Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on
The announcement of a proposed merger between
Sirius Satellite Radio
and its archrival
XM Satellite Radio
( XMSR) was treated by most of the media this week as if it were just another financial event to be studied through the prism of balance-sheet analysis and the federal regulatory approval process.
But the merger plan actually amounts to the death of a dream for investors who came to believe that shares of Sirius -- propelled skyward for a short time by the hiring of snarky talk show host Howard Stern -- would make them rich beyond compare.
For while the merger might ultimately save the company from total oblivion, it is unlikely to save investors from billions of dollars in losses incurred over the past several years or, perhaps more importantly, from a loss of faith in stock ownership.
Millions of people bought Sirius shares at $6 to $8 for their retirement accounts and rode them down to $3.50, never losing faith in Stern. At this point, they need to face up to the fact that they're stuck. Stern made half a billion. They will make nothing. They can file SIRI stock certificates away under "S" for stupid. They blew it.
How did this happen? It's a weird deal, it really is. For reasons that are little understood, certain public companies occasionally acquire an iconic status that inflates their market value light years beyond real value. Optimism overpowers common sense, and investors pile into shares of an unprofitable but sexy company that they believe will surprise skeptics and dominate the world.
Sirius earned that status around 2003, after it was rescued from bankruptcy by the skin of its teeth. Shares had plunged from the mid-$60s in 2000 to less than $1 by 2002. They then gently tripled to around $3 when its "radio in the sky" service launched nationwide. Investors figured a dozen years of fitful planning and marketing, and the expenditure of massive amounts of money, were finally about to pay off.
The company was considered special, in part because of the great timing of its service debut. The bear market of 2000 to 2002 was ending, the Iraq war was starting, the president was riding high, optimism was returning, and investors were in the mood to fall in love. I
recommended the stock at $1.15 in May that year in a column, arguing that it was like buying into the early days of cable TV.
Commuters stuck in vast suburban traffic jams from Long Island in New York to the San Fernando Valley in Southern California were the first to catch on to the promise of satellite radio and buy shares of Sirius and XM in mid-2003. No longer did they have to listen to the endless commercials and DJ drivel of conventional FM radio -- they were free!
They filled stock chat boards with endless messages about their love for the service, which cost around $10 per month, passed around spreadsheets showing the incredible profits the companies would earn if they only converted 5% to 10% of their potential audience, and vowed to put their kids' college savings money into the stocks.
Auto makers, which had already blown millions of dollars by backing satellite radio's early years in the belief that they would help kick-start sales, started installing the devices at their factories. Analysts caught the fever and published estimates that Sirius would rise to $10, $20 and beyond -- more than five times the price at the time.
But the fervor really kicked into overdrive in October 2004, when Stern announced that he would bolt from his long-term syndicated radio deal at CBS in New York for what seemed like the perfect setup at Sirius. No longer would he be hamstrung by restrictions on foul language imposed on conventional radio by federal regulators. He would be free to speak freely on a satellite broadcast and cuss out his parade of cross-dressing, dope-smoking, sex-switching guests on the air in any way he saw fit.
Trading Satellites for Apples
That sounded good, as Stern was the most popular radio host in America at the time, and shares soared on the news. But the price Sirius agreed to pay for Stern's services -- $500 million -- was utterly outrageous and emblematic of the company's unconscionable overspending on content, hardware subsidies and distribution.
By then, the iPod had also begun to come into vogue, and I came to believe that given a choice between listening to their own tunes on a portable device and listening to programming shoved down their ears over the air (even it was commercial-free), consumers would prefer the former. I
wrote a column in mid-December 2004 encouraging readers to sell Sirius at $9 and buy iPod maker
Since that time, Sirius shares have pretty much gone straight down, sinking more than 50%, while Apple shares have gone straight up, advancing 170%.
But you know, it didn't take a genius, or a psychic, to understand why this would happen. It was just common sense. No matter how popular Sirius became, it was almost impossible to determine how it would ever make a profit -- which is the only thing that should ultimately matter to investors. Apple, in contrast, was already wildly profitable -- and set to become more so.
The merger announcement lifted Sirius by about 10% Feb. 19, and the company issued an earnings report that Wednesday that was not quite as terrible as usual. But make no mistake: The death march is on. If the merger deal fails to gain regulators' approval -- and the betting now is that its chances of success are less than 30% -- Sirius shares are headed back under $3 by the end of the year.
At the time of publication, Jon Markman owned shares of Apple, although positions may change at any time.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
to send him an email.