Will they or won't they?

Merger speculation leaves 'em guessing

Apparently, some on Wall Street have become transfixed by the possibility of a Sirius Satellite Radio merger with XM Satellite Radio. Heck, CNBC star stock pundit Jim Cramer routinely lampoons both stocks because the companies haven't already merged.

The stocks of both, decimated by nearly 50% last year, have been in rally mode so far this year, much of the bullishness attributed to the speculation.

But when FCC chairman Kevin Martin said last week that laws would prohibit such a merger, XM and Sirius shares plunged 10% and 7%, respectively. A day later, Martin said rules could be changed to allow a merger and XM and Sirius shares soared 6% and 5%, respectively.

The satellite radio sector is no stranger to volatility, but the fuel added by the will-they-or-won't-they-merge speculation has investors buying and selling at monstrous levels. Sirius, for example, routinely boasts one of the most active stocks traded. On Thursday, the volume was a whopping 95 million shares, more than twice normal. XM shares, at a volume of more than 24 million, was also better than twice its average. By comparison, Clear Channel Communications, the nation's largest radio company, saw volume of less than 9 million shares that day.

J.P. Morgan Securities analyst Barton Crockett last week upgraded shares of both companies to "overweight" from "neutral," writing that "XM and Sirius could potentially attempt a merger this year, with regulator approval a toss-up."

Others are more skeptical.

Oppenheimer analyst Thomas Eagan is bullish on both stocks but advised investors not to buy "on merger hype," but instead to wait for a pullback as excitement dissipates.

Eagan argues that Sirius execs are more interested in a merger than are XM's, though he adds that Sirius "management's consistent discussion of the benefits of a merger may provoke XM to at least look at merger economics."

As for regulators, he points, as others often do, to the example of DirecTV and EchoStar Communications, which haven't been able to merge. He also notes that the competitive landscapes of satellite radio and satellite TV are not identical.

"The satellite radio market is more easily broadened to include terrestrial radio and iPod use," the analyst said, which should ease anticompetition concerns.

Banc of America analyst Jonathan Jacoby also weighed in, though with a bit more caution: "If a merger agreement is announced, we believe that attaining the FCC's blessing could prove difficult," he said.