Merger of XM and SIRIUS - Essay Example

MERGER OF SATELLITE RADIO COMPANIES – XM AND SIRIUS On February 19, 2007 XM Radio and Sirius – two satellite broadcasting companies - formally announced their historic $5 billion merger, (previously $13 billion stock swap), thus effectively putting an end to two years of wild speculation, rumor and anxiety. The would-be merger generated a great deal of controversy about and interest in it. Its impact on American anti-trust law created a still greater amount of talk that ranged from monopoly power to predatory pricing strategies. Satellite broadcasting services in America have a peculiar characteristic, i.e. they span the radio spectrum in perfect sync with customer expectations. On March 24, 2008, the Justice Department approved the merger, thus clearing one of the biggest hurdles. Still there was one hurdle though it is only of symbolic significance, i.e. the Federal Communications Commission’s (FCC) approval. Finally, somewhere by the end of July 2008, the approval of the FCC might be given, so that XM Satellite Radio and Sirius Satellite Radio will merge into one company with a subscriber base in excess of 17.3 million. Analysis Mergers and Acquisitions take place when companies use corporate strategy to broad-base equity participation and seek to merge two entities to achieve scale economies. A union of the employees of two companies to be merged will be formed to take care of the employee concerns such as voluntary retirement for some employees, redundancy and even asset-stripping. A merger can be either horizontal, vertical or lateral. In addition to these three types of merger there are con-generic mergers in which two companies in a huge industry may merge but do not share their customer bases. For example a bank may merge with a leasing company. The merger of XM Satellite Radio with Sirius Satellite Radio is an accretive merger, because already the acquired company, XM Satellite Radio, has experienced a rise in its share prices since the announcement of the merger. Potential mergers often raise concerns about the possible violation of antitrust legislation. Herfindahl-Hirschman Index (HHI), named after Orris C. Herfindahl and Albert O. Hirschman is extensively used in Economics, but now it is also used to measure the size of firms in relation to the size of the industry. Above all it shows the degree of competition in an industry. The Index is defined as the “sum of the squares of the market shares of each individual firm”. This means the average market share is weighted by the market share of the individual firm. The subsequent result is expressed ranging from 0 to 10,000. It may measure a situation of monopolistic competition where there is a large number of firms or even a monopoly situation with a handful of big firms. HHI may fall if the level of competition increases while it may rise if competition decreases. In other words it has a negative correlation with the level of competition. The technical glitch associated with monopolistic competition and monopoly power is the same, i.e. excess capacity. Both XM Radio and Sirius Radio have excess capacity that the two companies have not been able to use effectively. This is despite the combined customer base of roughly 18 million subscribers. The merger has an inevitable impact on the stakeholders of the two companies. It is obviously going to affect the stockholder, in the first place. Next, it will have an impact on the customer. The most affected internal stakeholder group will be the employees of the companies. Stockholders of the two companies have been particularly happy over the subsequent developments on the aftermath of the merger announcement. This is because of the fact the merger has driven up the share price of the Sirius Satellite Radio (Gaughan, 2007, p.557). The latest news tells us that shares of struggling satellite radio companies Sirius with a Current Market Capitalization of $3.93 billion and XM rose swiftly on the aftermath of approval for the merger given by the Chairman of the Federal Communications Commission (http://www.tradingmarkets.com). Sirius shares added 3.15% to $2.62 while XM rose 3.96% to $11.30 after approval of the merger, which has been in the works for 16 months. The original stock swap deal, which was worth around $4 billion, was delayed because both companies were the only satellite radio conglomerates in North America and their combination represented a monopoly risk (www.tradingmarkets.com). With total synergies for the year 2009 of the combined companies put at $400 million net of the cost, the future looks great though these synergies might not go according to the plan. Stand-alone values of the merging firms plus synergies ought to have a positive impact on the market. But there is no guarantee that synergies would significantly rise as a result of the merger (Devos, Palani-Rajan and Krishnamoorthy, 2005, Chicago papers). The calculation process of synergies is a highly complex one that involves cumulative probabilities. The above figure has been arrived at by the joint management of the two companies after considering a number of factors such as current balance sheets, profit and loss accounts, cash-flow returns, subscriber volumes and their growth trajectories and operating costs and revenues. An independent analysis would definitely put the figure down and this aspect of the whole affair is not going to be revealed. Sirius said in a statement that more than 96 percent of the stockholder votes cast approved the acquisition, while XM said 99.8 percent of its stockholders were in favor. The companies said they still hoped to complete the deal by the end of the year. The rise in stock value has already led to a