Update: The Sirius-XM Merger
March 24th, 2008Wow. I don’t know how many of you saw the news, but just today, the U.S. Department of Justice gave regulatory clearance for the Sirius-XM deal to move forward (see XM Satellite, Sirius Combination Approved). As Bloomberg reports:
There wasn’t enough evidence the merger “would substantially lessen competition or harm consumers,” he [Thomas Bennet, the Justice Department's antitrust chief] said.
I agree with the DOJ on this one. As I wrote back in March of last year (see my original post The Sirius-XM Merger),
…they [Sirius/XM] do face substantial competition, not in the form of competitors in their existing space, but in the form of substitutes. They face threats from HD radio, traditional radio, iPod connectivity, internet streaming, etc. So this…will put a ceiling on their pricing power.
Not only that, but I thought the deal made sense because
there are some real cost saving opportunities to this merger. The synergies are real and tangible. Not only do the firms have the ability to economize on administrative costs (e.g., why do we need two sets of management to run these firms), but there are some obvious synergies in production (e.g., why do we need two sets of alternative rock stations when one will suffice).
…it [also] adds value for customers. Exclusivity contracts negotiated by these separate firms locked-in consumers. For example, fans of Major League Baseball were forced to choose XM while fans of Howard Stern only had Sirius as an option. Combining the firms allows fans of both to resolve issues of which service to choose…consumers who have chosen to wait for the uncertainty to resolve over which service would become the standard because they did not like having to choose between two options that are second-best (e.g., I want both Howard Stern and MLB, but I won’t choose until things get resolved) will no longer have to agonize over the decision of which service to select. With Sirius and XM merged…more consumers will likely opt for satellite radio.”
Although I initially extolled the virtues of this deal, I thought it would face some tough regulatory challenges. In fact, while I agree with the DOJ’s decision, this is not to say I wasn’t not surprised by it. In a subsequent post (see Lessons for Sirius from Whole Foods) I wrote:
Sirius could stand to learn a few things from the government’s initial reaction to the Whole Foods deal, whose case rests on similar justifications. If we can infer anything from the Whole Foods case, it is probably high time for Sirius to give up its pursuit of XM. Given Sirius’ stock price performance since Karmazin’s appearance before the House Judiciary Committee Antitrust Task Force on February 28 (from nearly $3.75 to $2.75), it seems the market already has.
Boy did I miss the boat on that one. I thought this deal was all but left for dead. I can’t help but wonder what brought about the change in sentiment on the part of the DOJ.
All that stands in the way of this marriage now is the approval of the FCC. Given the DOJ’s decision, I would be surprised if this deal were blocked at this point by Kevin Martin and the FCC.
But then again, for strategy folks like me, the real fun will begin after all the regulatory approvals fall into place – when the deal finally gets done. Then the integration scrutiny begins…
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