DraftKings Inc., one of Boston’s hottest tech startups, has agreed to merge with New York’s FanDuel Inc., a deal that combines the daily fantasy sports industry’s dominant players as they confront a market transformed by new state regulations.
The deal caps a period of quick growth and bruising setbacks for the startups, which are backed by some of the country’s top media, financial, and sports organizations. But much about their future is still unknown.
DraftKings and FanDuel haven’t yet settled on a new corporate name and for now will continue to operate separate websites and apps. The deal, expected to close sometime in 2017, must also pass antitrust review.
Boston-based DraftKings chief executive Jason Robins will keep that position in the new company, with FanDuel chief Nigel Eccles, based in New York, becoming chairman. Both will serve on the company’s board, with three more directors from each company and an additional independent board member.
That power-sharing arrangement is one of several factors that could complicate the road ahead for DraftKings and FanDuel, whose rivalry is so intense that some have likened it to battles between the Red Sox and Yankees.
“They hate each other. They absolutely hate each other,” said Jeremy Levine, who sold his daily fantasy startup, StarStreet, to DraftKings in 2014. “There’s a lot of animosity between the companies, from the top down.”
Company executives downplayed any friction Friday, saying they developed a close relationship over the past year as lawsuits and regulatory fights with state officials forced them to combine resources and collaborate on political strategies.
“The regulatory challenge got us working together, but it also gave us a chance to talk about where we wanted to go,” Eccles said. “That really was the impetus to say, ‘Hey, let’s combine these two companies.’ ”
That fits a pattern seen in other industries that face strict regulations, such as casinos and beer producers, said Richard McGowan, a Boston College business professor. “I think they realized that, even though they don’t like each other all that much, they had a common enemy,” he said.
Using fantasy sports sites like DraftKings and FanDuel, contestants assemble mythical rosters of real-life athletes and score points based on the statistics of actual games. Traditional fantasy leagues last an entire season, but DraftKings and FanDuel operate games that can last just one day, with prizes topping $1 million.
Combined, the companies claim about 5.5 million active users, compared with tens of millions who play seasonlong games.
“We have a long way to go before we’re really going to be able to create an offering that addresses that market and hopefully allows us to become as big in the world of fantasy sports as the likes of ESPN and Yahoo and so on,” Robins said.
The deal will undergo antitrust review by the Federal Trade Commission but could also face challenges under state antitrust laws, said David O. Klein, a lawyer who represents several smaller fantasy companies.
“States that have taken a hard look at the fantasy sports model, particularly the daily one, may use this as an opportunity to take a second pound of flesh, so to speak,” Klein said.
The merger comes at a time of renewed focus on legalized sports betting. Last month, New Jersey officials asked the US Supreme Court to clear the way for sports betting at the state’s casinos and racetracks. That move has previously been opposed by several sports leagues, some of whom are DraftKings and FanDuel investors.
But National Basketball Association commissioner Adam Silver, whose league is a FanDuel investor, has said Congress should allow individual states to set up their own sports-betting systems.
Gambling industry leaders have criticized daily fantasy companies for not acknowledging how their games resemble sports betting, which remains illegal except in Delaware, Montana, Nevada, and Oregon.
But Geoff Freeman, chief executive of the American Gaming Association, said DraftKings and FanDuel have “sped up the debate” over sports betting, which his trade group predicts will become legal within five years.
“They brought it out of the shadows and really demonstrated the mainstream nature of sports betting, and the desire fans have to be invested in these games,” Freeman said.
Online sports betting, which would more closely match how daily fantasy sports games are played, is likely much further from reality than in-person sports betting at casinos or tracks. But under a legalized sports betting system, DraftKings and FanDuel could generate fees by referring their customers to approved bookmakers, said Jeff Ifrah, a gambling lawyer who represents fantasy sports companies.
“They don’t have to be a direct provider of that game. They could just wind up leveraging the information they have,” Ifrah said.
There are more immediate legal hurdles. The New York fantasy sports law is being challenged by gambling opponents, who argue it improperly skirted a state constitutional ban on most gambling.
For now, DraftKings and FanDuel say they will have dual headquarters in Boston and New York, and have no immediate plans to cut staff. Investors in the companies will evenly split stock in the newly merged company.
DraftKings’ financial backers include Rupert Murdoch’s Twenty-First Century Fox Inc.; the professional baseball, hockey, and soccer leagues; New England Patriots owner Robert Kraft’s company; and Cambridge venture capital firm Accomplice. FanDuel’s investors include the NBA, private equity firm KKR & Co., NBC Sports Ventures, and Comcast Ventures.
Heavy advertising by the two companies drew the attention of regulators across the country, forcing DraftKings and FanDuel to spend increasing sums fending off legal and political charges that their games violated gambling laws.
A lawsuit from the New York attorney general threatened to cripple the entire sector, but lawmakers ultimately passed legislation explicitly legalizing the games. Massachusetts Attorney General Maura Healey, meanwhile, allowed the games to continue but imposed new regulations, including restrictions on company advertising and a ban on players under 21.
“DraftKings has been an extremely aggressive company, and I think they forced FanDuel to become more aggressive,” said Levine, now the chief executive of a fantasy sports startup called Draft. “That led the industry to a place where it otherwise may not have gotten, at least in such a short time frame, both in terms of growth and the side effects that came with that.”