If DraftKings And FanDuel Do Merge, Still A Lot Of Questions About New Company

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Possible DraftKings FanDuel merger

Reports of an imminent merger between DraftKings and FanDuel started trickling out last week, first at ESPN then at Bloomberg. That comes after months of chatter and years of speculation about a possible tie-up of the two daily fantasy sports companies.

But what we know so far barely scrapes the surface of the possible impact on the DFS landscape, what the resulting company might look like and what will happen moving forward.

Here is a look at some of the concerns:

What we know so far about DraftKings and FanDuel

Despite a couple of reports, few details have come out other than merger negotiations are far along.

As of this morning, Legal Sports Report can report that a deal had not yet been signed and/or finalized.

Bloomberg reported that FanDuel CEO Nigel Eccles would chair the board of the new company, and DraftKings CEO Jason Robins would be the chief executive. That report also indicated the merged company “will likely seek to raise money shortly after the merger.”

DraftKings’ official statement on a possible merger is the same as has been offered for some time now:

“As we have stated previously, a potential combination would be interesting to consider. However, as a matter of policy, we don’t comment on rumors or speculation, and there can be no assurances at this time that any discussion about a combination would result in an agreement or merger.”

That leaves plenty of questions to answer.

What’s the new company called, and one site or two?

A new name almost certainly isn’t in the cards. Both FanDuel and DraftKings have generated a lot of name recognition and brand awareness over the years, and the resulting company isn’t going to scrap that work.

The biggest question about a merger: How would the company function at a base level? Options include:

  1. They could simply retain two separate and distinct brands and continue on as before.
  2. The sites attempt to share some liquidity and merge the platforms to some degree, but operate as two different “skins,” perhaps in a way similar to how some online poker networks operate.
  3. The player base of one site is simply dumped into the player base of the other, and one platform is retired.

Options one and three exist as possibilities but seem less likely without more information about the companies’ current status and cash flow.

The cost of continuing to operate two entirely different and separate sites wouldn’t provide some of the cost savings the two DFS operators hope to gain from a merger. At the same time, simply getting rid of one site and putting all players at the other might seem like an extreme tactic, but it would provide extreme cost savings up front in a potential merger.

Something in between might be the optimal scenario, approximating option No. 2. In that hypothetical, the two sites could pool liquidity — there are some percentage of DFS users that only use one site or the other in the current environment. Players could continue to enter into smaller contests that are unique to each site.

Merging the platforms and sharing player pools isn’t necessarily something that is as simple as flipping a switch. They are different software platforms. The two sites currently employ different methods of scoring and offer different salary structures under a “salary cap” format. These differences are certainly surmountable but require some amount of thought and planning.

Do all the sports remain?

For DFS users, this is perhaps the second biggest question.

FanDuel and DraftKings have diverged on what sports they offer. DraftKings offers golf, NASCAR and mixed martial arts fantasy contests, for example, while FanDuel does not.

The latter has never directly said why it has passed on including the sports the former has rolled out in recent years, but some of the concern is likely legal in nature, stemming from the language in the UIGEA. Eccles hinted at that concern at one point.

Given the popularity of the daily fantasy golf vertical in particular, it seems unlikely that it will be kicked to the curb. But at this point, it seems the matching $6 million New York settlements entered into by FanDuel and DraftKings last week was likely a sign that they are trying to “clear the deck” of legal concerns for a potential merged company.

Will everyone involved in the merger — that includes FanDuel’s partners and investors — be comfortable with DFS contests for sports that some have contended run afoul of the UIGEA?

What about Texas?

Another point of divergence for DraftKings and FanDuel has been Texas. The list of states the two sites serve matches exactly, save one. FanDuel settled with the Texas attorney general and left the state, while DraftKings is fighting a negative legal opinion in court.

Continuing a legal battle in Texas in the short term might not be optimal, especially considering an effort to legalize DFS there could start early in 2017.

But what will be done with Texas and its large population of DFS users is something that must be dealt with.

Does the new company pass anti-trust muster?

It’s pretty clear a single DraftKings-FanDuel company would dominate the DFS market. Between them, they account for more than 90 percent of marketshare in the space.

Attorney Marc Edelman has questioned whether federal regulators would let the merger go through:

With near certainty, any attempted merger between the daily fantasy sports industry’s dominant No. 1 and No. 2 players would suffer substantial regulatory challenges under the Hart Scott Rodino Antitrust Improvements Act of 1976.

There is at least a possibility a probe from the government could hold up the transaction, which is even more reason for DraftKings and FanDuel to act now, if it’s what the interests behind the companies deem best for the short-term and long-term viability of the companies.