Sirius-XM Combination: A Future Microsoft Acquisition?

Shares of Sirius (SIRI) and XM Satellite Radio (XMSR)have fallen over 30% since the reiteration of sell ratings and lowering of price targets for both companies by Goldman Sachs last week. 

With the sell off, the combined market capitalization of the companies now stands at just over $5.1B, levels not seen since Q4 of 2003.

At that time, the companies were approximately one fourth their current size in terms of subscribers and revenue. 

The Goldman analyst cited slowing sales, competition from other entertainment sources and the outstanding debt of both companies as key reasons for the negative rating, painting a bleak picture for the future of the combined companies and a dire picture if the planned merger does not happen. 

There’s no question that the world has changed dramatically since the merger was first announced in February 2007.  Since that time the iPod and iPhone (AAPL) have become the music and entertainment platforms of choice, digital radio has recently started to gain traction and terrestrial radio continues to fight on.  If the merger is finally approved, the new Sirius is going to have a difficult time competing with these companies as an independent entity.  Saddled with billions in debt and considering future capital needs for operations, infrastructure and devices, future financial success looks questionable at best.  I, however, do not see the company remaining independent for long.

I anticipate the company will eventually become part of a larger media or media/technology company that could make the required investments to finally realize the long promised financial success of satellite radio.  The company that could most benefit by such as acquisition is Microsoft.

There are two key selling points that make the combined entity attractive to a company like Microsoft (MSFT).  First and most obvious is content.  No entertainment platform will offer breadth of original content that the combined company will have.  From Howard Stern and Opey and Anthony, to the NFL and Major League Baseball, to Oprah and Martha Stewart, to CNBC and Bloomberg, music of all genres, etc, etc, etc. 

Second and most important is the potential to dominate the automobile environment.  Next to the home and work, the automobile is the third most important environment for most people.  Currently Microsoft controls the operating system of most home and business computers, and it’s obvious they see opportunity with the automobile.  Last year they launched a product called Sync in select Ford vehicles.  Sync is an integrated, voice activated communication and entertainment system for wireless handsets and digital music players.  The product has been a modest success and will be made available on most Ford, Lincoln and Mercury models later this year.  The company has plans to expand the Sync product to other automobile companies in the future. 

By acquiring or making a significant equity investment in the new Sirius, Microsoft could establish a dominant position in the automobile environment.  Such a venture would give the company an unmatched radio platform, in-car satellite TV capabilities and the future opportunity to deliver internet access and other value added services.  Additionally, Microsoft would become the dominant internet radio company and could leverage the content provided by satellite radio to boost their Zune product, finally creating a viable competitor to Apple’s iPod.

As of the end of Q108, Sirius and XM reported net debt of about $2.5B, which when added to their current market capitalization of $5.1B, brings the enterprise value of the combined company to approximately $7.6B.  Microsoft could choose to pursue an outright acquisition of the new Sirius for approximately $10B or take an equity stake by making a smaller investment.  I see the latter a the quickest way to gain traction as it is less likely to garner scrutiny from the DOJ and the FCC, however with Microsoft and Sirius/XM, you never know!  The government seems to have it out for these two companies.

All of this is hypothetical of course, but my hope is the Mel Karmazin has been thinking the same way and is ready to put such a plan into action after the deal finally closes.  If not with Microsoft, then with Google (GOOG) or a major media company like GE (GE) and or Disney (DIS).

Disclosure: The author currently maintains an actively traded long position in shares of both Sirius and Microsoft.

Comments

[jimmydasaint]

Love this idea! Now what are the chances of this happening?

JD
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[buddylee]

I would hate to see the circus the beauraucrats would set up on a Microsoft, Siri/XM deal. I don't think the Doj would let microsoft acquire Big Lots without a fight. But Google on the other hand now there's an idea.

[ace22]

Apple and sirius need to make a deal!!
Think of the power you would have if your i-pod had sirius radio

[lumberjak]

don't forget some of the other companies we use regularly in the car - RIMM, Sony, AT+T, Verizon, Garmin... may want to add content for mobile users.

[Stockguy456]

sounds like time warner and aol???????

[User 213962]

Sirius is going to get some big company's financial help or some kind of deal soon. Just my opinion.

[toolong]

Don't forget the number 1 car toy - GPS. XM has services that link into GPS systems for real time routing around traffic jams.

[Jon Smirl]

This will never happen. If Microsoft wants to do mobile radio they'll do Internet radio and then use devices like the iPhone to stream it to your car. Cellular based streaming Internet radio is a long term threat to satellite radio and should ultimately kill it. Cell radio will appear to be free since it is bundled into your cell plan.

