VOLUME IV: ISSUE III

NOVEMBER 2013

sPrintinG to the finish Line

Sprints Improving Position in the mobile market
Ryan Chen
the current day mobile telecommunications market is dominated by two players derived from the 1984 breakup of the
at&t monopoly: at&t and Verizon (an at&t spinoff). together, these two companies enjoy a cozy duopoly in the mobile
market, controlling over 70% of subscribers and easily fending
off competitors like Sprint and t-mobile. as seen from the graph
below, Sprint and t-mobile lag far behind Verizon and at&t in
terms of volume of subscribers.

this mobile landscape drastically changed with the acquisition of Sprint by the Japanese telecommunications company Softbank in october of 2012 and Sprints subsequent acquisition of
Clearwire in July 2013. With this acquisition, Softbank Ceo
masayoshi Son hopes to turn Sprint into the third major player
in the mobile market. Sprint is certainly now better positioned to
take on Verizon and at&t, but it faces several major risks that
will require strong execution and favorable market conditions to
overcome.
uS tReaSuRy CalendaR SPRead
Kevin Goldfarb
Page 2

m&a negotIatIonS

INSIDE THIS ISSUE

Kevin Lai
Pages 3-4

on the upside, Sprint is well-positioned to grow in the next

few years and has a plan to execute that growth. this is due to
three major factors: the shutdown of the nextel network, the financial strength of Softbank, and the spectrum capacity from the
Clearwire acquisition.
following the acquisition by Softbank, Sprint completed the
shutdown of the iden nextel network. everyone agrees that the
Sprint-nextel merger in 2005 was disastrous for the company,
bringing little synergy savings while crippling Sprints balance
sheet. In particular, the lack of compatibility between Sprints
Cdma technology and nextels technology caused Sprint to
bleed money year after year. With the shutdown of iden, Sprint
can finally close the nextel saga and find a fresh start.
Softbank provides the financial firepower Sprint needs to
catch up to at&t and Verizon. In the acquisition, Softbank provided Sprint with $5 billion to bolster its balance sheet, and Softbank has another $14.5 billion of cash on its balance sheet that
can potentially be used. this will provide Sprint with the financing it needs to execute its network Vision plan, which will attempt to overhaul Sprints Cdma technology into a completely
new lte network by 2017. With an increase in capital expenditures from $2.5 billion in 2012 to $8 billion (guidance) in 2013,
Sprint can now afford to spend the amount it needs to achieve
this goal.
With increased demand for data services from mobile users,
spectrum ownership has emerged as one of the major fronts of
the mobile battle. data is transmitted over very limited frequencies between 700 mhz and 2,600 mhz, as regulated by the fCC
(the federal Communications Commission). Spectrum is so limited that telecommunications companies spend millions of dollars
each year to rewrite rules for new spectrum auctions. this is why
the fCC spent so long to review Verizons deal toacquiremorespectrum.

deBt CeIlIng and

uS eConomy
Karan Parekh
Page 4

Story continued on page 7, see Sprint

emeRgIng maRketS
and the fed
Guilherme Baiardi
Page 5

BRICS and oIl

Charles Bagley
Page 6

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noVemBer 2013

PitCh of the month

uS treasury futures Calendar Spread (Sell march, Buy december)

