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For a buyer, Sprint Nextel could be a drag

Analysis: Deutsche Telekom, other suitors face big risks in merging

By Jeffry Bartash, MarketWatch

Last Update: 5:54 PM ET May 5, 2008

WASHINGTON (MarketWatch) — If Deutsche Telekom AG is weighing a bid for Sprint
Nextel Corp., investors in the German company better weigh in, too. Such a deal
is fraught with peril.

On some levels a merger makes sense for Deutsche Telekom. The owner T-Mobile USA
Inc., the nation’s fourth-largest mobile phone carrier, it has more than 29
million subscribers, but future growth could be limited unless it obtains more
wireless airwaves and upgrades its network to deliver faster Internet speeds.

An acquisition of Sprint (S), the No. 3 U.S. wireless carrier with about 53
million customers, might help T-Mobile do both.

However, the path to those goals would be quite rocky, and shareholders probably
wouldn’t see a return on their investment for a long time. As the troubled Sprint
Nextel marriage shows, Deutsche Telekom (DT) could be forced to spend billions of
dollars over several years to integrate its new assets — with no guarantee of
success.

Sprint’s failure to fully integrate Nextel into its own business after the 2005
merger says a lot about why the company’s stock now sits near a six-year low.
Sprint and Nextel used incompatible wireless technologies and had very different
corporate cultures — issues that would also confront Deutsche Telekom and
Sprint.

The result has been shoddy customer service and repeated network glitches,
prompting millions of former Sprint subscribers to defect to rival carriers.
Sprint’s revenue actually declined in 2007 for the first time in five years and
the carrier has been forced to write off nearly the entire value of its $35
billion purchase of Nextel.

“This [Deutsche Telekom] deal would make the situation at Sprint now look like a
honeymoon,” said Jane Zweig, a wireless consultant at the Shosteck Group who was
an early skeptic of the Sprint-Nextel merger. “It would be a nightmare.”

Indeed, Sprint reportedly is considering plans to sell or spin off its Nextel
business. Such a move could make it a more attractive buyout target to Deutsche
Telekom, and it also would amount to an admission of failure.

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