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Desperate Times

The Martin Chronicles
The Martin Chronicles
The Martin Chronicles
10/26/2006

6:00 PM -- The invaluable Oligopoly Watch has an interesting post on "increasingly bold acquisitions in the oil industry," pointing to a Financial Times story on the recent $2.1 billion purchase of a share in the Shenzi oil field in the Gulf of Mexico from BP by Spanish energy group Repsol YPF. The deal priced the field's oil reserves at $100 a barrel.

Crude-oil futures fell by more than $1 a barrel to just over $60 on the New York Mercantile Exchange today. That means that Repsol paid around 66 percent above the current market value of the oil in the Shenzi field to acquire the reserves.

"As country after country privatizes its oil fields and as Chinese state-run oil companies snap up assets, the prices have risen to seemingly absurd levels," writes the Oligopoly Watch commentator. "As in many industries, fear seems to be as big a motivator, if not bigger, than greed. We've seen such a feeding frenzy in other businesses, where [fear of] being left out outweighs prudence."

Sounds like what's happening in the telecommunications business. Look at Sprint Corp. (NYSE: S). The company reported quarterly earnings today down 52 percent year-over-year, despite a 35 percent jump in revenues. The cause? Ongoing costs from the $36 billion "merger of equals" between Sprint and Nextel, announced in December 2004 and finalized in August 2005.

At the time, the deal was seen as a marriage of necessity for Sprint, the No. 3 wireless operator in the U.S., to avoid being swamped by its larger, faster-growing rivals, Cingular Wireless and Verizon Wireless . That argument ignored the fact that Nextel, with its enterprise walkie-talkie focus, and Sprint, a leader in wireless data communications with a strong mass-market presence, was "not a puzzle piece fit," as one analyst dryly put it.

Since the merger was completed, the Sprint Nextel customer base has essentially flatlined, while Verizon Wireless has added more than 7 million net new subscribers and Cingular over 3 million.

Was this a merger of desperation? "Get big or get out" is once again the rule among telcos, as AT&T gobbles up the remnants of the former Ma Bell, and also among networking equipment vendors, where Lucent/Alcatel and Nokia/Siemens are among the larger M&As announced recently.

T-Mobile US Inc. , meanwhile, long rumored as a takeover candidate, is seemingly pursuing an independent strategy of risky ventures like its pilot WiFi/cellular offering in Seattle. It'll be interesting to see how that strategy fares as rivals choose larger and larger conglomerations. (See T-Mobile Pilots WiFi/Cell Service.)

— Richard Martin, Senior Editor, Unstrung

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