By kevin goldfarb
Background:
the uS 10-year treasury is one of the most liquid financial
instruments in the world. It is commonly used as a proxy for the
overall borrowing costs of a nation. over the past couple of years,
however, the market has been largely affected by the federal Reserves third round of Quantitative easing (Qe) which buys
$85bn of treasuries and mortgage Backed Securities from the
open market. all of this buying was meant to reduce the cost to
borrowers whose interest rates are usually given as a spread over
some treasury or Central Bank set interest rate. as recently as
may, we saw 10-year yields as low as 1.65%, translating into
record-low mortgage rates for consumers and spurring opportunistic corporate borrowing. If the monetary transmission mechanisms in the economy were perfectly efficient, this would
translate into both output growth and inflation . for this reason,
the federal Reserve set 2% inflation and 7% unemployment as
guideposts for when to start tapering Qe. What has been seemingly misunderstood by the markets is the fact that these are not
set rules and the unemployment rate was only used as a proxy to
gauge total output growth.
Where everything went wrong:
after Bernankes June press conference, it became widely
accepted that the tapering of Qe was inevitably going to happen
in September due to seemingly improving financial conditions.
What followed was a gradual run-up in the 10-year yield from
1.65% to 2.95%, undoing a lot of the easing that was still taking
place as investors were anticipating a gradual tapering and steady
increase of rates. this posed a threat to the tepid recovery, which
Bernanke did not feel was as convincing as he would have liked
before tapering.
at the September meeting, the fed did the unexpected in
choosing to continue easing. their reasoning: the economy had
not recovered sufficiently to warrant a tapering and the rise in
rates had undone progress. Beneath their weak recovery point,
the underlying issue is the divergence between the unemployment
rate and national output. It used to be that we could judge in
some respects how well our economy was doing by looking at
the unemployment rate; however, due to a sharp decline in the
labor participation rate (% of people in the labor force), this has
become a misleading statistic and has begun to overstate output
growth. for example, we may be seeing near 7% unemployment
rates, but these are analogous to the output and employment levels that we would have seen from 8% unemployment a couple of
years ago.
What do i expect?
I believe we wont see tapering in any significant capacity
until the beginning of 2014 . further, I think the worst case sce-

nario (for this trade) is the fed taking $10bn out of Qe before the
end of the year and then ramping up in the beginning part of the
year. as stated, we will continue to have lagging employment and
output growth, but this is now compounded by a new threat: ourselves. as karan Parekh discusses in this newsletter, our government likes to shoot itself in the foot. our idiots elected officials
in Washington are incapable of keeping the government open and
paying our creditors. this has obviously added a fiscal headwind
to the recovery along with increased uncertainty within markets.
the trade:
the markets are currently pricing in a greater effect of tapering between now and when the december contract expires than
between december and march. In fact, the spread differential on
the futures contract on the 10-year treasury is almost 3:1. I am
recommending selling the march futures contract and buying the
december futures contract, with a net outlay on the spread of
13bps. the goal of this trade is to see the spread between december and march widen relative to the spread between the Spot and
december.
If the federal Reserve does not announce tapering at the next
meeting, we will see the december futures contract converge towards the Spot price and away from the march contract, which
increases the profit of the trade. Because the contracts are both
on the same security (except for the negligible 3 month differential), the exposure to the underlying 10-year treasury is taken out
of the equation.
Caveats:
this trade, however promising, is not without risks. first of all,
it loses value with the passage of time (negative theta), because the
spreads should tighten towards zero as the contracts mature. Second,
you are quite vulnerable to headline risks. If any politician or member of the fed is speaking, you need to be ready to close out your
position immediately. lastly, you might see markets behave unpredictably. as we saw when the uS was first downgraded in 2011,
yields actually dropped because investors were weary of holding
their equities and flooded into safer bonds. there is a definite possibility that the markets will decide to flood into bonds again if
the government shutdown and debt ceiling debate persist.
overall, I think this trade is really attractive. I would get into
the trade with a time horizon of 2-3 weeks.
Disclosure:
I currently do not have a position in any of the mentioned securities.
this article was written on october 2, 2013, when the Spot contract traded at 2.62%, the december traded at 2.94%, and the march
traded at 3.07%.
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m&A PriCe neGotiAtions

