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Daily fantasy sports operators DraftKings, FanDuel to merge

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DraftKings and FanDuel, two websites that have transformed the once-nerdy hobby of betting on fantasy sports into a multi-billion-dollar industry, have agreed to join forces in what the companies are describing as a “merger of equals.”

Terms of the transaction, which is expected to close late next year, were not disclosed. 

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DraftKings CEO Jason Robins will serve in the same role at the new company while FanDuel CEO Nigel Eccles will become chairman of the board, which will include three directors from both companies and one independent one. 

The combined company will have dual headquarters in New York and Boston, where DraftKings and FanDuel are based, respectively. The deal will help both companies become profitable earlier than they would have otherwise and will enable them to invest more in new products and features.  

At their peaks, DraftKings and FanDuel, which are privately held, each sported valuations of $1 billion and, according to ESPN’s “Outside the Lines,” processed a combined $3 billion in payments in 2015.  Both companies bombarded the media with commercials and built up huge followings until The New York Times raised questions about their business practices in 2015 after discovering that DraftKings employee Evan Haskell won $350,000 on FanDuel. Both companies have since forbidden their employees from playing daily fantasy sports for money.  

Since then,  the daily fantasy sports operators have been waging a state-by-state battle to legalize daily fantasy sports, which critics have argued leads to some people behaving like compulsive gamblers, although the industry has vociferously denied that their games are a form of gambling. The legal battles have cost DraftKings and FanDuel a fortune and their valuations have reportedly plummeted.  According to OTL, the companies “have hemorrhaged tens of millions of dollars in legal and lobbying expenses.” DratKings’ auditor has also raised doubts about its financial viability, the ESPN show says.

The two companies’ challenges are far from over.

Attorneys who specialize in antitrust law have noted that DraftKings and FanDuel may face difficulty in getting antitrust approval for their merger since they control more than 90 percent of the daily fantasy sports market. The companies counter that their merger will provide the legal certainty that will encourage larger companies to invest in the industry.  Moreover, they note that daily fantasy sports “is just one component of a broader industry that has significant potential for sustained growth.”

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 “While both companies have accomplished much already, this transaction will create a business that can offer a greater variety of offerings, appealing to new users, including the tens of millions of season-long fantasy players that haven’t yet tried our products,” said Eccles in a press release.

Skeptics, such as Marc Edelman, an associate law professor at the Zicklin School of Business at Baruch College, note that getting a DraftKings and FanDuel merger through antitrust regulators remains a daunting prospect given their dominance in the daily fantasy sports market and their exclusive partnerships with professional sports leagues. Moreover, though the industry has resolved its legal issues in states such as New York and Massachusetts, its outlook in states such California and Illinois remains unclear as bills to legalize the game have stalled in local legislatures.

“It is very few states at the moment where legal clarity has emerged,” Edelman, who represents a client in a legal dispute with DraftKings said in an interview. “From my perspective, the biggest problem with this merger is the market share. You have a dominant No. 1 merging with a dominant No. 2 that combined have close to 100 percent market share, which in an of itself is highly problematic.”

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

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