprint Nextel wrote down $20 billion in goodwill it showed that the deal was overvalued. The rumors about Nextel spin-off show that synergy is easier said than realized.

Next up, Deutsch Telecom is reported to be looking to by Sprint Nextel. Once again there are multiple technologies, DT’s T-Mobile USA uses GSM and its evolution while Sprint used CDMA and Nextel uses iDen. DT having seen the Sprint Nextel integration efforts will not attempt the same. If a deal has to happen then DT has to see Sprint Nextel by itself as a positive NPV acquisition and run Sprint Nextel brand in parallel with T-Mobile brand.

That will be an interesting experiment to watch and learn.