A merger is comes into effect when two companies join together to form one company. After merging, the companies may more often than not harmonize their operations to the satisfaction of all stakeholders. There are many reasons why companies merge, most of the time, mergers are financially motivated. There is no question that in case of a merger the overall profitability will increase and this is certainly good news for the share holders. In the case of two profitable companies merging, their client base will most likely remain the same and thus the revenue generation will not be affected. After the merger, the new company will have to restructure its operations and this involves retrenching some people. This means, that costs will be cut significantly and thus increase in profitability of the company. When it comes to tax liability however, it is not obvious that, the tax liability will be lower; in fact it may be higher. It all depends on the profit margins that the company will generate. In the past we have witnessed many companies merge, with very but extremely confidential reasons. Two companies in a very competitive market may merge especially if the stake holders feel they are losing ground in order to have a competitive edge in the market. Companies merge for many reasons, for instance a profitable company may merge with a loss making company in order to offset their profits with the losses, so as to continue their expansions as a whole. Whatever the reasons are behind a merger, it is for the overall benefit of the share holders and hence wealth maximization.
T-mobile and sprint are the third and fourth largest companies in the United States. If they two companies do merge, it would combine the third and fourth largest wireless carriers in the country. Sprint and T-Mobile have both struggled to hang on to customers that are drawn to AT&T and Verizon, the two biggest wireless carriers in the U.S (Wall Street journal, 3/8/2011). The overall profitability of both corporations after the merger is no doubt set to increase. This is especially possible because, after the merger the corporations will have to restructure and even merge other operations of the companies. First thing that will be on the spot light is the staff, given that each company had its own staff doing the same operations as the other, then this staff will have to be reduced and possibly end up with a staff equal to that of one company. This is one aspect of cutting down costs. This mode of restructuring will affect all departments of the corporation, especially those whose functions are duplicated. This implies that most of the costs incurred by the two corporations combined will be reduced to be almost equal to that of one entity. On the other hand, with the two corporations combined, the revenues generated by the two corporations will be added together and compared to diminished costs of the resulting merger. As a result the overall profitability of the two corporations after the merger will be higher, that when the two corporations are not merged. This is all due to the significant reduction of the operational costs. Increase in the profitability of a company, means that the shareholders wealth is maximized. The merger of T-mobile and Sprint will no doubt add value to the shareholders from the point of view of overall profitability.
The profitability of T-mobile and sprint merger and the impact the merger may have on the shareholders of both sprint and t-mobile is distinct and may not necessarily be same in either side of the divide. The nature of the impact on t-mobile shareholders may be different from the impact that sprint shareholders may experience. The impact of the merger on the shareholders and the overall profitability of the two corporations are different in many aspects. The overall profitability of the two corporations may be higher, but the shareholders may not necessarily be happy about the merger. This may be because after the merger, the shareholders of one of the corporations may end up losing control of the corporations. This is certainly not attractive to any shareholder. If the merger of t-mobile and sprint in addition to more profits, means keeping the status quo especially in relation to control of the corporations, then the merger will 100% add value to the shareholders in all aspects, with the impact being a favorable one. However, that is just but an ideal situation and things may not necessarily work out in that manner. The fact that a favorable impact to the shareholders is not guaranteed, the shareholders wellbeing should be scrutinized by the respective shareholders. Sometimes it is not all about profits per see, ownership and control of your company matters. The impact of the merger on the shareholders of both t-mobile and sprint will go a long way to demonstrate, the satisfaction of all shareholders and this has a bearing on the value added to the shareholders.
Both t-mobile and sprint have not had a smooth running with the market, especially with regard to the customers in general. T- Mobile and sprint have had a rough time holding on to customers in this ever competitive market. The shareholders of both t-mobile and sprint would do anything to ensure stability in the market, and that is why they are going for the merger. From the point of view of an investor in these two corporations, the question is; how bad can it get? There could be an impact on the shareholders, but not necessarily the unfavorable one. The impact on the shareholders will most likely be more welcome and acceptable to both corporations, when looking at the overall profitability of these corporations as a combined entity. However the bone of contention is in relation to the control of the combined operations. In some instances, when a merger takes place, some companies end up being acquired, rather than a merger. The number and value of shares that each company will exchange will to a large extent determine who will be the dominant player in the merger. And this is where sprint has the edge. After the merger, sprint is set to take control of more than half of the combined entity. This empowers sprint to decide on who will run the combined company after the merger. This is certainly good news to the shareholders of sprint. On the other hand the shareholders of t-mobile will lose the controlling power in the company. This is certain not a favorable outcome for the share holders of sprint, as it makes t-mobile the minority shareholder.
