If Sirius (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR) are a match made in heaven, what's with all the pitchforks and brimstone?

I ask this only because yesterday's trading was emblematic of the madness that has been satellite radio stocks over the past few years.

Follow me here. Terms of the proposed merger call for XM shareholders to receive 4.6 shares of Sirius for every single share of XM that they own. The deal valued XM at a 22% premium to last week's close. With Sirius shares soaring 6% higher on Tuesday, the ratio would now translate to a 29% premium to XM's Friday close of $13.95 a stub.

Got it? Good. So what happens to XM's stock yesterday? It rises only 10% higher. Why did it make up just a third of that premium? Quite frankly, it's because the market isn't all that confident in the deal clearing antitrust hurdles. That leads us back to Sirius. If the ticker-tape polling machine believes the deal is unlikely to get done, why are shares of Sirius rising to begin with?

The downside of anger
The media is grinding its wheels over the prospects of a merger, but synergistic logic won't get the FCC heads to nod. Which is a shame, because the savings would be real, and the cross-promotional opportunities would be huge.

Two years ago, when Sirius was much smaller than XM, Sirius CEO Mel Karmazin had no problem referring to XM and Sirius as a duopoly.

"I think people have underestimated dramatically the size of this market," he noted in a 2005 interview with Neil Cavuto. "If you were to take today the size of the satellite television and cable television market, you're looking at almost 90 million subscribers."

He followed up by saying that the XM and Sirius duopoly would probably be closer to 70 million subscribers. Unfortunately, the massive potential of satellite radio is no longer in Karmazin's bag of dreams. In proposing the merger, XM and Sirius are now painting themselves as profitless upstarts competing against the likes of portable media players, HD radio, Internet stations, and mobile music streaming services.

XM and Sirius have a point. They have a combined accumulated deficit of $6.8 billion. They also compete with several rivals in many of those areas. Their latest portable receivers compete with the Apple (NASDAQ:AAPL) and SanDisk (NASDAQ:SNDK) media-storage devices. And they also sell their programming to wireless carriers and allow customers to stream their content online.

It still might not be enough. As it stands, the merger sounds like an exercise in futility. It's a parade to nowhere, complete with cascading confetti over a marching band that will only move in circles.

The hazy, crazy trading circles
Speaking of going around in circles, this brings us back to yesterday's peculiar stock moves. If regulatory forces were warming up to the combination and XM's stock rose only 10% higher, Sirius shares should have dipped 9% lower to $3.35 a stub.

But buyouts are never a perfect science. The stock to be acquired can soar past the buyout price if the market believes a bidding war is about to break out. On the other hand, what we usually see is a slight discount as investors calculate the possibility of the deal falling apart or the months required before an all-cash deal settles.

This particular case goes above and beyond all of those scenarios. XM is trading at a 15% discount to the stated exchange ratio. If an arbitrager was convinced that the merger would take place, he or she could lock in that discrepancy by buying XM and shorting Sirius. It would be a relatively risk-free transaction -- if the deal goes through. If enough arbs jumped on, the discount would narrow. So what does it tell you when even the arbs are spooked?

Sirius shares have traded euphorically before. For more than two years, Sirius has commanded a greater market cap than XM, even though Sirius was once much smaller. The argument goes that retail investors are won over by the low-priced shares, perhaps unaware of the company's share-dilutive past and the more than 1.4 billion fully diluted outstanding shares that are flapping in the breeze.

Investors ecstatically bid up shares of Sirius when Howard Stern first signed on. Despite Stern's helping Sirius sign up more net new subscribers than XM got over each of the past five quarters, shares of Sirius are nearly 60% off their December 2005 highs.

Is the helium seeping back into the stock again? Perhaps not. My bet is that Karmazin knows exactly what he is doing. He may know that this deal has about the same chance of passing as Allen Iverson in an open court. However, he was the one who called all the shots. This was billed as a "merger of equals," but it is really Sirius buying XM. Karmazin would be the one in charge, Sirius will continue to gain market share at XM's expense, and XM would lose focus as it works on integration plans that may never see the light of day. By the time the deal dies, Sirius will be even more powerful -- and XM more desperate.

This is like an illegal poker game in the back room of a speakeasy. Karmazin's got the hot hand. He knows the cops are going to break up the game before he can cash out. XM knows this, too -- but Karmazin is the only one eyeing the exit stairwell, ready to make a break for it.

If so, then well played, Karmazin. If not, what are you waiting for?

XM is a former recommendation in the Rule Breakers newsletter service.

Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since 2006. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.