This morning, after the announcement from Softbank that it is in advanced talks to acquire a large stake in Sprint Nextel Corporation (NYSE:S), shares in both that firm and Clearwire Corporation (NASDAQ:CLWR) have spiraled upward in what can only be described as frenzied market action.
The price put on Sprint, according to this morning’s reports, is $12.8 billion for an estimated 75% of the company. After today’s dizzying rise, Spring Nextel Corporation is worth $17.33 billion in market capitalization. 75% of that number is just under $13 billion.
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Along with the rise in Sprint stock there has been an associated, but much larger rise in the value of Clearwire Corporation (NASDAQ:CLWR). The failed mobile data carrier is trading up over 38% in this morning’s trading. That puts its market capitalization at around $2.58 billion.
The rise in Clearwire Corporation (NASDAQ:CLWR) is predicated on the theory that a purchase of Sprint by the Japanese firm will result in closer ties with the struggling firm. Clearwire is saddled with a mountain of debt and a large chunk of that most rare of natural resources, mobile spectrum. Sprint Nextel Corporation (NYSE:S) owns just over 48% of the shares in the Clearwire.
Investors in Clearwire have been waiting for some king of movement inside, or outside, the firm that would allow them breathing room. It appears today’s announcement provided that impetus. Whether or not long term holders of the stock take today’s rise as a signal to leave, or one to hold on, will be informative, though it is unlikely much information on that will be available today.
A research note published by Bank of America Corp (NYSE:BAC) after this morning’s announcement, put a twelve month price target of $6 on Sprint Nextel Corporation (NYSE:S) shares. The report highlighted the serious nature of the talks, and explored some of the paths Softbank might take should it acquire control of the company.
The first of these is, of course, the establishment of a transcontinental high speed mobile broadband network. Such a network would have many benefits for the Japanese broadband giant. It would allow it to compete in the US market, and, more importantly it could reduce its costs.
According to a Wall Street Journal article published today, Clearwire uses the same wireless standard, TDD-LTE, that Softbank uses in Japan. A purchase of the company and the complementary investment in networks in Japan and the United States, means the company could save on technology development and capital investment.
Such a large acquisition is unlikely to be made on the presumption of lower future costs. There is also the chance that a Sopftbank-Clearwire-Sprint conglomerate might have a decent chance at real competition in the US wireless carrier market.
A more interesting, and complicated, theory is that Softbank simply wants to pull value out of Sprint Nextel Corporation (NYSE:S), by merging it with T-Mobile, a US subsidiary of Deutsche Telekom AG (FRA:DTE) (PINK:DTEGY) (ETR:DTE). A rumored merger between the companies did not surface in the past year, and instead the two fought fiercely for control of a third smaller carrier, MetroPCS Communications Inc (NYSE:PCS).
There are incredible risks weighing on investors who wish to take advantage of this deal. It may be too late to do so now, as the increase in shares of both firms seems to have slowed considerably in the last couple of hours.
This deal will still have to go under anti trust approval and approval by the FCC. It will take a long time to be closed, and trading in the stock will be reliant on the turns and twists of that process. Large mergers are a minefield of exogenous risks, only those who know a great deal about the telecom sector should feel safe putting their money behind this deal.
Despite the risks, Sprint Nextel Corporation (NYSE:S) is now up by almost 19%, while Clearwire Corporation (NASDAQ:CLWR) has risen by over 40%. Shareholders will wait with bated breath for any further details of a possible merger, or a substantial investment from Softbank