Technology

Return to Article

Sirius-XM Euphoria Fading

Scott Moritz

Updated from 7:19 a.m.

Wall Street didn't take long to register its approval of the proposed merger combining Sirius (SIRI) and XM (XMSR).

Shares in the satellite radio broadcasters rose early Tuesday as investors wagered that regulators will smile on an all-stock deal bringing the longtime rivals together.

The deal, announced Monday afternoon, gives XM shareholders 4.6 Sirius shares for each XM share outstanding. As announced, the transaction is worth $4.57 billion, a 22% premium to Friday's closing prices.

But the landmark merger is worth far more than that based on early trading Tuesday. Investors enthusiastically sent shares in both companies into the stratosphere in premarket action, with Sirius jumping 12% and XM soaring 30%, before those gains eroded in early regular trading.

At 9:48 a.m. EDT, Sirius was up 23 cents to $3.93, making the merger worth $18.08 an XM share, or about $4.85 billion. XM shares were up $1.39 at $15.37.

The rally marks a sharp turn from last year's action, when shares in both companies lost more than 40% of their value as growth slowed, losses mounted and new competition loomed.

So the satellite radio broadcasters, long favorites of growth investors who don't mind a walk on the speculative side, finally did Monday what many fans have demanded for months and years: They announced a merger.

The new company, whose name hasn't been announced, will be led by Sirius chief Mel Karmazin.

The question, as Tuesday's trading opens following Monday's President's Day holiday, is whether the early rally will hold up. Shares in both XM and Sirius regularly trade heavily, and with investors placing bets on the merger's prospects for regulatory approval, Tuesday's action should be frenetic.

Investors may be eager to see the companies combine, in hopes that a merger will create a more efficient player less apt to burn through mountains of cash. Karmazin said in Monday's press release that the deal is "the next logical step in the evolution of audio entertainment."

But regulatory hurdles remain and it's not clear how Sirius investors will view the prospect of the company issuing more than a billion shares in the name of acquiring a struggling competitor. In addition, both companies have shown signs in recent months of a pronounced slowdown in their once-red-hot growth -- raising the question of what investors will expect out of a merged XM-Sirius combination and whether the company can deliver.

Shareholders have grown weary of financing Sirius' and XM's ever-growing needs for cash, particularly with rivals to satellite radio sprouting at every turn. The past year was marked by consumers' embrace of the Apple (AAPL) iPod, and now cell-phone companies are trying to grab market share with music phones of their own. Whether a combined Sirius-XM would be better equipped to advance technologically will be an important question for investors to weigh.

Karmazin and XM Chairman Gary Parsons, who is to be chairman of the combined company, will brief analysts and investors at 8:30 a.m. EST Tuesday.