Sirius XM: The Back Door Is Open For Liberty

Feb.26.12 | About: Sirius XM (SIRI)

As an investor in Sirius XM (NASDAQ:SIRI) who spends an inordinate amount of time researching the underlying currents surrounding my stock, I am barraged on a daily basis with speculation about Liberty's (NASDAQ:LMCA) stake, the company's next moves, and what it will mean for Sirius XM in the future. Tune out the noise of buyout speculators suggesting Apple (NASDAQ:AAPL), Research In Motion (RIMM), or even Dell (NASDAQ:DELL) or Microsoft (NASDAQ:MSFT) could tender an offer or make a move here. To divert your attention from Liberty for any reason-- either short term or long-- is doing yourself a great disservice.

For all intents and purposes, we are entering what will be an extremely speculative week and a half, as Liberty's handcuffs come off on March 6th, and the company's limitations on what it can own with regards to Sirius XM are removed. There has been so much speculation about possible buyouts, Reverse Morris Trust, what Liberty must acquire or do to utilize NOL's, and even what recent insider sales might mean as to Liberty's intentions in the future. This has offered great conversation, but-- personally, something has been nagging the back of my brain as I read all this. Here's a little background, and my take.

Money is the only thing that talks in the business world. Do yourself a favor and watch the movie Wall Street, and Wall Street : Money Never Sleeps (my personal preference is the original from 1987.) After watching these movies, do you walk away with a nice fuzzy feeling about business or the stock market? Do you walk away with a sense that the "little guys" are, as a general rule, anywhere in the big guys' minds as they go about their day to day? It's a ruthless, backstabbing, "thief in the night" type of game. To expect anything else is doing yourself a disservice, and an almost sure way to lose.

I ran my own business for many years, selling products online. From doing this I learned that one increases their chances of being successful GREATLY by pushing the competition-- your opponents-- into thinking you are doing one thing, while setting your game up to do something completely different. Ethical? Perhaps not, but business, investing and money, is war. And as I am immensely fond of comparing the two as I did in a recent article here, I wish to share two quotes applicable to what I am about to hypothesize :

"Be extremely subtle even to the point of formlessness. Be extremely mysterious even to the point of soundlessness. Thereby you can be the director of the opponent's fate." -Sun Tzu

"All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near." -Sun Tzu

How do we apply this to the current situation? First, we have to look at the majority player, Liberty, and understand the company's limitations... the "ruse" that I think people are falling for. There is a limitation which Liberty is, and has been subject to, that basically says it cannot increase its stake to allow it controlling interest in Sirius XM, until March 6th, 2012.

Question everything, be skeptical. Right now, as investors in Sirius XM, although Liberty holds 40% of the company you have invested, in, it is --for all intents and purposes-- your enemy. Expect the unexpected. Filter out the noise of what the "rules" say must happen, and understand that there are always back doors left open that can and most likely will be used.

Based on my skepticism, I will outline for you what I expect in the most simple terms.

I expect that Liberty will take advantage of a back door, which does not require it to enter into a bidding war for whatever percentage of Sirius XM it wishes to increase its stake to. I expect that Liberty, as of this writing (February 25th, 2012), has already made moves to acquire the vast majority of what it seeks in the future. To expect the more obvious suggestions that Liberty will have to purchase shares on the open market, or to accept what I feel are absurd suggestions, that Liberty will have to enter into some bidding war vs. another major player in order to acquire their stake, is folly.

I chalk up recent price action (up to 6 months worth of it) to calculated plays executed in order to shake out and acquire large numbers of shares for the impending move or moves Liberty is likely to undertake. I expect back door deals with a third party or parties, in order for those at the top and in control, to make the most from the coming activity. I expect more that Liberty will walk next door to its neighbor, and pay Bob for his shares Bob purchased for them ahead of time, plus a premium for his assistance, more than I expect Liberty to walk out its front door with a megaphone screaming to the public that it is ready to start buying at prices dictated by "everyone else."

Fines by the SEC for such activity? Maybe... but consider the upside profit that will likely outweigh any fines it may receive. Fines are merely there to make the public feel better about being "had." As a child, I knew enough that a punishment was often a small price to pay for a greater reward, even if I did ham it up a bit and pretend that a week of no video games was a "really big deal."

It's just business, it's not personal. And for those invested, I think you will do very well to expect the unexpected.

Disclosure: I am long SIRI.

Additional disclosure: I am long SIRI March $2 calls. I have no positions in any other stocks mentioned.