Sprint‘s stock has been taken to the cleaners because the company’s new CEO, Daniel Hesse, has taken the bold step of giving his honest — brutal — assessment of the company’s current and likely future performance. Two quick observations:
- While it makes sense that investors would head for the exits after Hesse announced the company’s $29.5 billion loss, no one should act surprised about this performance. Sprint has been ailing for a long time now, as reflected in the musical chairs among its top executives and . . . well, take your pick of symptoms: the company has been stinking it up for a while.
- It seems clear that the culprit for all of this is Sprint’s 2005 acquistion of Nextel. Again, no one should act surprised, since it’s well established that most mergers fail.
The lack of surprise didn’t keep analysts from coming up with artful ways to express the fresh dose of grief that Hesse laid down yesterday. I particularly like this paragraph from the New York Times story on the earnings announcement:
“No one expected Sprint’s results to be anything other than poor today, which makes the fact that they have managed to miss on virtually every metric a performance of some heroism,” wrote Craig E. Moffett, a senior analyst at Sanford C. Bernstein & Company. Further, he wrote, “the near-term contrarian argument of a turnaround — or, better, a strategic acquisition — remains highly speculative.”
So why do companies pursue deals like this? Well, have you ever made a move in life that left you holding your breath and hoping it would work out? “It’ll work out,” you tell yourself, “It’s just got to!”
Wouldn’t it be great if shareholders could count on better judgment than that from every high-powered executive? Unfortunately, they can’t, as this Knowledge@Wharton piece on failed mergers makes clear:
Wharton management professor Harbir Singh, who has done extensive research on mergers, says that the crucial distinguishing factor between success and failure in a merger is a sense of objectivity on the part of executives — a “realistic outlook” that needs to be maintained from the initial transaction through the entire integration process. The danger, it seems, is when executives “fall in love” with the idea of the acquisition, wanting it to work no matter what the cost.
Even executives are human: they see the potential upside of the deal — both for their company and for themselves — and their desire for things to work out overwhelms their better judgment.
Three Harvard researchers have come up with a list of “Nine Steps to Prevent Merger Failure,” from “no guiding principles” to “poor stakeholder outreach” to “cultural disconnect.” At least a few of these have affected the Sprint-Nextel combination, as the latest wave of reports on the company’s poor fortunes makes clear. What’s so sad (or enraging, if your an investor in the company) is that company management didn’t do more about them sooner.
Now for the bigger question — a theoretical one for you and me, but the make-or-break question for Hesse and his lieutenants: Can the patient be saved?