1. Explain the acquisition. How subjective are the intangible asset valuations? Why did Sirius XM Radio immediately write off $ 4.77 billion of the acquired goodwill? Did the write-off indicate Sirius overpaid for XM radio? Was the merger a wise one for Sirius? For XM?
2. Assume there were no costs associated with Mr. Stern’s contract other than the $ 500 million cash payment and $ 200 million of common stock, paid as follows: $ 300 million January 1, 2006; $ 100 million January 1 of 2007, 2008, 2009, and 2010. (For this question, assume there is no difference in value between the cash and common stock.)
a. Assume Sirius Radio’s cost of capital was 15%. Should Sirius Radio have entered into the contract with Mr. Stern? What assumptions did you make? Explain your assumptions about revenue per subscriber per month. Explain subscriber acquisition costs (Exhibits 3 and 7), and explain why you did or did not include them in your evaluation.
b. Should Sirius XM Radio re-sign Mr. Stern when his contract expires on December 31, 2010? If so, how much should it offer to pay him? Explain.
3. Would you have offered Sirius XM Radio the same financing terms on February 17, 2009, as those Liberty Media offered? Explain.
4. What do the Liberty Media investment terms imply for Sirius XM Radio’s value? Explain.
On February 10, 2009, Sirius XM Radio Inc. announced that it was working with advisors to prepare for a possible bankruptcy filing.1 Sirius Radio and XM Radio had been competitors in the satellite radio broadcasting field from 2002 until July 28, 2008, when Sirius acquired XM. XM Radio had offered the world’s first satellite radio service beginning November 12, 2001. Sirius Satellite Radio launched a more limited satellite radio service February 14, 2002, in Denver, Houston, Phoenix, and Jackson, Mississippi, and then expanded nationally in mid- 2002.3 XM and Sirius began with similar operations and funding. By December 31, 2002, XM Satellite Radio had raised about $ 1.8 billion ($ 1.5 billion from the sale of common stock and $ 270 million from long- term debt); Sirius had raised about $ 2.2 billion ($ 960 million from the sale of common stock, $ 670 million from long- term debt, and $ 530 million from cumulative convertible preferred stock). XM had spent about $ 815 million for property and equipment; Sirius had spent about $ 1 billion (primarily for satellites and related equipment). Each had cumulative losses of about $ 900 million by December 31, 2002.