With the proper focus, it's sometimes possible to see a business headed for trouble long before it occurs. Last summer, I told readers wireless service provider
Clearwire Corp. (Nasdaq: CLWR) was in deeper trouble than Wall Street analysts were publicly conceding. The analysts were carrying "buy" ratings, even when the business was starting to collapse. Since I looked at the stock, it has fallen nearly 80% in just 14 months. And from where I sit, a bankruptcy is almost certain. Let me explain...
In 2010, I noted Clearwire had been making a major bet on the WiMax technology (worldwide interoperability for microwave access) to deliver 4G mobile wireless speeds. The trouble was telecom engineers were increasingly convinced that a rival technology -- LTE (long-term evolution) -- was even better, since it could handle larger volumes of data at faster speeds. Clearwire's management acknowledged that growing sentiment, which immediately raised the question of why the company had borrowed and spent billions of dollars in support of WiMax.
In 2011, things got messier. Clearwire had always counted on generous financial support from its largest customer, Sprint Nextel (NYSE: S). (Sprint has made serial capital injections in Clearwire and now owns 48%, controlling 54% of the voting stock.) But Sprint has begun to express regret about pinning its 4G hopes on Clearwire's network. Once Sprint started to make its own 4G network -- using the stronger LTE technology -- it was almost a matter of time before it announced a public divorce. In a meeting with analysts on Friday, Oct. 7, Sprint said it would soon stop selling phones that work in conjunction with Clearwire's 4G network. This caused Clearwire's stock to fall 30% that same day. And the selling may be just beginning...
A transition to... what?
Clearwire probably saw this coming. The company had announced plans earlier this year to place LTE technology right on top of its WiMax network. Management figured the upgrade would cost just $600 million -- a mere pittance when compared with the nearly $6 billion that has been poured into the business. Clearwire hoped that would be enough to mollify an increasingly displeased Sprint, which has grown tired of writing more checks to support Clearwire while tackling financial challenges in its own business. And Sprint, apparently, has had enough.