Ever since the merger between Sirius and XM was announced in February of 2007, there has been questions as to which satellite radio company to invest in, whether it was better to stay on the sidelines, or simply what the best investment strategy is. The answer is complex, but the first question an investor needs to ask is simple, and it is not even merger related.
Do you believe that satellite radio is a viable business?
If you do not believe it is viable, then your investment answer is quite simple. However, if you believe in the sector, then researching these companies both as stand alone operations, as well as a merged entity is your next logical step, and many people have many opinions as to which company is a better investment. Personally, I have long been invested in both Sirius as well as XM. These questions however have been somewhat put on hold because of the merger, and that brings us to the next logical question.
Do You Believe The Merger Will Pass?
If the answer is no, then your investment strategy will rely on whichever company you think will hold better value and be a better performer as a stand alone company. Both Sirius and XM have various attributes that investors can consider. Quarterly reports and annual reports are readily available for each. While this sounds simple enough, investors need to remember that the companies are on different stages in their growth, they have deals that are structured differently, and they have various obligations that come into play both in the short term and long term. As if that was not enough, not all metrics reported by the companies can be compared in a direct manner. Average Revenue Per Subscriber (ARPU), Subscriber Acquisition Costs (SAC), Subscriber Counts, Churn, Revenue Share, Marketing Strategies, and other categories all have differences that an investor needs to consider.
If you do believe the merger will pass, then it becomes a question of timing. Recently, the spread between the current stock prices and the announced deal of 4.6 shares of Sirius for each share of XM have widened to levels that have not been seen since August of 2007. People looking to play that spread can lock in a decent profit by taking a position in XM. As of the close on January 8, 2008, the ratio was at 3.84 to 1 (as opposed to the 4.6 to 1 deal as announced) , meaning that an investment in XM today would garner a 16.5% profit on the spread alone should the merger be announced now.
Many are still undecided about whether or not the merger will pass. There is a lot of money on the sidelines waiting for announcement before taking any action. When that announcement will come is anyone's guess at this point, but many feel that a Department of Justice decision could come at any time. It will be interesting to see the streets sentiment going forward.
Position - Long Sirius, Long XM