Reports: FanDuel and DraftKings in Merger Talks

Multiple news sources are reporting that FanDuel and DraftKings are in merger talks. Bloomberg first reported that “people familiar with the situation” said investors in both companies have been pushing for the two companies to join forces for quite some time.

Although unconfirmed, a potential merger does make sense on multiple fronts. Both companies offer nearly identical products and face significant legal challenges in the United States. Joining forces would allow them to focus more effort on the legal challenges the industry faces and spend less money competing with one another for business.

iSpot.tv reported last year that FanDuel and DraftKings spent $205.9 million from January to October and another $107 million in September alone. Since then, legal challenges have mounted and both sites have cut way back on advertising spend. The most recent report from Bloomberg states that both companies were valued at $1 billion each but have since seen their valuations drop by roughly 50%.

After the fantasy sports industry hit its high point last year, an increasing number of state district attorneys have looked into the matter and accused both sites of violating state anti-gambling laws. New York State, which is estimated to account for about 10% of each site’s user base, has been especially problematic since Attorney General Eric Schneiderman issued a cease-and-desist order to both companies.

The legal battle in New York is ongoing today. Earlier this month, two legalization bills made headway in the legislature. However, the legislature adjourns for the year just two days from now. Barring any major news, those legalization bills will be shelved for the year and the issue will be decided by state courts who will determine whether or not the business model violates current state gambling laws.

New York is a key battleground, but it is hardly the only state that has given the two biggest daily fantasy sites trouble in recent times. Both sites currently restrict customers from Alabama, Arizona, Hawaii, Idaho, Iowa, Louisiana, Montana, Nevada, New York, Texas and Washington. The industry would like to see progress in each of those states plus clarification in nearly every other state in the US.

Legal costs are mounting as both sites are reported to employee teams of lobbyists and lawyers in a bid to situate themselves on solid legal grounds. A merger would make it more efficient for both fantasy sites to focus on their legal issues without the distraction of competing with one another for new customers. Competition from sites other than FanDuel and DraftKings is expected to account for no more than 5% of all daily fantasy players.

This also raises the question of the FTC or DOJ even allowing the merger to happen in the first place considering FanDuel and DraftKings account for up to 95% of the market. Rumors suggesting a merger between the two largest companies in any industry usually invite scrutiny from federal regulators. Jodi Balsam, professor at Brooklyn Law School, told CBS News that a successful merger is “a long shot” proposition.

Whatever happens with these merger rumors, FanDuel and DraftKings face a common threat. It seems likely they will find some legally accepted means to pool their legal resources in an effort to keep the business model alive. Any advances on the legislative front will benefit both sites equally just as any setbacks will harm both sites equally. Daily fantasy is clearly popular among a significant portion of the population; and a key part of the regulated US betting industry, the biggest threat comes from unfavorable legislation.