That son of a gun did it! Sirius (Nasdaq: SIRI ) CEO Mel Karmazin has all but pulled off a merger with rival satellite-radio operator XM (Nasdaq: XMSR ) , following yesterday's blessing from the Department of Justice.
The two companies still need the FCC to sign off on the union, but that regulatory body is generally considered more deal-friendly than the politically fractured Justice Department. With the companies portraying the deal as pro-consumer, not anti-competitive, the FCC is unlikely to get in the way.
The deal was a given, since every passing week finds a new technological breakthrough to challenge the ludicrous notion that XM and Sirius are some form of ear-candy duopoly. Blocking the deal would have cemented the reputation of regulators as dinosaurs, unaware of the competitive landscape quickly forming around satellite radio.
This is no puppet show
The one comforting aspect of the regulatory decision is that it comes with no strings attached. Things were starting to get out of hand earlier this month, when a member of Congress suggested that XM and Sirius resell half of their bandwidth to a third satellite-radio provider.
With 17.3 million current subscribers and counting, XM and Sirius will rule over a large audience. But those listeners are still a fraction of other subsets of audio consumption, including terrestrial-radio listeners, mobile-handset subscribers, and Apple (Nasdaq: AAPL ) iPod owners. The combined company will still command a smaller market cap than a single terrestrial-radio operator, Clear Channel (NYSE: CCU ) .
If the merger was so obvious, why do I consider Karmazin so worthy of of the year's top CEO honors? Let's review a few of his accomplishments.
- He was able to convince XM, a company that's larger than Sirius in terms of revenue and subscribers, to agree to a merger of equals.
- He managed to install himself as CEO of the combined company.
- He also showed amazing patience in saying all of the right things, even as regulators dragged their feet for more than 13 months.
- Given the long courtship, he was able to walk the delicate balance of selling investors (pointing out the potential of billions -- with a B -- in realized synergies post-merger), consumers (announcing lower-priced programming tiers), and regulators (by keeping his cool until only recently).
Before we crown Mel for this crowning achievement ...
As I mentioned earlier, the deal still has one more regulatory hurdle to clear. There are also financial hurdles to stomach before we even begin discussing the juicy synergies that will dramatically reshape the combined company's operating-income potential.
Mr. Market is slightly more certain that everything will work out. True to my prediction last week, shares of XM got a bigger bump than Sirius' on yesterday's news, given the discount that XM was trading at relative to the exchange ratio.
This story is really only beginning, and later this week, I'll be back to explore the five looming challenges -- and opportunities -- that await Sirius-XM in a post-merger reality.
I once recommended XM to Rule Breakers subscribers, but I was too early, and I erred in picking the slower-growing horse. Thankfully, the newsletter service ultimately issued a sell recommendation at a higher price point than where XM trades today, even after yesterday's euphoric run.
So now that the two companies are set to merge, is Sirius-XM worthy of being a Rule Breakers recommendation? We'll just have to see how it all plays out. The synergies will be real, but the many competitive threats that made this deal possible now loom as potential killjoys.
Either way, it'll be an exciting time for satellite radio. With regulators nodding their heads and subscribers tapping their feet, it's no wonder that shareholders are clapping along.