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Net Present Value & Mergers: Sprint and T-Mobile

Net Present Value, Mergers, and Acquisitions

Part I of this cse assignment is related to capital budgeting decision and part II is about mergers and acquisitions.

Part 1:

Net Present Value (NPV) method is one of the most important methods which is used to make capital budgeting decisions by almost every company. NPV method is important because it helps financial managers to maximize shareholders wealth by making better capital budgeting decisions.

Suppose T-Mobile corporation is considering a new project that will cost $4,000,000 (initial cash outflow). The company has provided the following cash flow figures to you:

Year /Cash Flow
0 /-$4,000,000
1 /350,000
2 /1,700,000
3 /2,000,000
4 /500,000
5 /3,000,000

If the T-Mobile's cost of capital (discount rate) is 6%, what is the project's net present value? Based on your analysis and findings, what would you recommend to the executives and the shareholders of T-Mobile Corporation? Should the project be accepted? The shareholders of T-Mobile would also like to know the meaning of NPV concept.

2) Calculate NPV

Part II:

T-Mobile - Sprint Merger?

Rumors about potential mergers are often a hot topic in the business press. One rumor being floated around recently is a potential merger between mobile phone giants T-Mobile and Sprint. Mergers between two large companies are always complicated, but some have noted the possible synergies in 4G technologies that might be possible in such a merger.

As you know from reading the material in the background materials, mergers can bring about great rewards but also can bring great risks and pitfalls. For this assignment, do some research concerning the arguments both for and against such a merger from a financial perspective. For this module we are not so concerned with how consumers may fair, as this is an issue for the government to consider if they have to approve this merger. Instead you are considering this from the point of view of whether or not such a merger would be a profitable undertaking that would add value to the shareholders of both corporations.

Answering the following questions and the questions in part I:

Do you think a merger between Sprint and T-Mobile would add value to the shareholders of both corporations?

Based on your analysis and findings (Part I and Part II), what would you recommend to the shareholders of both corporations? Should both companies merge? Please explain your reasoning.

In your answers to the primary questions in part II, consider the following issues:

1. The impact on T-Mobile shareholders

2. The impact on Sprint shareholders

3. The financial condition of both corporations (do not forget to consider the new project proposed by T-Mobile in part I)

4. Why might T-Mobile and Sprint combined as one company be more profitable than they would if they remain independent?

5. Potential pitfalls - might the combined entity actually be less profitable than either company operating independently?

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Solution Preview

Please see the attachment for formulas and calculations. The OTA interface is no good at graphics or symbols.


NPV=âË?'_(t=0)^(t=5)â-'ãâ?¬-ãâ?¬-CFãâ?¬â?"_0/ãâ?¬-(1+r)ãâ?¬â?"^0 +ãâ?¬-CFãâ?¬â?"_1/ãâ?¬-(1+r)ãâ?¬â?"^1 ãâ?¬â?"+ãâ?¬-CFãâ?¬â?"_2/ãâ?¬-(1+r)ãâ?¬â?"^2 +ãâ?¬-CFãâ?¬â?"_3/ãâ?¬-(1+r)ãâ?¬â?"^3 +ãâ?¬-CFãâ?¬â?"_4/ãâ?¬-(1+r)ãâ?¬â?"^4 +ãâ?¬-CFãâ?¬â?"_5/ãâ?¬-(1+r)ãâ?¬â?"^5

Where: t= Periodic cash flow payments (in this case, years)
CF= Cash Flow amount
r= Discount rate

Substituting the given values for the T-Mobile project:

NPV=âË?'_(n=0)^(n=5)â-'ãâ?¬-(-$4,000,000)/ãâ?¬-(1+.06)ãâ?¬â?"^0 +$350,000/ãâ?¬-(1+.06)ãâ?¬â?"^1 ãâ?¬â?"+$1,700,000/ãâ?¬-(1+.06)ãâ?¬â?"^2 +$2,000,000/ãâ?¬-(1+.06)ãâ?¬â?"^3 +$500,000/ãâ?¬-(1+.06)ãâ?¬â?"^4 +$3,000,000/ãâ?¬-(1âË?"06)ãâ?¬â?"^5


NPV= $2,160,242.55
T-Mobileââ?¬" the American subsidiary of Deutsche Telekom AG (ETR:DTE)ââ?¬" acquiring Sprint Nextel Corporation (S) would add value to shareholders of both corporations. A horizontal deal of this size is also not unprecedentedââ?¬"in 1998, Exxon and Mobile, previously fierce competitors, completed a $77.2 billion merger, (Gaughan, 2001, p1.4). The merger would combine many benefits of each competitor under a single bannerââ?¬"providing the opportunity for both rapid growth, as well as various synergies.
Rapid growth opportunity is the most intuitive benefit of the potential merger. Rather than slogging through internally generated growth on their own, a combined company offers immediate market-share growth for shareholders (Gaughan, 2001). For example, Sprintââ?¬â?¢s US based fourth generation network (4G) claims 9% of the total market share, but 75% of the 4G customers (Churchill, 2010). Compare this to T-Mobileââ?¬â?¢s 12% market share on its ââ?¬Å"3G+ââ?¬Â? capable network (Churchill, 2010 and Wolpin, 2010). Merging these two American market shares would result in the 3rd largest customer base behind Verizon and AT&T. Such a result would be worth a short-term cash investment from both sides of the mergerââ?¬â?¢s shareholders. Additionally, this considers only domestic market share. T-mobile is a subsidiary of the German giant Deutsche Telekom, which commands a massive presence in the European marketââ?¬" an immediate benefit to Sprint shareholders.

Synergy is really what attracts merger and acquisition projects. T-mobile and Sprint would be no exception. From marketing opportunities, network infrastructure upgrades and performance, as well as customer ...

Solution Summary

Uses hypothetical cash flow to provide detailed illustration on how to calculate Net Present Value (NPV) to begin with, then moves on to consider a potential merger between Sprint Nextel and T-Mobile. Illustrates basic concepts of M&A deals such as stake-holder value considerations, synergy, and the financing of an M&A.

1,500 words (6 pages) APA format with references.