Late last week XM Satellite Radio and Sirius Satellite Radio announced an agreement for a “merger of equals” or MOE. This combination was one of the most mooted in recent memory; thus, the announcement was no surprise. Both firms are losing serious money and are likely to survive only by harvesting cost savings and price increases from getting together. Does this deal deserve “boos” or “booyahs”? ((To the uninitiated, “booyah” is a cheer or positive exclamation popularized by Jim Cramer, host of Mad Money, the highly-rated TV show on personal investing. Like “hoo-hah” and “Wahoo”, “booyah” is one of those Americanisms that has absolutely no antecedent, won’t be found in a dictionary, and spreads by word-of-mouth. Cramer hosted his show at Darden earlier this month to many booyahs from the audience.))
Officials of the Federal Communications Commission wasted no time before fretting about the antitrust implications of combining the only two satellite radio broadcasters in the U.S. Surely the FCC felt the outrage of consumers at the rising prices and declining service after the wave of cable TV system combinations in the 1990s. It is good to promote competition. We want the Feds to limit the rise of monopolies in our economy. But before the bandwagon of indignation gains speed, consider that intelligent antitrust regulation begins from a careful definition of the competitive field. Consumers buy satellite radio because they want music and talk—in our society there is no shortage of sources for these: we have radio, Internet, broadcast and cable TV, iPods, Muzak, etc. My take on the XM/Sirius deal is that its impact on competition in the delivery of music and talk will be rather small. David Henderson has an op-ed in the Wall Street Journal on the subject of the relevant market.
On the other hand, I have issues with the structure of this deal as publicized—this isn’t a “merger of equals,” it is an acquisition. This is true for most MOEs as I have argued in an op-ed some time ago. MOEs typically involve rather unequal partners. One is rather obviously the buyer, as judged by who controls Newco—in this case, that is Mel Karmazin at Sirius. MOEs enshrine the target’s management for some period of time and defer the inevitable pain of consolidation; the proxy statement will tell us how long the target management has an employment guarantee, but it is not unusual to see a two- to three-year term. And two research studies find an unsavory tradeoff of lower price for the target with higher side-payments to the target’s management in the form of guaranteed employment or exit bonuses. But this deal offers a 22 percent acquisition premium paid by Sirius for XM, a point that prompted Andrew Ross Sorkin to ask in last Sunday’s Times, why they called it a “merger of equals.”
We use euphemisms to mask unpleasant facts. Arguably, calling an acquisition a “merger of equals” reflects an effort to salve the target’s feelings about being taken over by hiding the fact that control is passing to someone else. In this case, it seems that XM was losing the horserace with Sirius and insisted on the palliative, MOE. At a 22 percent acquisition premium, it does not seem that Sirius is buying XM on the cheap. Anyway, it’s a deal between consenting adults, so one is tempted to ask why we should care how they describe this deal.
My reply is that we should always worry about descriptions and definitions. Sloppy thinking leads to sloppy deals, a theme of my book, Deals from Hell. A good business school education will teach one to cut through the fog of dubious phrases such as “earnings management,” “special purpose entities,” “momentum growth,” “guidance,” and “fairness opinion.” “Merger of equals” belongs in the same category. Loose language is the first instrument of control. Hearing the term, “merger of equals,” one should wonder who is trying to control whom, and why. This reminds me of Humpty-Dumpty’s exchange with Alice in Lewis Carroll’s Through the Looking-Glass:
“When I use a word,” Humpty Dumpty said, in a rather scornful tone, “it means just what I choose it to mean, neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master – that’s all.
Posted by Robert Bruner at 02/28/2007 06:00:15 PM