Deutsche Telekom AG (DTE) has considered its T-Mobile USA division to merge with Metro PCS (PCS) Communications Inc. This action will leave Sprint Nextel Corp (S) trailing behind them. Once this negotiation pushes through, Deutsche Telekom AG (DTE) will gain a dominant share of 74%. Though there was a takeover plan made by Sprint, the tie-up between T-Mobile USA and Metro PCS will make them reconsider these plans.

Though Sprint was able to get a stock gain of109%in the stock market and has topped the MSCI World Telecommunication Services Index. It is still trading with 58% discount to its sales. But the only way it can compete with those larger companies is to buy Leap Wireless (LEAP) International Inc. or merge with T-Mobile or buy some shares with T-Mobile USA.

The board of both companies has approved the transaction with Metro PCS gaining scale of$1.5 billion in cash while the combined entity will remain under the T-Mobile name. T-Mobile USA being the 4th among the largest U.S. carrier seeks to stem losses and gain in order to compete in a market presently dominated by Verizon Wireless and AT&T. These wireless giants each have over 105 million subscribers as taken from June 30 results which is 3 times that of T-Mobile USA’s 33 million. Joining with Metro PCS will add 9 million prepaid customers to T-Mobile USA making them closer to Sprint’s No. 3 slot which has 56 million subscribers

Shares of Metro PCS rushed higher with 18% after 14 months the highest after Bloomberg increasing market value to around $5M. Sprint’s was affected slumping at its steepest level in a year.

The deal Metro PCS is having will cause Sprint to play on the defensive side forcing them to seek one deal with Leap to guard its spot in the telecommunications industry.

There is a rise in the shares of Leap at 17% being the biggest improvement in 4 years, but it only finished at 8.4%. Leap has 5.9Mprepaid subscribers as recorded in the end of the second the quarter and is the logical choice for Sprint.

Purchase of Spectrum

There is another alternative for Sprint and that is in place of buying it could acquire radio waves like the spectrum from entities like Dish and Verizon Wireless in order to widen its network of coverage which is an open to all process giving any prospective buyers the chance to participate.

Though the merger of T-Mobile USA and Sprint is not a distant possibility and even though T-Mobile USA continues with the deal with Metro PCS. Sprint cannot take the chance of having T-Mobile off the table for negotiations, what it does is only increases the pricing if they were to acquisition is to be pursued.

Complications on the Deals

A deal as complicated as this can go more complex if Sprint attempts to purchase the combined entity. It will take a year for the team up of Sprint to T-Mobile even with T-Mobile getting interest in such deal because T-Mobile is now a bigger entity to take for Sprint. Another alternative is or Sprint to make a rival proposal with Metro PCS. Sprint can wave the deal and improve its operation instead through a roll out of its present network and focus on getting a return in profit which could make the company increase its chance in competing. The investors of Sprint may as well continue running the business as successfully as they are doing and it is believed that Sprint considers this as their top priority move.

Failed Deals

There are many telecommunications deals that failed to reach completion. Take for example Sprint’s deal with Metro PCS this year which was rejected by the board. Cost of such move would have been in the level of $8 billion to include debts. There was also the discussion with Deutsche Telekom on the purchase of T-Mobile USA before March of 2011 announcement of AT&T offering to acquire the company for $39 billion. At a certain point due to the U.S. regulatory scrutiny which has forced AT&T to abandon its December offer for T-Mobile USA. Such deals with Metro PCS or Leap are not sufficient in making either T-Mobile USA or Sprint a threat on its rival which are already larger.

T-Mobile and Sprint are not as big as AT&T and Verizon so it is harder to compete. For them to increase their size by as much as 25% but if the rival is twice your size even an acquisition of 25% cannot close the gap to make it at par, rather it only reduces the gap.