Why Doesn't the Market Like the Macrovision/Gemstar Deal?

As I noted earlier, this morning’s announcement of Macrovision’s (MVSN) deal to buy Gemstar-TV Guide (GMST) has some people scratching their heads - or if they own either stock, licking their wounds. Both stocks swooned Friday: Gemstar fell 99 cents, or 16.6%, to $4.99, while Macrovison dropped $5.55 to $20.44.

For a little more perspective on the deal, I checked in with Pete Dailey, a senior research analyst from Stratecast, which is a division of market research firm Frost & Sullivan. Dailey has a deep understanding of the TV technology market, and he’s just as confused about this deal as everyone else:

I don’t really understand Macrovision’s strategy here. I was just talking to one of my colleagues who focuses on content security and rights management, and he’s equally baffled. It could be that the deal is much more about embedding technology in consumer electronic devices than it is about the guide business of Gemstar.

I do think that we’ll see a proliferation of extenders and other consumer electronic devices that are positioned as media clients in the near future. Macrovision may see this as an emerging market segment, and that the combination of content security and content tracking, coupled with functionality for searching and introducing relevant content, will be a material catalyst for this emerging category of consumer electronics.

Remember that for Gemstar, the guide business as implemented by MSOs [the cable companies] is largely a domestic phenomenon. Internationally, the guides are embedded in TVs. This means that Gemstar already has working relationships with CE [manufacturers], and has business and technology practices that are accustomed to porting to CE at a basic hardware architectural level. Gemstar probably also has some distribution channel and retail visibility in the CE world outside the US. Just speculating.

All that said, he adds:

However, I remain unconvinced that there is material synergy for either side on this merger.

The WSJ’s Deal Journal has some comments from the post-announcement conference call, which apparently did not appease the Street. Deal Journal included this comment from Fred Amoroso, Macrovision’s CEO:

Look, I recognize this is a complex transaction, no kidding. You got a little company, you got $800 million of debt, there are certainly questions, the debt markets haven’t been the most robust and all of that. But you know what? We don’t make decisions and we haven’t looked at this as a factor of what the immediate first-day market reaction is going to be.

Apparently not.