NEW YORK (TheStreet) -- When it comes to rosy stock predictions, M&A hype is often the last refuge of a blown call by a Wall Street analyst. Research In Motion (RIMM), Best Buy (BBY) and Netflix (NFLX) are notable examples of stock breakdowns that precipitated M&A hype.
In the case of SiriusXM (SIRI), one of the market's most compelling battleground stocks, analysts deserve credit for sticking with their fundamental expectations for the company, and in particular, its dance with large minority shareholder Liberty Media (LMCA). As SiriusXM shares fell below $2 in June, well below the consensus analyst estimate, the satellite radio giant looked like yet another prime example of overoptimistic expectations clouded by M&A hype.
Noting changes in SiriusXM's relationship with Liberty Media and a recovery in its earnings, balance sheet and cash flow, analysts stuck with optimistic calls for Sirius to rise to $2.50 -- beyond $3, in some instances. After SiriusXM reported strong user, earnings and cash flow growth in second quarter earnings on Aug. 7 and Liberty Media subsequently bolstered its stake in the company to 46%, the Wall Street optimism appears vindicated.
On Thursday, SiriusXM touched a new 52-week high of $2.60 intraday, pushing the company to its highest level since the financial crisis.Three years after Liberty Media caught the market bottom with a 40% stake in SiriusXM, investors and analysts entered 2012 with the prospect that the easy money had been made on the company. But a detailed look at SiriusXM's earnings and takeout prospects still gave many room for optimism about its shares. Liberty Media gained its SiriusXM stake as a result of a $530 million loan it provided the satellite radio company in 2009. A standstill agreement that prevented Liberty Media from increasing its SiriusXM stake for three years expired in early 2012. In March, a petition with the Federal Communications Commission paved the way for Liberty Media to build its stake in SiriusXM towards control, which it's done in recent stock purchases. In February, anticipating the end to Liberty Media's lockup, Citigroup analyst Jason Bazinet made the argument that M&A could drive SiriusXM's stock in 2012, justifying a buy rating and $2.50 price target, and as Liberty builds its stake, those expectations seem justified. Deal speculation centers on whether Liberty Media will look to buy SiriusXM through a merger and tax-free spinoff transaction called a Reverse Morris Trust, or through a direct acquisition to take advantage of billions of net operating losses [NOLs]. However, the FCC petition and a subsequent request by SiriusXM to block some prospective stake increases revived speculation of a takeover by the highly acquisitive Liberty Media, and portrayed two companies at odds over the M&A end game. Bazinet's expectation for a deal changed slightly as a result of Liberty Media and SiriusXM's FCC petitions. Now he sees a merger and tax-free spinoff as remote because of the hostile relationship between the two companies and, instead, sees Liberty Media bidding for a controlling stake.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV