Yesterday, Carl Icahn disclosed ownership of nearly 10% of Netflix, Inc. (NASDAQ:NFLX). Carl Icahn issued a filing with the Securities and Exchange Commission (SEC), which states his goals. Icahn says that his primary reason for buying the stake is that the stock is “undervalued due to [its] dominant market position and international growth prospects”.
The following sentence of Carl Icahn’s filing says that he believes “Netflix, Inc. (NASDAQ:NFLX) may hold strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another, due to the evolution of the internet [sic], mobile, and traditional industry”. It concludes that his various entities are “considering ways for [Netflix] to maximize shareholder value, but have reached no conclusion”.
Wedbush has an article analyzing Carl Icahn’s intent, and has some criticism for the activist investor.
Read together, Wedbush believes the first and second sentences say that Icahn hopes to find a buyer for Netflix, Inc. (NASDAQ:NFLX), and his history suggests that he will be activist, if necessary, to get a deal done.
Wedbush states that ‘We think he’s completely wrong. His belief that there are a “variety of larger companies” that see strategic value in buying Netflix is way off the mark. In fact, we can think of only one, Amazon, that makes strategic sense, and only three, Amazon, Hulu and Verizon, who are even engaged in a business sufficiently similar to Netflix’s that they could potentially justify an acquisition.’
We would not count Carl Icahn out, but to buy a company on sole hopes of a sale seems like a poor investment. Additionally, we noted in a previous article, that CEO, Reed Hastings would likely oppose a sale.
What is Netflix, Inc. (NASDAQ:NFLX) worth, that is the million dollar question. Let us examine that below:
We believe that Netflix, Inc. (NASDAQ:NFLX) consists of three main assets: Its brand, its technology, and its customer list. A strategic buyer must consider whether any of these assets helps them to achieve their business strategy more rapidly, and whether the cost of acquiring Netflix is lower than the cost of building the business themselves.
That essentially means that potential buyers will only pay up (at yesterday’s price, Netflix is worth $4.8 billion, and presumably Icahn would seek a premium) if they think it is less costly than building it themselves. In our view, that means that the only buyers would be companies already in the business— Amazon.com, Inc. (NASDAQ:AMZN), Hulu or Verizon Communications, Inc. (NYSE:VZ) —and that other companies would likely be far less interested. For example, Microsoft Corporation (NASDAQ:MSFT) would have little to gain from an acquisition of Netflix, as it is highly unlikely that Microsoft has any interest in being in the movie streaming distribution business, and there are few synergies for Microsoft from such an acquisition.
It is highly unlikely that Microsoft management would believe the company was any more likely to sell additional copies of Windows 8 or additional Surface Tablets to Netflix customers if it owned Netflix outright, although MSFT CEO, Steve Balmer is notorious for his love of bad acquisitions (see Skype $8.5 billion purchase).
The same could be said of Apple; the company would gain synergies, only if it did something drastic like making Netflix content available only on Apple devices, and such a limitation would draw the ire of the Justice Department.
An acquisition of Netflix might make sense for Amazon, but it appears to us that Amazon has made a conscious decision to build its service rather than buy. Amazon will spend approximately $900 million on content for its Prime streaming business this year, and likely in excess of $1 billion next year, so it is clear that the company has chosen to build rather than buy.
While it is always possible that Amazon.com, Inc. (NASDAQ:AMZN) could change its mind and buy Netflix, it is highly unlikely that Carl Icahn’s involvement will make Amazon any more aware that Netflix, Inc. (NASDAQ:NFLX) is a good strategic fit, and the acquisition is less likely due to the higher share price that resulted from Carl Icahn’s involvement. In summary, this appears to be a bad move by Icahn.
Disclosure: No position in any securities mentioned