The fallout from one of the messiest mergers in American history appears to have entered its final stage on Monday, March 30th, when Sprint agreed to pay investors $131 million in a settlement dating back to the beleaguered 2005 Nextel acquisition. Lauded at the time as the creation of a telecom dynasty, technological incompatibility led to executives delivering false optimism to investors about the profitability and cost-savings stemming from the deal from 2006-2008. Instead, the merger ultimately led to a goodwill write-down of $29.5 billion in 2008, costing the company nearly as much as the $36 billion acquisition itself. Pending final court approval, the settlement ends a grueling 6-year fraud lawsuit, certified as class action in 2014.
When the company made its 2004 announcement, Sprint rocked the booming communications industry, combining the 3rd and 6th largest wireless carriers. Sprint CEO at the time, Gary Forsee, claimed over $12 billion in cost-savings from the merger and predicted immense profitability for investors. This never happened; however, as Nextel’s iDEN network was ultimately incompatible with Sprint’s CDMA network, causing massive inefficiencies due to managing the dual platforms. The inefficiency was especially costly for the Nextel side of the business, with thousands of subscribers leaving en masse. By early 2008, the company’s stock had dropped 25 percent. The subsequent lawsuit became a marathon affair that included 8.7 million documents, 65 subpoenas, 40 depositions, and several attempts at mediation. While Forsee, listed as a defendant, claimed no wrongdoing, the $131 million settlement was only a small fraction of the estimated $1.079 billion dollars in actual damages. Forsee resigned in 2007 amid shareholder pressure, although terms of the settlement include denials of liability for all defendants.
Despite the costly price tag, the settlement should give the company some sense of relief. As analyst Bill Ho explains, “The decision to settle may simply be chief executive Marcelo Claure clearing away the cobwebs of a distant past.” The lingering effect of litigation has continued to help keep Sprint’s stock price volatile, and the hope is that closure will create some stability on Wall Street. Claure is 2 CEO’s removed from Forsee’s disastrous tenure, and despite the eye-popping settlement amount, it is only roughly equivalent to 2 days of business revenue. It may be a small price compared to the continued specter of the merger, which has been widely panned as one of the worst in history. The settlement may finally enter the deal into the annals of scholarly history and away from news headlines.
Bloomberg Business – Phil Milford
Kansas City Star – Mark Davis
RCR Wireless News – Dan Meyer
Reuters – Jonathan Strmpel