Conflict Resolution between Buyer and Seller

By kevin lai
many finance majors, at some point or another, have considered a possible career advising m&a at an investment bank.
through classes like Corporate Valuation and advanced Corporate finance, we examine on the intricacies of finance. In this article, we examine the more qualitative dynamics of the ensuing
price negotiation between the buyer and seller.
the more the buyer and seller disagree on valuation, the more
intense price negotiations become. this discrepancy often precipitates a variety of new execution provisions reflecting an interesting mix of incentive conflicts with regard to payment.
Buyer and seller Considerations on Payment method
Payment can be made in cash, stock, installment notes, or assumption of indebtedness, and is often a combination thereof.
the buyer typically wants to prolong payments and reduce the
initial cash outlay so they are less vulnerable to nasty surprises
between the transaction announcement and the close date. furthermore, cash financing may be difficult for the buyer to secure,
especially for larger scale acquisitions. By shifting more of the
consideration towards promissory notes or stock, the buyer lowers his initial cash outlay and defers cash payments into the future. this effectively creates a source to offset indemnification
claims against. for these reasons, buyers will also be inclined to
negotiate for stock payments, especially when management perceives their stock to be overvalued.
for the seller, the main consideration for an all-cash deal is
that it results in an immediately taxable gain to the seller. While
stock payment does offer the target shareholders tax advantages,
the main concern for the seller is stability of future acquirer share
value. they will often demand some form of protection, such as
a discount from market price, or contingent value right that commits the buyer to pay additional cash or stock consideration if the
shares fall below a pre-specified level. along these lines, the sellers can negotiate a fixed/floating collar agreement whereby acquirer stock is paid in a fixed/floating exchange ratio if the
acquirer stock price falls within a certain range. the seller may
be particularly concerned about price fluctuations when the acquirer pays in stock, as there are often resale restrictions. for example, if the seller accepts unregistered securities, a private
placement exemption under Section 4(2) of the Securities act becomes necessary, and s/he must hold the stock for a 1-year minimum before selling it publicly per Rule 144.
When initially negotiating payment for the transaction, buyers and sellers commonly use earnouts and escrows to reconcile
the fundamental valuation disagreement.
Common mechanisms used by the buyer to mitigate purchase
risk include extending payments, escrows, and earnouts. earnout
provisions, regularly found in transactions with private equity
buyers, help bridge the gap between valuation estimates and may
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also help ameliorate financing difficulties for the buyer. t h u s ,

for the buyer, earnouts serve as an effective negotiation tool to
lower the upfront cost of acquisition and defer payments into the
future. In cases where management stays on board after the transaction, benchmarking earnout payments against financial operating metrics and/or non-financial milestones also incentivizes
sellers to maintain the performance of the firm in years post-closing. earnouts allow sellers to realize potential value that they see
in the company, but the buyer does not.
an escrow is basically the mirror image of an earnout if
the seller breaches pre-specified representatives, warranties, or
convenants, money can be deducted from the purchase price. this
offers the buyer protection after closing against negative surprises
undisclosed during previous due diligence. escrows agreements
vary based on amount put in and time limit in which claims can
be made. By holding back a portion of purchase price in escrow,
the buyer now has a readily accessible source to cover post-closing indemnification claims and other specified contingencies. It
helps alleviate concerns regarding the sellers ongoing operations,
solvency, and any potential problems locating seller assets for executing judgments.
Addressing material Changes between signing and Closing
What happens if the targets business changes materially after
the purchase and sale agreement (P&S) is signed but before the
transaction close date? Purchase price adjustments have to be
made. these adjustments help allocate risk of material changes
between the buyer and seller, who will agree to a base price in
constructing the P&S and define a procedure for making adjustments to specific items. In crafting these procedures, there are incentive conflicts as well. It is in the sellers favor to try to limit
post-closing exposure while buyers tend to seek protective
clauses like material-adverse-change (maC) clauses in the P&S.
the vast majority of m&a deals will see purchase price adjustments made to protect both the buyer and seller before closing.
the largest sources of purchase price adjustments come from
material changes in working capital, pension liabilities, and net
debt forecasts. Working capital tends to consistently be the largest
source of adjustments. a concern for buyers is that more working
capital might be needed post-closing and will set target working
capital at historical levels. there is typically a two-step adjustment process whereby the buyer and seller agree to a target level
and the buyer reassesses this level post-closing. If the re-estimate
is less than the target, the seller will owe the buyer the difference,
and vice versa. this effectively protects the buyer from the seller
manipulating working capital downwards by selling inventory
without replacement, accelerating collection of receivables, or by
stretching payables.

