Diversification sometimes turns into di-worse-ification. The opposite of the concept, cutting away underperforming sprawl from the business model, can remake a conglomerate into a leaner, meaner competitor in a select few core markets. IBM did it with great success in the 1990s, and General Electric (NYSE: GE ) couldn't have survived for more than a century without applying this austere principle every now and then. Just last year the company publicly floated the idea of spinning off its iconic lighting and appliance businesses.
But sometimes that Occam's razor cuts too close to the bone or cuts off the wrong parts altogether. You could cripple a company that way. That's why I don't think that Sprint-Nextel (NYSE: S ) should spin off its long-haul networks, as The Wall Street Journal suggests that it might.
According to the Journal's unnamed sources, Sprint is talking to Level 3 Communications (Nasdaq: LVLT ) about a possible consolidation of the two companies' long-distance data and voice networks under a joint venture. The idea is to create a very large combined network that could pose a more formidable challenge to larger rivals like AT&T (NYSE: T ) and Verizon (NYSE: VZ ) than the two participants could do on their own.
It's not gonna happen, for several very good reasons:
- Level 3 is buckling under a punishing debt load of $6.4 billion with only $671 million in cash. Sprint has a $21.6 billion total debt to worry about, but also $4.5 billion of liquid assets with which to keep the lifeblood of business flowing.
- Qwest Communications (NYSE: Q ) already tried to auction off a similar unit, but received no bids it deemed high enough for the assets and withdrew the offer. The telecom community at large seems leery of this sort of deal -- and I don't see how this one would be any better than Qwest's.
- And most importantly, it would leave Sprint living or dying almost exclusively by its wireless phone division. In the last three years, Sprint has already removed (through a spinoff and joint venture) its local phone service and WiMAX wireless broadband operations, and we're already starting to cut into the bone here.
I'd understand if Verizon or AT&T wanted to simplify, because they're the 900-pound gorillas in several markets each. But Sprint is merely a third-place also-ran in the wireless market, and I sincerely doubt that the Palm (Nasdaq: PALM ) Pre launch provides enough momentum to turn Sprint into a contender anytime soon.
So I hope that Sprint's management sees all of these issues and backs away from the deal table with contracts unsigned. Sign that dotted line, and you could be killing your own company in the long run.