The odds against a DraftKings-FanDuel merger

Last Updated Jun 14, 2016 8:03 AM EDT

DraftKings and FanDuel are reportedly in talks to merge as protracted fights over the legality of the daily fantasy sports games they provide take their toll on both companies' finances. Some legal experts argue, however, that the odds of antitrust regulators approving such a deal are slim.

Investors in the two companies have been pushing DraftKings, which is based in Boston, and FanDuel, headquartered in New York, to join forces for a while, Bloomberg reported, citing people familiar with the situation. The talks were still at a preliminary stage and could fall apart, the news service said.

FanDuel declined to comment on the Bloomberg story. DraftKings spokesperson Femi Wasserman said, "These rumors have existed for as long as both companies have been in operation. We don't comment on speculation."

"There are two glaring problems with even suggesting a merger between FanDuel and DraftKings," said Marc Edelman, an associate law professor at the Zicklin School of Business, Baruch College, City University of New York. "A merger between the No. 1 and No. 2 companies in any marketplace where those companies have an overwhelming share of the market is going to lead to significant antitrust scrutiny from the regulators whether it be the FTC [Federal Trade Commission] or the DOJ [Department of Justice].".

Not only was it "incredibly unlikely" that such a merger would survive antitrust scrutiny, but going through the process would open up DraftKings and FanDuel to additional scrutiny of their business practices and would subject their senior officers to "investigational hearings," he said.

"It seems to be a foolish proposition even to attempt to do this, especially as the lobbyists on behalf of FanDuel and DraftKings are attempting to quell chatter about these companies participating in a duopoly or an oligopoly," he said. "It makes me question who is providing antitrust counsel to these companies."

Edelman's view was backed up by Jodi Balsam, a professor at Brooklyn Law School, who noted that antitrust regulators recently blocked a merger of office supply retailers Staples (SPLS) and Office Depot (ODP) because they were the top two players in their market.

"I don't see how they allow DraftKings and FanDuel to merge when at the moment they have something like 95 percent of the combined market," she said. "It's a long shot."

If the merger report proves to be accurate, it underscores how dramatically the industry's fortunes have changed. At their peaks, DraftKings and FanDuel, which are privately held, each sported valuations of $1 billion. Both companies bombarded the media with commercials and built up huge followings until The New York Times starting raising questions about their business practices.

Now, they're battling officials in several states over how their industry should be regulated. Some argue that the games are a form of gambling and thus illegal, a notion the daily fantasy sports industry disputes.

"Twelve months ago, at the beginning of the NFL season they were trying to outdo one another and outspend one another so one of the two companies would emerge as the dominant force in fantasy sports," said Daniel Wallach, a sports law expert who follows the daily fantasy sports industry. "Today, they're comrades in arms more than anything else."

DraftKings and FanDuel are probably both spending "eight figures" on lobbying and legal costs, duplicative costs that they would no doubt like to pare down, Wallach said. For now, the betting is that they probably can't do anything about it.

Note: CBS News parent CBS Inc. has an ownership stake of less than 1% in FanDuel.

  • Jonathan Berr On Twitter»

    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.