Story continued on page 4, see M&A

3

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UniteD We stAnD

the Significance of the debt Ceiling on the economy

By karanParekh
over the past few months, lawmakers in Washington have
been squabbling over the government shutdown while failing to
address the seemingly elementary task of raising the uS debt ceiling. the united States cannot raise unlimited debt to cover expenses, but rather is authorized by Congress to raise debt up to a
specified ceiling. In past years, Congress has had to raise the debt
ceiling at multiple occasions. Just under the obama administration, the debt ceiling has had to be raised three times. although
this is an issue that has been dealt with in the past, Congress is
attempting to use the decision to raise the debt ceiling to also address a tangential issue of obamacare. With the houses divided,
the american citizenry will take the fall should Congress not
reach an agreement in time, which treasury Secretary Jack lew
estimates be as soon as mid-october.
failing to raise the debt ceiling in time would be a worst-case
scenario that most experts believe we will not reach and is entirely unprecedented. In the worst-case scenario, the united States
could technically default a late payment of interest, but not a
failure to pay on its debt. as aforementioned, the treasury has
a tendency to rollover any notes that it owes money on, paying
for them by issuing new notes instead. however, there is a very
real possibility that the government could default on its debt this
time around if the debt ceiling isnt raised, which would be catastrophic for domestic and world markets. the united States treasuries represent risk-free money, essentially having no risk of
default since it has always been assumed that, in a worst-case
scenario, the united States would be able to borrow more money
to cover its debts. this risk-free rate sets the baseline for the majority of interest rates and fixed income products domestically
and internationally. a default on government debt could find
prices falling for treasuries, and these falling prices could correlate to rising costs of funds for the private sector, since private
sector bonds are sold at a premium to uS treasury bonds and a
default on uS debt would lower their prices as well. furthermore,
the banking system could be thrown into havoc again, since many
banks rely on uS government bonds; in one situation, for example, the borrowing window, which is what financial institutions
use for short-term borrowing, could become jammed. finally,
should we default on debt, ratings agencies such as S&P and
moodys would almost certainly downgrade the rating on uS
debt, which has historically held a perfect aa+ and aaa rating,
respectively.
not all scenarios in which the debt ceiling is not raised in
time point to a blanket default. economists see two other viable
courses of action, although their legality is questionable at best.
In one scenario, the treasury could choose to prioritize and fulfill
some obligations while technically defaulting on others. however, few see this as a viable course of action. for one, there are
no legal guidelines as to which debts would take priority, and this

would no doubt be contested with legal action for years to come

on behalf of the parties that face default in this situation. furthermore, the treasury simply does not have the infrastructure to sort
through all debts, organize them in priority order, and pay them
out accordingly; such a process would require too much manpower and too many subjective decisions. for these reasons, although this is a viable course of action, few see it being
implemented.
another final scenario that avoids default would be one in
which President obama orders the secretary of the treasury to
raise funds to pay all outstanding debts by selling whatever securities necessary. although a stretch for most, some consider the
national debt to be an issue to be placed as high as national security and that the President would be justified in unilaterally taking
action to avoid a default. furthermore, the debt ceiling is considered statutory law, which can be superseded by constitutional law.
and, in a weak argument, many have cited Section 4 of amendment 14 of the constitution as an empowerment for the President
to take action. It reads that the validity of the public debt of the
united States, authorized by law, including debts incurred shall
not be questioned. however, this provision was written during
the period of the Civil War with a focus on debts associated with
the Confederate government, and even President obama has cited
this as a weak argument when questioned about it. he did not unequivocally refuse to use it, and it remains a possibility should
the need arise; however, few desire to see the precedent that such
an action would set.
as lawmakers continue to hammer out tangential details on
issues such as medicare and hold the uS debt ceiling as hostage,
our economy, Wall Street, and main Street are held hostage. With
the united States sitting on a cash balance of less than $30 billion
(liquidity of less than 3 weeks), it remains to be seen whether
Congress will shape up or send our nation into another crisis.
M&A, story continued from page 3
on a larger scale, making appropriate adjustments for working capital is also important since this metric ultimately affects
many credit statistics that might be relevant in obtaining financing
from commercial lenders. typically, one can expect large purchase price adjustments in industries with large working capital
requirements, such as retail. With regard to pension benefit obligations and net debt forecasts, adjustments are made based on a
similar two-step adjustment process. for pension benefit obligations, the difference between what is owed to retired employees
and the money already held in the pension fund to pay those liabilities determines whether there will be an adjustment to account
for unfunded pension shortfall.

