Sprint and Business Combinations Research Paper:
Sprint has engaged in a various business combinations over time. Research the business press and Sprint’s 10-K. Describe Sprint’s business combination activities. Consider the following questions as you examine Sprint’s activities.
• What motivates Sprint to engage in business combinations? What does the company hope to obtain as a result?
• Have all of their combinations been local, i.e. only U.S. based combinations? What are the implications of foreign based combinations?
• How is Sprint accounting for its business combinations?
• Examine the financial statements of Sprint. Is there any evidence of non-controlling interest, foreign translation costs, goodwill, or goodwill impairment? Discuss how/why these elements exist for Sprint.
• Has Sprint been successful as a result of its business combinations? How can “success” be measured?
Sprint was incorporated in the year 1938 and operates as a holding company whose businesses and revenue generation is achieved through its several subsidiaries. Its core business is in the facilitation of the communication process by offering wireless and wire line services to different individuals and private consumers. In the course of its operation sprit has participated in business combinations with local US companies and even foreign entities. For instance, recently SoftBank Corp purchased 70% of Sprint’s shares in order to increase its volume and make itself one of the largest communication companies in the world. Similarly, Sprints’ WiMax combined with Clearwire to form one company and in the process boost their business.
What motivates sprint to enter into business combinations
The nature of services that the company renders is increasingly gaining on demand. People and business are beginning to realize the importance of internet to their businesses and personal lives. Irrespective of whatever career or business sector one operates in, the internet and communications play a vital role. Owing to this, network technologies are among the fastest changing technologies. In order to remain at the top, it is imperative that the company keeps abreast with all these new technologies or become the initiator. The knowledge that the market is growing lagers by the tick of the clock and that new technologies will always find always sell. Sprint is motivated to enter business combinations to realize it new goals. Mergers with international businesses increase its market and broaden their range of technologies (G4+1 (Organization) & Financial Accounting Standards Board., 2003).
Benefits of business combinations by Sprint
Before Sprit contemplates getting into a business combination with another company, there must be an additional advantage it hopes to acquire. Some of the targeted benefits include the following:
Reduction of competition: the communications industry, particularly in the US is dominated by a number of companies in the U.S. Each of these companies strives to outdo the others ensuring they are offering the best, most efficient and reliable communications networks using the latest technologies. At certain periods Sprit realizes a competitor has a potential technology that would easily reduce its market hold. Consequently, sprint may opt to form a business combination with the company in order to eliminate the looming threat of competition (Arthur Andersen & Co., 2006).
Competing in the international market
Sprint began offering its services in the US market. Presently it renders its services to fifty states and extends to Puetro Rico. However, the US market is only a fraction of the global market that is in need of the communications services. This can be internet network of mobile communication technology. Given its strong business model, different companies in the international markets can seek mergers in order to utilize its technologies in the international market. This gives Sprint a wider market base and therefore generates more revenue for the company. One recent acquisition is SoftBanK Corp and Sprint (Byrd & Society of Management Accountants of Canada. Accounting Principles and Practices Committee., 2003).
Application of the latest technology
The dynamics of the communications industry are first changing and companies with the most advanced technologies will often call the shorts in terms of the highest number of clients in the market. And the amount of revenue they collect. Sprint identifies the technologies that seem to have great potential in the provision of wireless and wireline communication products and services and approaches them for business combinations. For instance, it discovered the potential of virgin mobiles and brought it under its wings. This has been beneficial form the amounts of profits it reaps through this initiative (Wyatt & Kieso, 2002).
Cutting down production costs
For most of the communication companies, the initial costs met in ensuring the transmissions are up to standard and reliable are similar. This implies that the companies can share transmission boosters and save on the initial costs. Sprint identifies the companies that use similar technologies to what it uses and proposes business combinations in order to cut on the production costs. Alternatively, a competitor firm could approach Sprint seeking the same.
Control the communications rates
Sprint is known to have some the most favorable rates in the market, both for its prepay and post pay options. Moreover, its monthly internet subscriptions are affordable. In case a competitor firm advances with a much cheaper option, Sprint may seek to form a merger in order to keep its rates as before. Consequently, it shields itself from competition that could drive it out of operation.
Nature of combinations and benefits for the company
Sprint has engaged in a number of combinations in the recent past. Some of these combinations have mainly been companies within the United States such as Nextel, one of it major combinations and lesser ones such as leap wireless (LEAP). These combinations have been mainly useful increasing the customer base in the US and cannibalizing competition. However, Sprint has also done major combinations with international giants such a SoftBank for capital reasons. SoftBank is the third largest mobile subscriber in Japan. It purchased almost three quarter of Sprint’s stocks making its largest shareholder. The acquisition came just as the company was preparing to purchase Leap wireless (LEAP) and Metro PCS. This was significant in providing the capital required for this venture.