Why hasn't someone cut a deal to use the cell based systems like OnStar to stream radio to cars?

[Paul in FL]

There is no way that the merged Sirius-XM company will remain a stand alone entity. It's too juicy a fruit on the tree for the large media conglomerates to pass up on. The merged company will be the ONLY satrad game in town with capabilities yet to be discovered and they can have it if they have the money. Once it's gone it is gone for good. Just watch the bidding to buy it. Satellite radio is not what it is today, but like the fledgling PC business of the 1980's satrad is about what it can become. Some would call it a once in a lifetime opportunity. I would be one of those.

[quixsilver]

I mentioned something about this a couple weeks back - this guy went into a lot more detail though. Good to know there are others out there thinking outside the box and recognizing potential game-changing variables other than the current merger nonsense.

[tech man]

good call paul in fl. glad i am not the ony one thinking this way. something good is about to happen. that is why most are holding on the this one. better days ahead. just hang in there, even though this is a bad day at the market. yep. people are panic selling again. however, a good time to add to positions.

[Cash BackReal Estate]

This is a brilliant! It would seem to be a valuable asset tothe right buyer.

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[omagod500]

I would love it if one of the corps trying to block the merger then moved to acquire the combined company. It would be even greater if the FCC approved the merger in the short order that it usually does...

[lumberjak]

We've heard Mel say 'content' rules. This unique assembly of content that he has built will be equally entertaining over WiMax or cell or sats. Sirius is more and more an entertainment company. And Mel is a dealmaker. I bet he's got the next move waiting in the wings.

[jimmydasaint]

Check out this video posted on Yahaoo from Jim Kramer today...if he's right, then the companies are doomed! We just can't catch a break...WTF!

www.thestreet.com/_yah...;cm_cat=FREE&c...

[satelliteradio isdead]

Microsoft, are you kidding? This has got to be the stupidest speculation I've ever read on satellite radio. Will you people please face reality and take your tax loss? You've long missed your sell signal when you start believing your own BS. Decent technology but awful, dreadful financials. Sell the stocks.

[one959]

But they are already working with Apple :-)

Apple iPhone Gets Streaming Sirius Satellite Radio

www.mobilemag.com/cont.../

[Roxieanne]

Everytime that a question of who should buy whom comes up-----three or four names pop up---i.e. Microsoft and Google being two.

Assuming the merger happens SIRI/XM should expand their own markets------Siri already services Canada and soon Puerto Rico with merger approvala----why not become the commercial Voice of America -----its Sirius with all of the programs it currently has.

Name identification is high, programming good, satellites in the sky-----nothing wrong with some partnerships here and there but a takeover by one of the well knowns such as Microsoft or Google would destroy it' s uniqueness.

[cos1000]

Roxieanne.....I agree with you on Brand dilution by these names. Besides with their network of satellites, which is really all Google and Microsoft would be after, they will have their own opportunities to lease bandwidth while maintaining content control and quality.

[Oii55544]

Microsoft... you mean that company that screws up everything it touches?

I understand that Kevin Martin would like to buy XM when he has it down to a dime? ... Maybe next week!

[stillwaiting]

i hope microsoft got the memo

[Zeninvestor]

Who knows about Microsoft, but you make a good point that SIRI has a long future in the car industry. Remember too that they have hardware circling the earth that can provide internet, and other content across the country to your automobile. WiFi from your dashboard anyone?

[The RealExpert]

The wiest piece of advice here "Microsoft, are you kidding? This has got to be the stupidest speculation I've ever read on satellite radio. Will you people please face reality and take your tax loss? You've long missed your sell signal when you start believing your own BS. Decent technology but awful, dreadful financials. Sell the stocks."

It's funny to see some of these people think that this article is somehow "thinking out of the box." I would classify it as being written by a 10th grader.

Microsoft would never take a dying company in a dying industry. They learned alot from previous bad telecom investments and they sure arent going to invest in this ancient satelite radio, unless its broadband satelite radio, which is on the way.

[The RealExpert]

The BEST piece of advice here "Microsoft, are you kidding? This has got to be the stupidest speculation I've ever read on satellite radio. Will you people please face reality and take your tax loss? You've long missed your sell signal when you start believing your own BS. Decent technology but awful, dreadful financials. Sell the stocks."

[zeno79]

Buy XMSR and SIRI both, let them merge. They have a big cost reduction then. And afterwards Microsoft will take them over.
glta