The financial condition of t-mobile and sprint is no doubt in good shape, but not in the excellent shape as the shareholders would like to have it. T-mobile has pointed out earlier, has immense resources and thus the financial muscle to not only build but also sustain networks in a big platform. The latest audit reports of both t-mobile and sprint, give the two companies a favorable evaluation as regards the authenticity of the corporations. This goes a long way to show that the financial condition of these companies is in good shape. Besides, favorable reports encourage potential investors and even customers to invest more in the company and thus ensuring the overall financial of the company. The financial ability of the two corporations set aside, one thing stands out though, the market. In the past and even now, both t-mobile and sprint are not the customer favorites. This has made it extremely hard for them to hold on to their customers in this fragile market. This is one the key areas that determines the profitability of the two corporations. Given the intense competition in the market, the merger of t-mobile and sprint would be the solution to solving their customer retention abilities.
T-mobile and sprint have other financial problems of their own, that have led them to merge with each other in order to complement and tackle the set backs. T -mobile has fallen behind technologically and the only way it can get back to its footing is to merge with sprint. T-Mobile is the U.S. subsidiary of Deutsche Telekom AG, and it is falling behind in the next-generation-network-building race. Merging with Sprint could give Deutsche Telekom a boost in that race without a major investment (Wall Street journal, 3/8/2011). This implies a merger with sprint is fundamental for t-mobile for its survival in the fierce market. Sprint on the other hand incurs a lot of cost and the fact that sprint is currently in debt, hence a merger with t-mobile will most likely solve the problem and thus enhance the profitability and value to the shareholders. Sprint could save a lot of money on marketing and overhead by merging with T-Mobile. They could use some savings; Sprint is currently in debt (Wall Street journal, 3/8/2011). Given the financial and technological difficulties faced by t-mobile and sprint, a merger is no doubt a welcome idea, if they have to remain competitive in the market arena.
Given the financial difficulties facing sprint, and the technological setbacks experienced by t-mobile, a merger will no doubt be a success. T-mobile has the resources and thus will cover sprint in the finance sector, while on the other hand, sprint is well placed in a technological aspects, hence in a position to compliment t-mobile. This implies that the combination of these two companies will be profitable in the long run. Apart from complimenting each other in the key weak areas, the operational costs and revenue generation is another aspect that will make the combined entity more profitable than when it is not. The revenue will be of the two companies combined while the costs will be cut down significantly. This will ensure overall profitability of the combined entity. Efficiency and expertise is the other factor, which gives the combined entity an edge in the market. In the event of a merger, t-mobile and sprint will have the pleasure to pick only the best from the staff they have at their disposal. This means the combined entity is more likely going to be more profitable combined than not. Another factor that may work in favor of the combined entity is completion. Given that t-mobile and sprint take position three and four, they would tend to compete and outdo each to get a head of the other. However in case of a merger, this will no longer be the case. Instead of focusing and strategizing on how to outdo each other, the combined entity will focus more on how to enhance their profitability. The merger of t-mobile and sprint will by all means be more profitable and therefore will add value to the share holders.
The merger may be attractive, but it could have its pitfalls, that may make it not be profitable and appealing to the share holders. The new combined entity will bring in different people with different ideologies and thus may result to slow decision making. The company may even lose lucrative opportunities due to slow nature of making decisions. This has the effect of reducing the profitability of the combined entity. The other factor is the retention of customers. The new entity may fail to appeal to the customers and hence, the combined entity may lose their respective customers and therefore loss of revenue. The other aspect is tax liability, as a result of increased profitability, the overall tax liability may increase and thus lowering the overall profitability of the combined entity. However the tax liability may not have a big impact, but efficiency will affect the combined entity. Given that restructuring will take place, new people will be brought to work together, and this may affect the efficiency of the combined entity in the initial stages. Decreased efficiency implies, less profitability.
Comparing the potential pitfalls of the merger and the benefits with regard to profitability and value to share holders, there is no doubt; the merger option is more appealing compared to retaining the status quo. The merger of t-mobile and sprint is essential to enhance profitability and value to the share holders.