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reCeDinG tiDes

analyzing emerging markets and the fed taper

By guilherme Baiardi
Warren Buffet famously said, only when the tide goes out
do you discover who's been swimming naked. this quote perfectly describes the situation most emerging markets are going
through as they adjust to the effects of the federal Reserves possible reduction in their Quantitative easing program, commonly
referred to as tapering. With the exception of China, which has
been going through problems of its own related to a possible
credit bubble and a change in its growth model, most other
emerging economies are being hit hard by the possibility of a decrease in the feds monthly purchases of bonds. With the decrease in purchases, markets expect less dollar inflows into
emerging markets, leading to the devaluing of several asset
classes.
the three main transmission mechanisms have been the stock
market. yield spreads, and the exchange rate. take, for example,
two of the BRICS, Brazil and India: the IBoVeSPa stock index
has gone down by 7% since Bernanke first mentioned tapering
in a may press conference, reaching a 20% decline in its worst
moment. Similarly, the nIfty stock index has gone down by
4.6%, reaching 14.6% in early September. the yields investors
require in order to invest in government bonds have also skyrocketed, with Brazilian and Indian 10 year bond yields reaching
highs of 4.798% and 9.228%, respectively. these numbers correspond to a staggering increase of approximately 200 basis
points since may for both countries. debt and equity capital markets in these countries have effectively shut down as a result of
these yield spikes. Brazilian ytd debt issuances for 2013, for
example, have fallen 8% relative to the equivalent period last
year, with much of the reduction coming from the very low number of debt issuances since may. finally, and perhaps most importantly, the tapering talk has caused emerging market
currencies to depreciate sharply, with the Real depreciating 10%
since its peak in may, reaching a total depreciation of 20% in
mid-august. the situation in India has been even worst, with the
Rupee having devalued 27% in mid august. this prompted the
Indian government to impose strict capital controls, including
limits on the amount of money civilians and companies can invest
outside the country. Similarly, in Brazil, the Central Bank has implemented significant dollar selling programs in a bid to stem the
Reals devaluation. fX depreciation hits these countries especially hard as there is a significant pass through to inflation as
imports become more expensive. In order to combat this, central
banks increase the nominal interest rates,
leading to even lower gdP growth. to make matters even
worse, Brazil and India have serious fiscal problems, leaving the
central governments little room to try to make up for lackluster
foreign investment.
the situations in Brazil and India are symptomatic of what
is happening throughout the emerging world, with investment exyour one-stop shop for finance

pectations tumbling and an increased possibility of inflation.

however, some countries are clearly being affected more than
others. mexico, for example, has seen a depreciation of its currency, but one that is not nearly as sharp as Brazil and India. foreign investment expectations have also gone up in mexico,
prompting the question of what makes some countries different
from others? tapering has affected all emerging economies, but
it has been particularly disastrous to those countries that did not
undergo significant reforms.
even though Brazil and India have seen record economic
growth in the preceding decade, these countries failed to seize
the opportunity to reform several of the structural problems that
have historically plagued their nations. In Brazil, precarious infrastructure and extremely unwieldy labor and tax laws make investment way too expensive, while worker productivity remains
way below international upper-middle income countries. India
also has complex and bureaucratic labor laws and has long suffered from a current account deficit that is further worsened by
the precarious state of its manufacturing sector. Its government
has also run a fiscal deficit of around 10% of gdP, which has
scared off investors in these troubling times. With the previous
knowledge that the fed-led liquidity boost would eventually end,
these countries should have taken advantage of prosperous times
and strong political leverage to conduct a series of reforms to address these nagging issues. on the other hand, since the election
of President enrique Pea nieto in 2012 and the creation of the
inter-party agreement aptly named Pact for mexico, mexico has
been conducting a series of structural reforms including breaking
down monopolized industries such as telecommunications and
oil (to a certain extent), while curbing the influence of the powerful teachers union. these reforms have significantly increased
mexicos attractiveness in the eyes of foreign investors and have
curbed the negative effects of tapering on the economy. mexican
10 year bond yields have increased, but by 50 basis points less
than Brazilian and Indian equivalents.
It is not too late, however, and one could argue that all the
tapering has done is deflate the asset bubble in these countries so
that the prices are now better indicators of their fair value. Regardless, this is the ideal opportunity for these emerging countries
to realize the mistakes of the past and try to correct them going
forward. extensive reforms must be carried out if they wish to
return to the growth rates of the past decade. While the solution
is clear, it will be difficult part to muster the political support to
pass these reforms in both countries. this is no easy task, but if
these reforms are not enacted, the financial volatility of the past
few months will be merely a herald of far worse consequences.

