Recently, rumors around a potential acquisition of Netflix (NASDAQ:NFLX) by Verizon (NYSE:VZ) have surfaced. [1] This isn’t something new since Netflix’s stock price fall began, making its stock look like a bargain. Some rumors have also suggested that Amazon (NASDAQ:NFLX) could potentially acquire Netflix. We believe that Verizon would have trouble purchasing Netflix outright based on Netflix’s fundamental value, but it could look at partnerships with Redbox, Netflix or others for streaming content. Verizon’s management has also denied any acquisition related meetings or talks with Netflix’s management. [2]
See our full analysis for Netflix
There have been various studies on acquisition premiums, which are often necessary in getting shareholders and management to agree to an acquisition. This premium looks to have been on a downward trend in recent years aside from a spike between years 2000 and 2003. [3] Of course the actual premium depends on several factors specific to the company as well as overall economy.
However based on history, Netflix’s current market capitalization of $3.7 billion, a potential acquirer could try to make a bid for just over $5 billion and justifiably argue that this is a 40% premium to the market price and a fair offer. This is slightly above the rumored price of around $4.6 billion that Verizon might be willing to pay. [1]
However, as per our current estimates, Netflix’s true value should be closer to $6.6 billion, a 70% premium to current market value.
As such, we think that it is highly unlikely that Netflix will sell itself at a price of around $5 billion. The company still has a lot to look forward to despite shooting itself in the foot earlier this year.
Its competitive lead is tremendous and its international opportunity is being undervalued based on our analysis. Even though next year could be loss making, the company’s long term outlook is not that bad. We think Verizon or another suitor would need to pay a premium well ahead of the historical norms, which Verizon shareholders would unlikely support.
Our price estimate for Netflix stands at $126, implying a premium of about 70% to the market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Verizon ‘Very Serious’ About Making Bid for Netflix, Banker Says, Bloomberg, Dec 13 2011 [↩] [↩]
- Verizon Said Not to Have Discussed Making Offer for Netflix, Bloomberg, Dec 13 2011 [↩]
- Deal Size, Acquisition Premia and Shareholder Gains, Research by G. Alexandridis, K.P. Fuller, L.Terhaar and N.G. Travlo [↩]
