June 16, 2016

The good, the bad and the ugly: A potential DraftKings-FanDuel merger

Will a DraftKings-FanDuel merger pan out?

Two of the largest and most influential daily fantasy sports companies in the country, DraftKings and FanDuel, are back in the news – or rather, they never left. Due to their similar legal challenges and nearly identical services, these fierce rivals may soon lay aside their competitive differences to join forces in a potential merger, as first reported by Bloomberg. 

While officials near to the situation revealed to Bloomberg that both companies have been pushing for a merger for a long time, the deal is not finalized and still has the potential to fail. Both companies have not yet responded to media requests at this time. Though this merger could present a united front against regulators attempting to classify their services as illegal gambling and lessen a competitive marketplace, there are various factors to consider when approaching this potential merger.

While a TechCrunch article wrote this merger would make sense, a Forbes piece disagreed, writing that it would not survive under antitrust review. Essentially, there are numerous good, bad and even ugly sides to a DraftKings-FanDuel merger.

The good
Most notably, DraftKings and FanDuel offer nearly identical services. While traditional fantasy sports involve no money and fake scores based on players' real-life output over the course of an entire season, these two companies allow consumers to bet money on players and teams in a day-long contest. As TechCrunch explains, on any given game day, participants can choose their unique NFL player lineup and earn points based on how well those players do on that particular day.

As these companies offer similar services, it makes more sense for them to merge and benefit from a united consumer base, instead of spending $206 million on television ads promoting their respective brands like the two did in 2015, according to CNN. From a sheer financial perspective, it doesn't seem logical that the two companies should continue to spend extravagant amounts of money, when they could just merge and redirect that advertising money toward their expensive national lobbying efforts and lawsuits.

The bad
Fantasy sports can be legal in states due to certain caveats in the Internet Gambling Prohibition and Enforcement Act of 2006 – at least on a national level. However, many states already have their own gambling laws set in place that don't allow for paid fantasy sports. This being said, attorneys general in 11 states – New York included – have already announced publicly that DraftKings and FanDuel's services violate their own states' gambling laws.

These companies have continuously fought and compromised in each of these states, stating that their services require a certain level of skill – not just luck – thus, making them legal. While it makes sense for these two companies to unite to fight these lawsuits, a merger would only bring antitrust scrutiny into the mix, Forbes explained. Due to the high-profile legal issues already raised in individuals states, it is extremely likely the Federal Trade Commission and Department of Justice would attempt to block a potential merger on antitrust grounds.

Despite this fact, both companies have influential investors who will most likely fight hard to see these lawsuits come to an end. DraftKings' investors include the Kraft Group (which also owns the NFL's New England Patriots) and Madison Square Garden, while Time Warner and KKR & Company backs FanDuel, according to Bloomberg.

The ugly
Following an ongoing legal battle with New York Attorney General Eric Schneiderman, both companies bared residents in the state from entering their paid daily fantasy sports contests this past March. Back in January, Schneiderman filed an an amended lawsuit against DraftKings and FanDuel, requiring them to make restitution on all money they made in the state, according to Reuters.

While this was a win for Schneiderman, the state's legislature is currently drafting new regulations that will allow New Yorkers to enter into the two companies' daily contests once again. Though the merger's success is less than certain, DraftKings and FanDuel still have a long road ahead in the 10 other states that will not accept paid entries.