For a fleeting period it looked as if Sprint Nextel's (S) beleaguered chief executive, Gary Forsee, might pull through. After the second quarter, Sprint announced slowing subscriber losses and a revenue gain—albeit very modest.
But as one industry executive put it, "They pulled the wool over investors' eyes."
The truth is, very little has improved at Sprint. Analysts and industry experts note that the quarter ending in June is usually one of the industry's best periods, when low-income customers use tax refunds to buy more calling time. The third, or summer, quarter is more telling. So when Sprint announced late on Oct. 8 that it would suffer a net loss of nearly 337,000 billed subscribers and that full-year sales and operating income would miss earlier targets, it also announced that the 57-year-old Forsee was out.
Now, Sprint's board of directors is wrapping up an accelerated search to replace him with a candidate who can resurrect the limping telecom carrier. With the help of executive search firm Spencer Stuart, the board is evaluating several candidates from the U.S. and overseas. The goal is to name Forsee's successor in as little as two weeks and no later than 30 days, sources say.
Seeking Unshackled Execs
Sprint cast its line overseas not only to broaden the pool of strong candidates but to avoid the snare of noncompete contracts often held by executives who have worked at other U.S. telecoms, says one industry recruiter with knowledge of the process. Landing Forsee from BellSouth was a struggle because of a noncompete clause in his contract at the time.
Potential hires from outside the U.S. include Sanjiv Ahuja, the well-regarded former CEO of European wireless carrier Orange, and William Morrow, a former Vodafone (VOD) turnaround executive who is now president and chief operating officer at Pacific Gas & Electric (PCG).
Other candidates include Andrew Sukawaty, a former Sprint exec and CEO of satellite player Inmarsat (ISA.L), and Daniel Hesse, CEO of Embarq (EQ), the local phone division recently spun out by Sprint. Sukawaty is said to be leaning against taking the job.
Ahuja and Morrow had been interviewed for the Sprint COO job, which Forsee and the board had been looking to fill for more than a year. For that position, sources say Sprint also considered or approached telecom execs such as former BellSouth President and COO Mark Feidler and William Hannigan, No. 2 at AT&T (T) before it was acquired by SBC Communications. Noncompete clauses in both executives' contracts raised red flags.
How Sprint Got Into This Mess
Whomever the board picks, Sprint's new CEO will face perhaps the most daunting telecom turnaround in years. Once an innovation and marketing force (remember hearing a pin drop?), Sprint has become an industry also-ran. Several of Forsee's key strategic initiatives, once held up as strokes of daring, are now in serious question.
He had hoped to elevate Sprint's competitive stature by aligning with cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC). Those operators compete with AT&T and Verizon Communications (VZ) by offering voice service using Sprint's landline and wireless networks. Industry analysts say Sprint's relationship with the cable companies has been strained as Sprint has turned its focus to future technology initiatives (BusinessWeek.com, 8/18/07). The beauty of Forsee's strategy was that it required only a couple hundred million dollars in up-front investment for integration of marketing and billing systems. But what was once seen as strategic leverage for Sprint to compete with the other telcos might be seen as a needless distraction by the new chief. "Clearly, with Forsee's exit, this is up in the air," says Ed Lewis, a managing partner at consultant RelevantC Business Group (RCBG) in Chicago.
Similar questions surround Forsee's biggest bet, the 2005 merger with Nextel. That deal made Sprint bigger, but the company has since struggled as a schizophrenic combination of disparate technologies and corporate cultures. The new leader will somehow need to accomplish what Forsee couldn't: make the Nextel merger work. Sprint has yet to move more than 15 million Nextel customers onto its network, according to UBS (UBS) analyst John Hodulik. That means Sprint has been forced to invest additional capital to support two networks, customer service teams, and billing systems. "They need to accelerate the move," says Hodulik.
Or Sprint could cut its losses and move on. The losses in Sprint Nextel's customer base are coming mainly from the Nextel side, where service and support has deteriorated. And the new CEO wouldn't have to justify the merger the way Forsee did, says one industry executive. A new leader could take the radical step of making a multibillion-dollar write-off and offering incentives for Nextel customers to migrate to the Sprint network.
Then there's the question of what to do with some of Sprint's noncore businesses. Essentially, Sprint is a wireless company that is under pressure by some investors to sell its long-distance and much smaller wholesale businesses. This year, UBS estimates that Sprint's traditional long-distance business will produce about $6.4 billion in sales and $915 million in earnings before interest, depreciation, taxes, and amortization. But the business is on the decline. Last year sales shrunk 4%, and adjusted operating income slipped 10%. "It is not strategic," says UBS's Hodulik. Analysts admit the long-distance business wouldn't be an easy sell, but it could find a buyer in telcos Qwest Communications (Q) or Level 3 Communications (LVLT).
Above all else, Sprint must settle on the strategic importance of its broadband wireless technology. About two years ago, Sprint Nextel announced it was building a nationwide network using speedy WiMAX technology, which promises to let users surf the Web on the go—in a car or walking down the street—at rates comparable to the fastest home Internet connections. With the $5 billion WiMAX bet, Forsee determined that Sprint could vault ahead of Verizon and AT&T in next-generation data services by as much as four years.
Initially the plan was to launch in a trio of top markets, such as Chicago, by the end of the year. But now the target is closer to April, 2008. Worse, the cost and challenge of operating dual networks has raised the ire of one key board member, according to a source familiar with the situation. One option being considered is spinning out the WiMAX service, called Xohm, into a separately operating unit managed by Sprint and Clearwire (CLWR). Sprint and Clearwire teamed up this summer to jointly own and operate the WiMAX network. The idea would be to offload the capital-expenditure requirement to Clearwire, allowing Sprint to preserve capital, one banker says.
Spinning out Xohm has its own perils, though. Clearwire would likely take a greater role in promoting the WiMAX technology and operating a nationwide network. With the loss of Sprint's heft and influence, the fledgling effort could founder, giving rivals time to standardize their own next-generation mobile services. Then, too, Sprint will have lost the long-term differentiator that could set the company apart from the crowd. "The new CEO brings every single business to the table for reevaluation," says RCBG's Lewis. "WiMAX is years from scaling to a significant part of the business. There are no sacred cows."