XM/Sirius Merger: Defending Mel Karmazin

The New York Times' Andrew Ross Sorkin wrote a piece on the Sirius (SIRI)/XM (XMSR) Merger entitled "When Unequals Try to Merge as Equals."

My punch line: Mel Karmazin is a smart, logical guy focused on the big picture, for the benefit of Sirius shareholders. And Mr. Sorkin's questions concerning the economics and timing of the merger announcement miss the boat from my perspective, only serving to reinforce a myopic and cynical view that obscures the big picture: that this merger is both necessary and value-creating for both Sirius and XM shareholders, especially in light of questions over the long-term viability of satellite radio as a value-added distribution platform. The merger at least gives these two companies a fighting chance to find out, and in the most efficient and shareholder-friendly manner possible.

Andrew's lead, to set the stage:

HERE’S a tip about deal-making: When companies start talking about a “merger of equals,” someone is usually getting the better deal. It is especially true in the proposed merger of XM Satellite Radio and Sirius Satellite Radio.

It is being billed as a merger of equals, with each company getting exactly half of the new entity.

But here’s the unequal part: The stock market thinks that Sirius is worth almost $1 billion more than XM. To get the numbers to work, Sirius offered to pay a handsome 22 percent premium to shareholders of XM. (The premium is actually almost a whopping 30 percent if you account for the run-up in XM’s shares the Friday before the deal was announced, as word began to leak.)

And then, a little more color to make the point:

And then Mr. Parsons played his ace: If Mr. Karmazin wanted to create the enormous savings they both projected would result from a deal — worth more than $5 billion, more than the value of either company — they needed each other.

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“I can’t do the deal without them,’ he said. “I thought it was more important for our shareholders that we do the deal.”

Even by giving the 22 percent premium, Sirius stands to save billions of dollars a year if the deal goes through.

These are facts. And the fact is that Mel is a big picture guy, and Mel wants to run a successful and viable entity. Is paying a premium for XM when the deal is billed as a "merger of equals" either irrational or untrue? I don't think so. Both hold valuable and necessary keys to unlock the value of the combined enterprise. I think it is quite clear what is going on here and I'm not sure why this point warrants much discussion. The cost savings alone, even if one assumes savings on the low end of the projected range, are worth well north of $10 billion. So 22% on XM's stock price to get the deal done and to get busy? A small price to pay.

The Andrew goes on to discuss the other possible motive for "rushing" into things now instead of waiting until their stock price somehow magically align in order for a "true" merger-of-equals to organically take place:

Still, it seems as if Mr. Karmazin may be paying a premium to do the deal now so that it can be rushed through the regulatory maze while the Bush administration is still in power. Many partners in mergers of equals wait around — often for years — until their stocks align.

Mr. Karmazin disputes that view, contending that he wants a deal as soon as possible so that the savings can start. His view is that there “is no regulatory window.”

In fact, he believes that the longer the companies, both now money losers, wait to merge, the better their chances would be in Washington. That’s because new technologies will continue to emerge that may prove to be competitive with satellite radio.

So Andrew puts forth the "ulterior motive" theory, and I've got to say Mel gives the right answer. Besides which, Sirius and XM have been tap dancing together for quite some time; it's not as if this is a shotgun marriage. Much thought, analysis, pondering and negotiating went into last week's announcement, so I find Mr. Sorkin's line of argument more consistent with conspiracy theory than one grounded in fact or logic. Regardless of Administration, this is going to be a challenging merger to get through the Justice Department (not that it should, but it will). But those cost savings are real - and pressing - and they are both spending prodigious sums to win in the marketplace, dollars that could be spent together in a more efficient manner developing better consolidated programming and reaching its target audience.

So Mr. Sorkin, I don't think it requires much thinking to answer the "why, when and how" this merger got announced - and it is far more simple and logical than you are making it. It is driven by the need to extract value - now. To stop the bleeding. And I hope Mel is able to get this deal done - and fast.

Comments

[Malkiel]

I have no problem with Karmazan entering into this strategy now--there's been enough buzz among analysts and experts to make it a reasonable strategy--but I can tell you as a citizen that what's happened to radio (stripping of all new cultural content in the name of profit) makes it clear that mergers of this type are not in the public interest and will be fought hard.

While Mr. Karmazan is waiting for the cherries to come up in a row on this deal he and his counterpart at XM need to exercise their acumen on trimming the bottom line and making the companies profitable as standalone, competing enterprises. They should not hold off doing that on the supposition the merger will happen. Each could turn a profit by the end of this quarter if they choose to...