There are many different factors that influence a company as to what it will produce. Things such as good earning reports could send a stock soaring, where as bad earning reports will usually send it plummeting. Thinks suck as mergers and takeovers greatly influence the price of a stock and the way it conducts its business. I recently bought stock in a company called Nextel Communications Inc. (NASDAQ symbol NXTL, www.nextel.com). I feel that it was a very wise purchase, as I will describe in this report. In the last two months, Nextel Communications Inc. has been on a huge rally. Its stock went soaring from 17 dollars to 39 dollars in two months. This is very exciting for Nextel shareholders (I didn't really buy it because I was a little scared) because it means that there is something taking place in the company like never before. The main thing that makes Nextel special is the type of business it sells. Nextel has a unique service that benefits all different types of business. It combines cellular telephone with a two-way radio service. This enables employers to communicate directly to a second party with the two-way radio feature. Or a person can "group call" and is instantly enabled to call multi-users at one time. It also has a fully digital wireless telephone service that makes it a versatile tool in business communications. In this report I will analyze what contributed to this huge increase in stock price and how the company is gearing up to be taken over by a much bigger company.
There was a very important move that the company made early in the year. It was selling its communication towers to Spectrasite Inc. Spectrasite Inc. is a company that owns communication towers. It then rents the space out, to those that need space to provide communications. Nextel is going to then rent those towers back from Spectasite to continue their operation. Nextel sold their towers to Spectrasite in order to gain cash flow. They got 200 million dollars in the deal and will use this to run day to day operations. These types of business, I have found, will lose a lot of money in the first few years of business and need huge sums of cash flow to keep it afloat until it is able to make profit. This deal with Spectrasite enabled then to keep the business going strong. They are earning yearly $-1,518.9 Million which is very discouraging to say the least. But their number of subscribers, currently at 3 Million, increases monthly, which helps bring their sales numbers up to $1,846.8, Million. Another thing that makes their business very appealing, is that they are the only ones in this specific market. Airtouch communications was formerly a rival company, but since it was takes over by HRP group, it has been takes out of the running as a competitor. As I said Nextel is gearing up for a takeover. Why does MCI WorldCom Want Nextel? Bernie Ebbers Chairman and Vice-Chairman John W. Sidgmore have held preliminary talks to acquire Nextel Communications Inc., according to sources close to Nextel. The deal would give MCI WorldCom 3 million subscribers, a national wireless network, and operations in six international markets. And most importantly it would help MCI WorldCom plug a gap that is becoming increasingly dangerous. Not only is wireless the fastest-growing form of voice phone service, it is also becoming important for competition in the business markets MCI WorldCom targets. Later this year, AT&T is planning to introduce a new bundle of services for corporate customers designed specifically to take advantage of MCI WorldCom's weakness in wireless. Under that plan, a business that buys long distance from AT&T for, say, 10 cents a minute would be able to offer its employees the same rate on wireless phones--without paying any extra roaming charges. ``Our business customers want wireless,'' says Michael Keith, the newly appointed head of AT&T's corporate unit. ``They're asking about it every day.'' Businesses already account for 47% of wireless revenues in the U.S., says market researcher Dataquest Inc. That share could increase if AT&T and others can market bundles of services to them effectively. ``If there was a package deal and we saved money, we would go to them immediately,'' says Sanford Rich, a senior vice-president at money manager GEM Capital Management Inc.
Beyond risking erosion in the business market, WorldCom could crimp its growth prospects if it sits out the wireless boom. The number of U.S. wireless customers has risen 25% in the past year, to 69 million, according to the Cellular Telecommunications Industry Assn. By 2003, wireless will account for 15% of total communications minutes in the U.S., up from 3% today, Dataquest estimates. Says Andrew Cole, head of the wireless practice at consultant Renaissance Worldwide Inc.: ``to play in the telecom world, you have to have a wireless business.''