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tWenty thoUsAnD LeAGUes UnDer the seA

dissecting the Changing oil Industry
By Charles Bagley
great change is imminent in the oil industry. Currently most
of the worlds oil is drawn from the middle east and sold to north
america and europe, but recent trends indicate an upcoming and
dramatic reversal in the status quo. north america, for decades
the worlds largest consumer of fossil fuels, will soon pass the
torch to asia. demand is slowing and production is accelerating
in north america: while consumption of oil is anticipated to drop
in north america by 1.6% and by as much as 7% in europe, the
united States has had gains of 20% in oil production and Canada
gains of 12%. meanwhile, asias oil consumption is predicted to
increase by 6.6%. While demand is growing in asia, however,
asian production will not follow: countries in asia (including the
middle east) have only been able to grow oil production by 1.6%
annually despite the recent increased appetite for oil from their
neighbors.
Which companies will be able to adapt to this changing environment? In order to keep pace with demand, firms are being
pushed to search further and deeper for resources, and it seems
that the largest opportunity for growth will come from ultradeepwater (approximately 7,500+ feet underwater) expansion.
to this end, transocean (ticker: RIg) is well suited for expansion
into this zone, already owning half of the worlds 50 or so deepwater rigs. on the other hand, could a small company that has
made significant investment in moving towards a new market be
more successful?
first, we need to understand the business. Both transocean
and ensco operate wells, but rather than take the oil and then sell
it to large gasoline companies like Shell or exxon mobil, these
drillers offer gasoline companies contracts to use their rigs. on
land, companies like halliburton and ge do the same thing: they
essentially rent out their drills to gasoline companies. on land,
as well as with shallow water rigs, contractors like halliburton
are subject to boom-and-bust cycles according the price of gasoline. Because on-land and shallow-water oil wells can be constructed in a matter of weeks, players like Shell can simply wait
until the price of gasoline is high again. thus, the contracts for
such machinery are very short.
not so with ultra-deepwater wells. Because these wells require months until they can produce, contracts for ultra-deepwater rigs owned by companies like transocean and ensco can
last for many years, even decades. additionally, those buying
contracts for ultra-deepwater rigs are willing to spend a lot of
money because they are so productive. from our current perspective, we can say with confidence that the ocean bed oil drilling
industry is likely to grow; supported by skyrocketing demand in
asia, this industry will take over a larger share of oil sup ply
growth in coming years as continental drilling lags. furthermore,
ultra-deepwater drillers will offer high growth without high fluctuation due to the term of their contracts.

A brief note on financials:

transoceans current market valuation is relatively cheap at
just eight times next years projected earnings, compared with
the industry average of 14 times projected earnings. this, compounded with 4% gains achieved since april, allows one to be
bullish on the stock. In fact, famous activist investor Carl Icahn
reportedly took a 6% stake in the company in mid-august. furthermore, transocean has recently grown its revenue backlog by
$2 billion. ensco, on the other hand, has achieved great dividend
growth, from $1.50 per share to $2 for 2013, a number which will
likely increase in the future. like transocean, ensco is currently
trading at the lower end of industry comparables with its multiple
of 8.6 times projected earnings per share. lastly, where etf alternatives have seen remarkable growth year-to-date, both
transocean and ensco have been lagging, but that difference may
pull their stock prices up soon.
transocean, received notoriety for its deepwater horizon
project that infamously burst and spilled a fortune of oil (210 million gallons) into the gulf of mexico and claimed 11 lives. Since
that time, however, transocean has made an even more significant move into the deepwater space. earlier this year, transocean
sold 38 shallow water rigs, achieving the 4% gains mentioned
above as well as downsizing its coastal operation. this change is
likely to create greater capital efficiency for the firm, essentially
streamlining its business towards one operation. transocean itself
states that this shift towards focus will help save over $300 million a year, starting in 2014. Currently, 68% of transoceans revenues are from their deepwater rigs alone.
furthermore, transoceans deepwater rigs have the highest
utilization among any company at the deepwater and ultra-deepwater rig depth. transoceans rigs have a utilization rate of 96%,
meaning transocean has been able to cut down its set-up times
to only 4% of the total operation. In addition, for 92% of that uptime, it is generating full revenue, meaning that each rig earns
just over $500,000 in revenue every day for the company. lastly,
transocean intends to add six more deepwater rigs to its fleet
within the next three years alone. Since transocean has been a
player in this zone for some time, it has begun to maximize its
efficiency.
ensco, on the other hand, still has a large proportion of its
fleet devoted to shallow water and coastal drilling operations.
that being said, it has achieved greater efficiency in its deepwater
operations, and 65% of their revenues are drawn from deepwater
operations with just 4 deepwater rigs in service. moreover, ensco
has already made investments to more than double its deepwater
operation to nine rigs by 2017. Compared to the industry average,
ensco is operating a state-of-the-art fleet; most deepwater drillers
are operating rigs that, on average, are 25 years old.

