Softbank's acquisition of a majority stake in Sprint Nextel Corporation(NYSE:S) for $20.1 billion has surprised a good many people, including analysts who feel that it does not make much sense for the Japanese company to make the purchase.
Investors showed their displeasure by hammering down the price of the shares as soon as news of the deal leaked out a week before it was formally announced. Among the analyst community Standard & poor's placed some securities issued by the company on credit watch with negative implications as it felt that the acquisition would have a negative impact on the financials of the company.
So why did Softbank go ahead with the acquisition anyway?
According to a blog on MarketWatch, one of the key reasons could be the strength of the yen. "At an exchange rate of about 78 yen, the U.S. dollar is today a third cheaper than it was in March 2006, when Softbank acquired Vodafone’s Japanese operations. A weaker dollar makes cross-border acquisitions in the U.S. cheaper for overseas companies."
Apart from this Softbank president Masayoshi Son had offered three reasons why the acquisition was so crucial to the company.
Reason 1: At $20.1 billion for a 70 percent stake that gives it management control of Sprint, this is the largest overseas acquisition ever by a Japanese company but in terms of valuation, it is still cheaper than Softbank's purchase of Vodafone's Japanese operations in 2006, he said.
Reason 2: The cost of funding is fairly low at just about 1 percent as the deal has been financed mostly through cash and a bridge loan from three Japanese megabanks and Deutsche Bank.
Reason 3: The combined might of Softbank and Sprint make them the third largest mobile carrier in the world, tying with AT&T and just behind China Mobile and Verizon. It also gives Softbank a critical entry into the United States, which is the world's largest smartphone market.