Friday, October 12, 2007

Dropped Call Earns Ousted Sprint CEO $55.3 Million in Severance

Disappointed with weak financial results, including lowered sales guidance in coming quarters and larger than-expected subscriber losses, the Board of cell phone carrier Sprint-Nextel Corp. (S-$17.99) finally pushed out Chairman and Chief Executive Gary D. Forsee on Monday.

Gary Forsee orchestrated Sprint's troublesome $36.8 billion takeover of Nextel in 2005, promising efficiencies from expanded economies of scope/scale.

Footprint of Failure

Integration initiatives intended to merge networks, technology platforms, and customer care and billing services took longer than Forsee or the Company predicted—which proved to be a distraction, having an adverse effect on the Company’s results of operations.

The difference between genius and stupidity is that genius has its limits. ~ Physicist Albert Einstein (1879 – 1955)

Forsee miscalculated the costs of integration, too.

In February 2005, Forsee communicated to shareholders that “the integration costs [would] be significant, $800 million will be an estimate of the integration cost that will be provided to allow us to take care of branding, to take care of systems, to take care of any reduction in workforce as we look at the combination timeline and schedule.”

Each quarter, each further step to reduce a sprawling cost structure only resulted in more red ink—and more employees losing their jobs.

In the 1H:07, total severance, exit costs and asset impairment costs aggregated $259 million compared to $78 million in the prior year period.

In fiscal 2006 and 2005, Sprint recorded net charges of $620 million $723 million, respectively, primarily related to merger and integration costs, asset impairments, severance and exit costs.

Updated Financial Guidance

The Company pre-announced a loss of about 337,000 dissatisfied net postpaid customers for the 3Q:07. Management blamed the defections on increasing churn, due to customer service problems with its
code division multiple access (CDMA) technology, and on customers fleeing Integrated_Digital_Enhanced_Network (iDEN), due to capacity constraint issues with Nextel’s iDEN network.

Straining capacity problems—an overloaded wireless system, due to the addition to the network in recent years of many high-call-volume subscribers; limited effectiveness of the 6:1 voice coder upgrade in the iDEN technology (designed to increase network capacity); and, the impact of the reconfiguration process under the Report and Order (which implemented a spectrum reconfiguration plan designed to eliminate interference with public safety operators in the 800 MHz band).

As part of the announcement, Sprint also said operating income would fall below the expected $11 billion to $11.5 billion range and revenue would not meet the expected $41 billion to $42 billion range either.

Operational Metrics

In addition to failing to wrest customers from Verizon Wireless and AT&T Inc., the beleaguered Forsee stumbled in trying to integrate Sprint’s wireless standard (known as CDMA) with Nextel’s iDEN wireless networks, systems which operated on different technology platforms and used different spectrum bands.

The merger, contrary to Forsee’s best efforts, splintered from the start, given the difficulties in developing an integrated customer service platform and wireless devices and other products and services that operated seamlessly off the multiple legacy platforms in existence.

Not surprisingly, Sprint was the only big carrier to show churn divergence during the period 2Q:06 – 2Q:07, increasing from 2.10% to 2.25 percent.

Selected subscriber data revealed that weighted average monthly service revenue per user continued to erode, falling from $62 in 2005 and 2004 to $57 for the second quarter-ended June 30, 2007, primarily due to decreases in pricing (due to competitive market pricing), incremental customer acquisitions at lower average revenues, and existing customer migrations to lower priced plans.

Pay for Non-Performance

In August 2005, CEO Forsee said: “In this challenging environment, leadership is about ensuring that the individuals in [our] organization know what our priorities are. We are working hard to make sure our employees know how important they are. If we do that, the legacy of Sprint's winning culture will be reinforced.”

Sadly, Forsee’s legacy is a myopic vision fraught with a telecom company struggling to veer back to a path on which it can compete profitably against larger rivals,
AT&T Mobility and Verizon Wireless.

According to available proxy documents, Forsee’s contract calls for a severance outlay of about $55.3 million, which includes base salary, option incentives, and retirement benefits of approximately $2.9 million, $48.5 million, and $2.7 million, respectively.

Ironically, the bulk of Forsee’s severance was effective and conditioned sufficiently on the completion of the merger—not on the success of the combined venture!

Messer. Forsee, however, did not receive any excise tax reimbursement.

No legacy is so rich as honesty. ~ William Shakespeare (1564 - 1616), "All's Well that Ends Well", Act 3 Scene 5.

Little consolation, however, to the approximately 5,000 workers who learned just ‘how important they were’ to Sprint after being
terminated in 2006—in one of Forsee’s poorly executed attempts to achieve “$1.0 billion in adjusted OIBDA benefit from anticipated synergy attainment” through headcount reductions.

Too bad honesty doesn’t pay as well as a sycophantic Board of Directors ~ David J. Phillips

Editor David J. Phillips does not hold a financial interest in Sprint-Nextel Corp. The 10Q Detective has a Full Disclosure Policy.

No comments: