XM or Sirius? Why Not Both?

One of the hottest rumors on Wall Street these days is the merger between XM Satellite Radio (XMSR) and Sirius (SIRI).

While some analysts and investors were already talking about a merger as being the saving grace for both companies as far back as last year, the rumors were intensified a few weeks ago after Sirius CEO Mel Karmazin noted in an interview that the idea has crossed his mind, and in fact, he mentioned it to XM executives.

According to Mr. Karmazin XM executives laughed at the idea, but it does make business sense.

Both companies continue to struggle to make profits and decrease costs. The problem is that there doesn’t seem to be enough room for both companies on the market. There are a limited number of car companies to make deals with.

While there is room in pushing the sale of satellite radio into consumers’ homes, the competitive fight between the two companies will mean increased marketing costs, which both cannot afford.

It is obvious that satellite radio will be the norm in everyone’s daily lives, whether in the car, at home, at your work desk, or outside on the run. But the problem is which company will be the eventual winner as an investment vehicle.

It seems that it will be difficult for one stock to win over the other in the long run, especially if both continue their stubborn cash burning ways, and continue to fight over big name talk show hosts and music industry stars. The value of the entertainment content will be diluted, if not already.

It just makes sense to merge, thereby providing consumers with full entertainment value for their money, and in turn decreased marketing costs for the merged company as competition would be non-existent.

Now of course, all this merger talk is moot if the FCC decides to block the deal, probably based on monopoly issues. However, if the two do merge, there are others capable of stepping in as the new competition.

But even assuming that a merger is not possible, or will not happen, investors could play the satellite game safely by investing in both companies.

Whether the merger occurs, or one company wins out, or if both survive into profitability, holding both stocks in your portfolio would be the wise choice.

As such, both company stocks, XM and Sirius are now STI Stock Picks.

XMSR vs. SIRI 1-yr chart:

Comments

[NO DooDahs:]

Why not neither?

Seriously, if we separate the "cool technology of tomorrow" from the companies involved, there is a profound risk that both of these companies could wind up bankrupt, and the technology would still be viable, and good, and some other company will wind up being a multibagger when it obtains the FCC licenses. Or, perhaps private equity will step in during their bankruptcy plans.

There is no doubt that terrestrial radio WON'T go up 1500%. There is some doubt that satellite radio MIGHT go down 100%. I would (and have, actually!) take terrestrial radio for a trade and a value play before touching XMSR or SIRI, although (disclosure) I have shorted SIRI before …

2006 Dec 19 05:55 PM

[Ron Coleman:]

H.S. I think you are absolutely right. I have been saying the same thing for some time now, great article.

2006 Dec 26 03:56 PM