Why This Buyout Boosted a Totally Different Stock Past the Actual Target

Shares of mobile network operator Clearwire (Nasdaq: CLWR  ) are flying high today, jumping as much as 41.5% overnight. The boost comes from confirmed reports that Clearwire's dearest partner and 49% shareholder, Sprint Nextel (NYSE: S  ) , is in buyout talks with Japan's third-largest wireless network.

In a strange twist, Sprint's shares only gained 21% on the news. Why is the second-generation company jumping higher than the actual buyout target?

It's actually pretty simple. Under the project code-named "Network Vision," Sprint is investing heavily into its own networks right now, hoping to get a fully functional 4G LTE network in play. The Apple (Nasdaq: AAPL  ) iPhone and, frankly, most smartphones worth the moniker don't support the WiMax network that Clearwire runs and leases out to Sprint.

So Clearwire is converting its WiMax network to the LTE standard, the better to complement Sprint's own operations and stay in the picture. But it's a double race against the clock. You see, Clearwire burns cash like the Spanish Inquisition burned witches and Sprint's free cash flows are dipping dangerously close to negative territory as well.

In short, Sprint could use some deeper pockets in order to finance its LTE-based business plans. Clearwire lives and dies with Sprint's support, and this suggested buyout would remove a ton of risk from the company's future. In the long run, a Softbank-owned Sprint could even make a play to acquire Clearwire outright and merge the two budding LTE networks.

And yes, Softbank really does have deep pockets. The company sits on a $9.6 billion cash cushion and has seen its Tokyo-listed shares rise more than 27% in the last six months. Softbank has a history of buying smaller companies in stock-swap deals.

It's unclear exactly why Softbank would want to expand into the American market, but foreign telecoms are no strangers here. T-Mobile USA is a wholly owned division of German giant Deutsche Telekom and British operator Vodafone (Nasdaq: VOD  ) owns about half of Verizon (NYSE: VZ  ) Wireless in a joint venture.

This deal wouldn't exactly turn the American wireless market on its head, but it would make Sprint a much stronger minority option. Add in the proposed merger between T-Mobile and MetroPCS (NYSE: PCS  ) , and we're looking at a seismic shift. The small guys are growing stronger.

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Fool contributor Anders Bylund has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 13, 2012, at 1:28 AM, CDIGently wrote:

    Good article! Cleverly follows the thread leading to necessary and capital intensive 4G LTE network building.

    And by the way, contrary to common belief the Spanish Inquisition burned very few witches and actually came to forbid or strongly discourage this practice, while it still flourished elsewhere in Europe. As for North America, witches were not getting a gentler treatment at that time. The Inquisition's victims were heretics, real or supected. But witches were not the "actual targets".

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