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Mar. 13, 2009

Sprint Nextel now faces a class-action shareholder lawsuit that alleges the company didn't disclose some serious technical problems with its purchase of Nextel Communications which made the company’s stock look more attractive.

The class-action lawsuit was filed Mar. 10 in the U.S. District Court of Kansas by a single shareholder, Cora Bennett.

It would cover shareholders who owned the company’s common stock between Oct. 26, 2006, and Feb. 27, 2008. Damages have not been specified as of yet.

In the complaint, Bennett states that Sprint’s merger with Nextel turned out to be a real nightmare when the two companies failed miserably in successfully integrating their networks which use very different and incompatible technology.

In the process, Sprint Nextel has lost thousands of subscribers.

Sprint spokesman Matt Sullivan said “Sprint will continue to operate in full adherence with all federal securities laws.”

At the time of the merger, Nextel operated its wireless network over its proprietary iDEN technology, which proved extremely difficult to integrate with Sprint’s legacy and industry-standard CDMA network.

The class action lawsuit states that during the first year after the merger, Nextel experienced severe technical problems due to rapidly degrading call quality, dropped calls, network instability and rebanding necessary to limit interference between the iDEN network and public safety radios systems.

Despite a serious loss of customers and a rapidly plummeting stock price, the complaint states that the company whitewashed problems with its network, subscriber churn and customer service, assuring the market that initiatives were working and the company was poised for a turnaround, nevertheless.

However, in December 2007, the company conceded that its initiatives weren't working and that it had experienced significant deterioration in its subscriber base.

In its fourth-quarter earnings release on Feb. 28 of last year, the company reported it lost $29.5 billion, due in large part to a $29.7 billion writedown related to its Nextel acquisition. The company’s stock immediately fell 10 percent on the news, and Fitch downgraded Sprint’s credit ratings for long-term and short-term debt.

Shortly afterward, Standard & Poor cut Sprint’s credit rating to junk status.

The complaint states “hiven the increased volatility in the subprime market, the intense competition in the wireless industry and the numerous problems facing Sprint due to its failure to successfully integrate Sprint and Nextel network operations, the Company had no reasonable basis to make projections about its ability to maintain and grow its subscriber base, its ability to decrease and then maintain its churn rate to a level of 2 percent by year-end 2007, its ability to recognize $14.5 billion in merger synergies and its ability to deliver two to three million hybrid dual-mode phones into the market by year-end 2007.”

It also added “as a result, the Company’s projections issued during the Class Period about its earnings for 2007 and 2008 were at a minimum reckless.”

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Source: Sprint Nextel.