positive outcome with a wider interest in its stocks. Then again anti-trust authorities fear a possible monopoly. Consumer groups expressed their concerns over the deal and feared that it would create a monopoly, and allow XM and Sirius to increase their rates charged to the end user. The companies were quick to deny this allegation. They have promised a level playing field of fair competition with other emerging technologies like broadband internet services. Both the Department of Justice and the Chairman of FCC agree with them. Usually, customers have a negative perception of mergers, irrespective of the official version of desirable mergers. The Federal government expressed concerns over the merger, though it gave green light after weighing in the much debated monopoly power clause. For instance Democratic senators John Kerry of Massachusetts, Claire McCaskill of Missouri and Ben Cardin of Maryland said they remained “concerned about the possible elimination of competition in the satellite digital audio radio service (SDARS)” (Albanesius, July 1, 2008, www.pcmag.com ). It has been pointed out that merger guidelines and agency decisions on related market definitions of mergers alone might not be enough to estimate the overall impact of the merger. A realistic assessment on substitution possibilities must be based on the available evidence in the market. For example it is unlikely that consumers would consider the other alternatives such as mobile internet radio and pod-casts to be on par with SDARS. Neither would they rate the services of advertisement-based terrestrial radio stations as equal to that of SDARS. Even Hybrid Digital (HD) Radio services are not taken identical to SDARS. Therefore the merger creates more controversy than it is usually assumed to. There is a great likelihood that the market picture created by XM and Sirius merger would definitely lead to more controversy. Those who favor the merger, on the other hand, argue that the merger would have a lot of desirable benefits to the consumer. In the first place, a combined scale of economies would benefit the customer by way of a lower price since operating costs would be reduced by a big percentage. Secondly the merger would enhance technical capacity and the quality of available technology. As we are aware, prices are invariably determined by costs and therefore, a merger of two equals should have a positive impact on costs by reducing them by a greater percentage. It is this benefit that has been touted by the managements of the two companies. The greatest benefit is associated with the quality of service and therefore the level of competition by rivals who may provide near substitutes. How would the employees of the two companies be affected? Certainly, the employees would be happy if there were no labor lay offs or redundancies. Trade unions are not actively involved here, except that some representatives have been appointed to watch the interests of labor. The Chairman of the FCC has not given his approval sans conditions. There are some conditions that he has outlined for a total approval of the merger. The conditions that the FCC has imposed include a three year freeze on prices for satellite-radio service and inflated prices for satellite receivers. Another condition calls for additional service options for three years to give consumers choice to determine to which channels they want to subscribe. This means a la carte, that would be available within three months of the close of the deal Also, the FCC would require the combined XM-Sirius to set aside 24 channels of its equally for non-commercial and minority programming. Epilogue June 16, 2000: The Chairman, Kevin Martin, of the Federal Communications Commission (FCC) makes his mind on the matter known. He announces his support for the merger if the above conditions are met. Along with him 4 more members are there on the Commission (Dunbar, June 26, 2008, http://www.huffingtonpost.com ). Conclusion After two years of wrangling over the merger there is a clear sign from the Federal authorities that the merger would go through without much trouble. The following implications have been drawn to follow from the merger. XM Satellite Radio, based in Washington, with a subscriber base of 9 million customers, is more likely to experience an upsurge in its share prices in the coming weeks. Sirius Satellite Radio, based in New York City, with a subscriber base of 8.3 million customers, is likely to contribute more to the total amount of merger-related synergies. SDARS will never be the same again, because when the only two companies in this industry, are merged into one there is more likely to be a huge capacity build up so that consumer choice could be curtailed either way. Finally, no amount of gainsaying the fact that a merger of equal giants would skew the SDARS market in favor of the service provider, will help to reverse the trend. The news of the announcement of the Chairman of FCC on or around June 16, 2008, has set in motion further wild speculations about the merged entity. The uppermost among them is how well the market would adjust to prevent a kill-off of substitution services such as HD, i-pods, terrestrial-based, advertisement supported broadcasting services and so on? REFERENCES 1. Gaughan, Patrick A, (2007), mergers, Acquisitions and Corporate Restructurings, New Jersey, John Wiley & Sons. 2. Devos, Erik, Palani-Rajan, Kadpakkam and Krishnamoorthy, Sirinivasan (2005), Are There Synergy Gains in Mergers?, Retrieved on July 4, 2008. from www.fma.org/chicago/papers/synergies_paper/fma_2005.pdf . 3. www.tradingmarkets.com ( 2008-07-05), Sirius, XM Shares Rise Following Merger Approval, Retrieved on June 5, 2008-07-05. Read More