FBR & Co. affirms Pandora Media (NYSE: P) with an Outperform rating and $16 price target after the company announced the appointment of a new CEO and management team. The firm suggests that the changes could hit at a potential merger deal.

Analyst Barton Crockett commented: Pandora and McAndrews never commented on reports in the New York Times and other media that Pandora had at some level consulted bankers or was mulling acquisition talks. The public stance had always been that Pandora was building the company to remain independent. Still, investors remember that McAndrews -- before coming to Pandora -- sold aQuantive to Microsoft for $6.3 billion in 2007. By switching from McAndrews to a founder/visionary CEO, we suspect that resistance internally to potential takeover options is likely to be stronger. While that's a headwind near-term for equity value, investors should remember that Pandora, at this price, could have real value to potential acquirers, with 81 million active users a potentially valuable source of subscriber acquisition for emerging on-demand services, and Pandora's ad-based streaming radio service poised to be very profitable with the core domestic music licensing cost structure set by the government at a favorable level and the service sitting largely unchallenged in a position of dominance in the free ad-based streaming radio niche.

Even if the founder might want to remain independent, we believe that unsolicited in-bound acquisition offers could not be ignored, were they to come in. We also believe that Pandora's business can generate meaningful value as a stand-alone. It has potential to leverage its strong position in the free radio niche and in personalization via the Music Genome project to become a strong competitor in on-demand streaming. And the planned $120 million spend to launch a new ondemand service could either result in a differentiated product, or be cut if it fails to work as expected as a merger synergy in a combination with another company, Crockett noted.

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