Story continued on page 7, see Oil Industry

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Oil Industry, story continued from page 6

ensco has an average rig age of just 7 years. finally, ensco recently de-levered its balance sheet of debt associated with its
young fleet, meaning they will be able to operate this fleet for at
least 20 years more without many debt-service costs. looking
into the future, ensco can replicate this strategy and invest in a
larger deepwater fleet while keeping costs down for the firm.
Between these two companies, however, the question still remains as to who can be more successful than its peer as the market changes. I believe the victor will be whichever firm is able to

Sprint, story continued from front page

[CREDITS]

thus, Sprints acquisition of a treasure trove of 160 mhz of spectrum from Clearwire is a major win that will allow it to build the
nation-wide lte network it needs.
It seems as though Sprint has the ingredients it needs to build
a nationwide 4g lte network. the question is, does the market
have enough space to sustain a major third player? Can Sprint
win customers from Verizon and at&t?
one major challenge for Sprint is that the u.S. mobile market
is nearing maturity. the number of new subscribers slowed from
5 million in 2011, 3 million in 2012, to a forecasted less than 2
million in 2013. thus, the market cannot sustain Sprint as a major
third player through growth alone. Sprint will have to wrest subscribers away from Verizon and at&t.
the problem Sprint faces on that front is timing: Verizon and
at&t expanded their 4g lte network in 2011 and 2012, while
Sprint is just beginning to build its network (see graph below).
By the time Sprint catches up with coverage in 2014 or 2015,
many customers will have already been locked into contracts with
Verizon or at&t. moreover, the capital expenditures Sprint spent
to build its network will pay less over its life, as Sprint will soon
have to upgrade to the next generation.
lastly and most importantly, Sprint has yet to prove that subscribers will respond favorably to its offerings, differentiated by

Kevin Goldfarb
Editor-in-Chief
Vice President of Financial Analysis

drill in the Pacific ocean with success. most drilling operations

are in the atlantic ocean between Central america and africa,
with the most lucrative operations near Brazil, West africa, and
the gulf of mexico; these regions are well explored, so drillers
can find a plot and secure a permit to drill fairly easily. a new
opportunity exists near asia, although that area is largely unexplored. What is known, however, is that waters of asia are being
scoured for opportunities. Whoever is able to create drills than
can effectively navigate these waters will achieve much success
in the coming years.
unlimited voice and data plans which neither Verizon nor at&t
provide. unlimited data plans have long been around, offered by
Sprint and low cost providers like t-mobile, but so far they have
had little success in stealing market share from Verizon and
at&t. In fact, Verizons popularity, despite its high price point,
mediocre customer service, and lack of unlimited data, shows that
customers dont attribute too much value to those offerings. Instead, they value what Verizon does very well: great geographic
coverage, high-quality service , and a large smartphone selection.
there is one redeeming grace for Sprint: data usage is forecasted to grow dramatically over the next few years. Smartphones
use 24 times more data than a traditional cellphone, tablets consume 122 times more, and sales of both products are still growing
quickly in the united States. although traditional plans may be
more effective than unlimited plans now, unlimited data plans
will become more desirable with the growth of mobile video
streaming and other high data usage. Sprints history of offering
unlimited plans makes it the best positioned to capture that
growth.
With Softbanks financial backing and ClearWires spectrum,
Sprint is certainly well-positioned to challenge Verizon and
at&t. Whether it can pull it off depends on its ability to predict
customer preferences and win market share from the current duopoly.

Jasmine Azizi, Alejandro Villero

& ese Uwhuba
Copy Editors

Karan Parekh

Guilherme Baiardi

Deputy Editor-in-Chief

Senior Financial Analyst

shruti shah

Charles Bagley,matt evans,

Kevin Lai, roni Luo
&ryan Chen

Senior Managing Editor

Jenny Qian
Managing Editor

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