IFRS and GAAP differentation question and XM radio review

Jan 25th, 2014
Price: $20 USD

Question description

Question 1: Discuss the significant differences between the IFRS and GAAP as it relates to Earnings per Share. Identify which you prefer and state why.

Question 2:  This case covers the Sirius Radio’s 2008 acquisition of XM Radio and the combined firm’s near bankruptcy in early 2009.  Sirius Radio and XM Radio entered the satellite radio market within months of each other, were of about the same size, had about the same capital structure, and had about equal operating losses.  The market was simply too small for such high-cost operations.

XM radio had an early lead and seemed destined to control the market with its long-term contracts to broadcast nearly all major professional sporting events.  However, Sirius Radio hired Howard Stern to a five-year, $500 million contract.  That saved Sirius Radio from immediate bankruptcy but also ensured that both firms would remain unprofitable until one or both declared bankruptcy, or merged.

The case can be used to cover three issues: (a) an unusual business combination that resulted in an immediate $4.8 billion impairment charge; (b) an unusual loan that gave the lender 40% of the firm’s equity, and; (c) the value of Howard Stern to the firm.

The firms agreed to merge on February 19, 2007, but were unable to complete the merger until July 28, 2008, because the firms needed approval from both the Justice Department and the FCC.  Because of accounting rules, XM Radio recorded $6.6 billion of goodwill based on the February 19, 2007, Sirius Radio share price, but immediately wrote off $4.8 billion of that goodwill because the market had declined in the 17 months between the agreement and acquisition dates.

By January 2009, the combined firm was about to declare bankruptcy when it was unable to refinance its debt due to the collapse of the lending market.  However, the firm obtained a $500 million loan that also gave the lender preferred stock worth 40% of the company’s total equity.  Those terms were highly attractive to the lender if the economy improved, but the lender could easily have lost the entire investment.  The economy did improve and the investment is now worth about $2 billion. Howard Stern’s contract expires in January 2011.  There is sufficient information in the case to estimate how much Howard Stern is worth to Sirius XM radio. What are you overall thoughts on this case?

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