That's what has inspired the talks between MCI WorldCom and Nextel. ``It's a good marriage,'' says Dataquest analyst Matt Hoffman. But not a cheap one!! Nextel would sell for a premium over its market value of $11 billion, and MCI WorldCom would have to assume debt of nearly $8 billion--all for a company that lost $1.8 billion in 1998. A Nextel deal would likely chop MCI WorldCom earnings by as much as 25%, or $1.3 billion, in 2000, says Merrill Lynch & Co. analyst Daniel Reingold. MCI WorldCom declined to comment, but an insider says the company would only buy Nextel if it could limit dilution to 10% or less. In addition, Nextel relies on unusual technology modeled after a radio-dispatch system. As a result, Nextel depends solely on Motorola for equipment instead of using several suppliers, as other wireless carriers do. That gives Nextel little leverage to get cutting-edge phones. Nevertheless, Nextel may be the best choice for Ebbers. Other options include buying three or four small companies that use the Global System for Mobile Communications wireless format that is favored in Europe. But dealing with several sellers would be complicated, and it still wouldn't give Ebbers national coverage. Analysts also speculate that Ebbers could try to buy Sprint Corp. for its Sprint PCS. But regulators likely would block a combination of the second- and third-largest long-distance players. A down side to all this is Nextel's network isn't compatible with other cellular networks, so customers can only make calls in areas where Nextel has service, and analysts said the network also has less than half the capacity of AT&T and Sprint PCS. That could limit MCI WorldCom's ability to offer new data services, such as e-mail, Internet access and videoconferencing to cellular customers.
Some Wall Street analysts believe the Nextel rumor may have been leaked as a trial to see how MCI WorldCom's shareholders would react. The feedback was not encouraging: On Apr. 6 and 7, the stock fell $6.50, to $86 a share. Meanwhile, competitors hope Ebbers will stay out of wireless. ``Tell Bernie not to change a thing he's doing,'' says AT&T's Keith. Don't bet on it. But stocks of Nextel have risen by almost 100% in the last 2 months. This I believe is do to the speculation that it actually will be taken over by MCI WorldCom.
I have spoken to numerous Wall Street traders and analysts and all I hear is good things about Nextel. I spoke to Steve Schlam of North River Trading (also known as "The River") and all he was able to say is "we love it!!!". He told me he has traded it for a few months now and he is taking in big gains on the talks with MCI WorldCom. He said the analysts have very strong feels about the company and all we should see in the future are good things.
In my own personal option Nextel is a strong buy. If it would dip down below 30 dollars a share then it would be the best time to but it. But I think that we are going to see a strong period in Nextel's future, and we might not get so lucky to see it hit 30 bucks. When I first watched the company it was at a strong 17 to 20 bucks. Then I got a tip that it was headed for good things, so I bought it(in the game anyway). It is now at 39 dollars and I think if will stay around there for a while. But if it does dip a little bit, it would be a very good buy.
As I mentioned previously the government might step into the ring in the anti-trust format. If Uncle Sam thinks that when and if Nextel is acquired by MCI, that it would have to much of the market for wireless communication, then they could try to stop MCI WorldCom/Nextel from getting any bigger. It would be a big blow to Nextel because they need to get bigger in order to make themselves profitable. It would also prevent them from joining up with other companies to create bigger and better alliances. Another minor government regulation is tower space. Now that Nextel has sold all of it's tower's to Spectrasite it does not have to worry much about this, but, the never-ending problem of tower zoning. I can tell you that in my neighborhood the coverage was very shaky for a while. The Town of Inwood in the Five Towns was not granting Nextel, at the time, permission to put up a tower above a certain height. This restricted the capabilities of the Nextel service in our area. Such problems like this can greatly delay the speed at which Nextel is able to create its infrastructure. I don't think that history has effected Nextel's business as much as the future will hopefully. Time has yet to tell how huge the wireless industry will be, but one can only imagine how huge it will become.
In summation, as I have stated many times before in this report I feel that Nextel is a very strong buy. It is a very strong company with a very appealing business concept. It has room for huge growth and as in everything in the technology market you never know!!
America Online Research Reports
Business Week Jan, 11 1999
Hoovers Business Reports
Interviews with stock analysts and traders, notably Steve Schlam of "The River", Jacob Safier of South Ferry Building Company and Matt Hoffman of DataQuest