Sirius Satellite Radio (NASDAQ:SIRI) completed its merger with rival XM Satellite Radio this morning, becoming Sirius XM Radio in the process.

Are investors cheering the news? Not exactly. The freshly blended shares opened 20% lower today, and that is after dropping 16% yesterday.

This clearly isn't the way that the country's two satellite radio providers expected things to go when they announced plans to combine more than 17 months ago. Everyone knew that this was going to be a tough deal to clear in terms of regulatory hurdles. But now that the hookup is complete, why are investors staying away? It could be the reality of the combined savings.

The sin of synergy
A year ago, analysts were estimating that the merger could result in as much as $7.2 billion in realized synergies. The reality isn't as kind, with Sirius now projecting $400 million in cost savings in 2009 as a result of the deal.

$400 million is certainly nothing to sneeze at. Sirius now expects to post adjusted EBITDA of $300 million next year. It is looking to generate positive free cash flow next year, but that milestone excludes satellite capital expenditures (which as you may imagine, can be costly).

Another grim deal reality has come in recent moves to refinance debt ahead of the deal. Between XM restructuring obligations at substantially higher interest rates and yesterday's move by Sirius to sell more stock, investors may wonder how much the dilution and higher interest expenses will eat into the overhead savings.

The stock sale, announced yesterday, finds Sirius looking to raise $375 million. The move pales when compared to the billions that Merrill Lynch (NYSE:MER) and XL Capital (NYSE:XL) revealed that they are looking to raise this week, but those stocks are getting hammered too.

Signs of a bottom
With all of the negativity in the air, why am I somehow upbeat at the notion that you can rub six quarters together to buy a share of Sirius XM Radio? Well, for starters, Sirius and XM are coming together after posting respectable quarters.

In their final financial period as stand-alone companies, XM and Sirius posted narrower losses, lower churn, and improving conversion rates. Perhaps more importantly is that they combined to tack on another 602,000 net new subscribers during the three months. That is huge, since this is a highly scalable model, where the variable costs are low and the fixed overhead substantial. Whether Sirius XM Radio is beaming to 10,000 listeners of 100 million, those satellites don't get any cheaper. Howard Stern doesn't get any cheaper, either. Dividing those fixed costs by a widening audience pushes the company that much closer to eventual profitability.

Another reason to be upbeat is that now the combined company can send out a unified marketing message. Sirius and XM have been quiet on the promotional front lately. That is no doubt by design, as the satellite radio providers didn't want to appear too big-headed as they stepped on the regulatory weighing machine. It was also the right cash preservation move.

That will hopefully change now, as Sirius XM has an even greater incentive to grow again in the retail space. Most of the industry's gains have come from the automakers, who rake in hefty ransoms. It's a great market. The sellers are motivated, because dealer showrooms are looking for add-ons to make dwindling auto sales more lucrative. However, Sirius XM needs to win back the retail buyer, snapping up a portable receiver for the home or the even more lucrative Internet streaming accounts.

Don't forget the potholes
CEO Mel Karmazin played it perfectly. He kept his frustrations in check, even as the FCC moved at a tortoise's pace. He bellyached about the many alternatives to premium radio these days, like Apple (NASDAQ:AAPL) with its iPod, and Napster (NASDAQ:NAPS) with its music subscription service. They may have been ploys to get regulators to back off the notion that Sirius and XM coming together would form a monopoly, but there is a lot of truth behind the bellyaching.

Even something as seemingly harmless as Internet radio -- an afterthought as a competitor to satellite radio, since it's tethered to Web connections that die on the morning commute -- is a bona fide threat.

One doesn't even have to wait for municipalities to begin embracing citywide wireless connectivity. I sure don't. My iPhone can now stream Pandora, Time Warner's (NYSE:TWX) AOL Radio, and CBS' (NYSE:CBS) wherever I go. They are some of the most popular free apps available since Apple updated its phone's operating system this month.

In other words, Karmazin can't just belt out "I gotcha, sucker" as he fishtails out of the FCC. Sirius XM Radio has some serious challenges ahead, even now that it's nearly exactly where it wants to be in theory, if not in share price.

Here are some other recent XM stories on its long courtship with Sirius: