Thursday, September 14, 2006

A Deeper Look at The Credit Suisse Report

September 16, 2006

Today the subject of mergers once again came up. Once again, it was a driver of these equities. The Credit Suisse report discussed several outlines of possible mergers, and outlines the impact that the synergies would have if Sirius and XM were to merge. Given the contents of the report, it is little wonder why XM appreciated so quickly today.

Setting aside the regulatory process for a moment, lets take a deeper look at this, and show why XM stock moved up so sharply with the release of this report, and why the alleged comments by the FCC Chairman took the wind out of the sales of Sirius as well as XM.

1. Credit Suisse outlined in their report about 12.1 billion in synergies that would result from a merger. This would mean that virtually overnight the market cap of SDARTS would increase by $12 billion dollars.

2. The analysis assumes that XM gets a 51% premium to existing share price of XM so that the companies could merge as equals. This would make shares at the current price VERY ATTRACTIVE.

3. The analysis assumes that $2.2 billion of the synergies would be absorbed by XM shareholders in the form of the premium. This would leave 9.9 billion of synergies to be split between shareholders of Sirius and XM. That translates into an “instant” appreciation of $2.75 for Sirius shares and $12.90 for XM shares.

4. Credit Suisse also points out a consideration for a 50% arbitrage which brings SIRI to $5.41 and XM to $22.16. Still, this would represent an nice increase in stock price for both equities.

Regardless of whether you are a fan of a merger or not, there exists a fiduciary responsibility on the part of the boards of companies to the shareholders to at least explore the possibilities……..especially if the synergies that Credit Suisse eludes to are even in the right ballpark.

Will a merger happen? Who knows. Should these companies give due consideration to the concept? Absolutely. Are there downsides to a merger? At current valuations, it is pretty hard to find any that would negate at least consideration.

9/14/2006 04:02:00 PM

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