In other instances, Sprint could take up combinations with international companies in order to take advantage of an upcoming and potential market. The new company may be having difficulties penetrating the market but due to Sprints readily available cash collateral. the company could receive backing and increased range of communication technologies. For instance, the company has business combinations with communication business mogul, Carlos Slim and other Chinese network providers. The two have been instrumental in shaping the success of the company in the new markets. Such combinations also give the company the advantage of not having to learn the attributes of their new customers. The new company it joins often understands the foreign market and offers he company a starting point. This is a boost for any new business in a new market.
Accounting for business Combinations
From its financial statements, Sprint classifies its business combinations as either wireless or wireline technologies. It classifies all its subsidiaries as with wireline or wireless technologies depending on the services it offers. For instance, Virgin Mobile is treated as its wireless prepaid option. Revenues from each of these businesses are then consolidated and transferred to the accounting records as revenues fro the wireline or the wireless category. In case any of this business combinations withdraws form the combinations, its is reflected as discontinued operations. Moreover, all the expenses incurred in the merger process are treated as merger expenses and used to reduce the company’s earnings.
Similarly, form its financial records; there is no evidence of controlling interest in its subsidiaries operations. The figures indicate that the company simply collects a certain fraction of their sales revenues. Again, under the wireless category, Sprint classifies the subscribers as prepaid or post paid. It then classifies its earning based on these criteria. If the company had control interests in the companies then financial records would have been analyzed per individual company. Imposing a particular commission on all operations is amore viable option since it allows the company to cut on its operations as costs and focus on greater business opportunities such as identification of the best business mergers in the market.
Foreign translation costs that would arise in case of business combinations with foreign countries are not indicated in the financial statements. Returns form these foreign entities are converted into the main transactional currency, the US dollar and posted in the financial records. The costs incurred are treated as expenses by the subsidiary company and do not count as Sprints operational expenses.
Good will and good will impairment are common phenomena in the company’s financials statements. Good will represents the value by which the purchase price of a new business or entity exceeds its fair or true value of all its assets combined. Sprint calculates the goodwill annually especially in situations where the carrying amount is still way above the fair value of the acquired asset. Good will impairment refers to the negative implications of the good will on the company’s performance. These implications could be indicated by a reduction in the price of the company’s share, a decline in its market capitalization or adverse alterations in the legal structure defining the operations of the company.
Determination of good will helps the company evaluate the additional costs it concedes in taking up an investment whose value is way above its market price. Carrying the amount annually helps gauge how long the company takes before growing its acquired asset form its fair vale to the exceed the purchase price it gave away during the combination process. Often this acquisition costs is inclusive of the expenses incurred in the process. The impairments help gauge the effect of paying the substantial good will on the market. For instance, a decline in the share price or market capitalization indicates a negative feeling about the purchase by the public. Depending on the company’s reason for the undertaking, such impairments can be influential in determining future purchases by the company (Nickerson, 2000).
Generally, Sprint has been a successful company. Success is dependent on a company’s ability to meet the goals for which it was established. For instance, Sprint was established to aid in communication in the US and other nations. It targeted provision of both wireline and wireless technologies in the facilitation of communication. So far, it has managed to do this successfully and has even grown its capital base since inception. Reasonable growth attained throughout its the duration of operation indicates that the come has realized substantial gains that have enabled to attain such remarkable growth (Benchmarking identifiable intangibles and their useful lives in business combinations, 2012). Another measure of success is the change in customer base. Sprint has grown its customer base form a few number of customers to millions of customers world wide. The fact that it has grown to be ranked as one of the largest communication companies that trades in the New York Stock Exchange is also in its elf an indicator of success.
Arthur Andersen & Co. (2006). Accounting for business combinations : interpretations of APB opinion no. 16 : accounting for business combinations. North Vancouver, B.C., Canada: STP Specialty Technical Publ.
Benchmarking identifiable intangibles and their useful lives in business combinations. (2012). Portland, OR: Business Valuation Resources.
Byrd, Clarence E., & Society of Management Accountants of Canada. Accounting Principles and Practices Committee. (2003). Business combinations and long-term intercorporate investments, the Canadian view. Hamilton, Ont.: Society of Management Accountants of Canada.
G4+1 (Organization), & Financial Accounting Standards Board. (2003). Methods of accounting for business combinations : recommendations of the G4+1 for achieving convergence. Norwalk, Conn.: Financial Accounting Standards Board of the Financial Accounting Foundation.
Nickerson, Clarence B. (2000). Accounting handbook for nonaccountants (3rd ed.). New York: Van Nostrand Reinhold.
Wyatt, Arthur R., & Kieso, Donald E. (2002). Business combinations: planning and action. Scranton,: International Textbook Co.
Sprint and Business Combinations Research Paper: