Who Could Justify Acquiring Netflix?

by Trefis Team
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Netflix (NASDAQ:NFLX) adopted a ‘poison pill’ defense against a potential acquisition after billionaire investor Carl Icahn disclosed his stake of roughly 10% of the company setting off speculation on the fate of Netflix as a standalone company. Netflix CEO Reed Hastings commented this past weekend that he think it could do better on its own clearly signalling his preference to go on alone.

The question that many are wonder is whether or not Netflix is better off as an acquisition from a cash rich tech giant? If so then who could be the candidates?

We believe that Google (NASDAQ:GOOG) and Time Warner Cable (NYSE:TWC) may have the motive for this acquisition as well as the financial muscle for the transaction. Given the looming threats around the company, Netflix may be better off if someone acquires it.

See our complete analysis for Netflix

Who Can Buy Netflix?

All of the big tech giants could including Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Comcast (NASDAQ:CMCSA), Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) and others. But would they want to buy Netflix? That’s the real question!

Apple has typically been averse to acquisitions even with lot of cash sitting around. Also, Apple has its hands full with multiple signature products which have been doing very well for the company so far. The iPhone and iPad have been tremendously successful gadgets for the company aided by its tightly integrated ecosystem. Additionally, Apple has not really followed a subscription model that Netflix does and seems to be happy selling movies via iTunes.

Microsoft may have a motive since having a well known service such as Netflix could help it promote its Windows 8 ecosystem with mobile users. However, that could only happen with certain exclusivity agreements and this would hurt Netflix. Netflix is available to everyone on a variety of devices, and it certainly doesn’t favor the customers if the device reach is limited.

As far as Comcast is concerned, the company has launched its own Xfinity Streampix service for its own subscribers. It is unlikely that the company will bid for Netflix if it is getting success with its own streaming service.

Who May Actually Be Interested In Netflix?

What about Google and Facebook?

Both of these companies aren’t exactly familiar with subscription-based model and are more dependent on advertisements. However, integrating Netflix with their applications could be something lucrative for them if they are willing to divert from their ad-based model. Netflix is currently trading at market cap of about $4.3 billion. Google, on the other hand, is trading above $200 billion with close to $40 billion in cash and therefore has the real muscle to buy Netflix. For Facebook, it might be bit of a reach given close to $8 billion in cash and market cap of close to $50 billion.

We have previously voiced that Netflix’s potential partner could be Time Warner Cable (NYSE:TWC) for a few reasons.

Firstly, Time Warner Cable does not have a viable streaming service that can emerge as an alternative to Netflix. At best, it offers apps to stream current programming on few devices. Secondly, unlike others, Time Warner Cable’s pay-TV subscriber trends have not shown much improvement. Thus the company can bundle Netflix’s service to improve subscriber experience and gain from cross-marketing opportunities. Thirdly, Time Warner Cable has been traditionally slow to catch up with industry changes and partnering with Netflix might be a viable option to launch a streaming offering.

Would Netflix Be Better Off If Sold?

Netflix’s growth in the U.S. has slowed although the company still remains the leader in streaming arena. Some of management’s missteps last year such as a significant price hike and the decision of rebranding the DVD service (this was reversed later) have led to subscriber defections, thus affecting Netflix’s stellar growth.

The international markets look good from a potential subscriber perspective, but the company is making losses there and expanding too quickly in our view. Netflix’s content deals are primarily on fixed cost basis and the company has no intention of shifting towards a revenue sharing model. While this demonstrates confidence, it also poses a significant risk of not gathering enough subscribers to justify the content spend. The content costs and obligations have soared for Netflix and given the rising competition, an acquirer with deep pockets might be able to offer just what’s needed.

Our price estimate for Netflix stands at $81, implying a premium of little over 5% to the market price.

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