XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI)……there can be only one.
Read carefully, because this is not a suggestion that one or both CEO’s need to leave immediately. This is a blueprint. The last CEO change suggestion is a tough one and in many ways is roughly the same call. One CEO is much more famous than the other, yet the lesser-known CEO currently is in better standing with the street. This is also more strategic suggestion than it is pondering. These competing companies need to merge and we urge them to pursue a merger before year-end so they can hide behind what the street is thinking will be bad holiday sales.
Doug and I already offered a brief indication and opinion two weeks ago about what a combined SIRI/XMSR would look like and what it could save, a week before other research notes pointed that direction. Lehman pointed out the synergies to the companies would be in the vicinty north of $9 for SIRI and north of $40 for XMSR, although that isn’t our call and those numbers are for the "beneficiary" party of the merger (which there can only be one). There are obvious regulatory issues that would have to be resolved and the combined companies would have to sign some future product pricings in blood, but the difference between a merger of these two and a merger of two other behemoths is how relevent these are to life. This isn’t exactly like the cable companies and the satellite companies all trying to merge into one conglomerate that controls all we see and hear. Unless you are on the road all the time, satellite radio companies are not exactly vital to the economic models out there. The best comparison is one of media to food & water, satellite radio would be considered chewing gum as far as the importance to survival. So what needs to happen?
Sirius’ (SIRI) Mel Karmazin and XM’s (XMSR) Hugh Panero are in a dead tie for who needs to go and depending on which month it is you have six of one and a half-dozen of the other. Please don’t take this the wrong way. It wouldn’t be good for either of these heads to step down immediately. XM & Sirius need to announce a merger first and then the contest can begin for the surviving face man. Remember, this is strategic and longer-term. If you want to can the famous guy then it’s Karmazin; if you want to boot the unknown then you pick Panero. We have been vocal that both XM and Sirius needed to do a lot more for shareholders since summer. XM has been doing a better job than Sirius in the last month. XMSR shares were down more than 50% for 2006 before recovering recently, and SIRI shares are just trying to hold onto a base here and are down almost 50% for the year.
What the companies could even try doing is make one of the CEO’s the head of the divestitures and responsible for the inevitable new product launches. Wall Street would probably accept that, particularly if you think of contingency and instant back-up plans if disaster ever struck. The CEO’s could even do a coin toss over who gets to be the face man. Both are considered deal makers on the street, so it isn’t that either is irrelevant. It isn’t like one or both have to look forward to feeding park pigeons for the rest of their days. But only one of these two can can remain as the CEO and front face man after the merger. The companies may never merge, but if they do not there are going to be more shareholder problems that are harder to model for TWO companies instead of one. People love their satellite radios and there is no denying that.
Wall Street (and 24/7 Wall St.) has already given the blueprint to the companies, now both CEO’s need to stomach some pride and pull the trigger.
Jon C. Ogg
December 19, 2006
This is part of "THE 10 CEO’s THAT NEED TO GO" series. Jon Ogg can be reached at email@example.com; he does not hold securities in the companies he covers.