Why No One Has Jumped at Buying ‘Bite-Sized’ Netflix Right Now
Netflix has seen its market cap drop from more than $300 billion in November to less than $90 billion as of Wednesday. The leading streamer’s enterprise value, which ballooned to $277.3 billion last year, is down to around $100 billion. The steep declines have made the company a ripe acquisition target on the open market, but Hollywood has been strangely silent.
“It’s bite-sized for any number of companies out there,” Dale Wettlaufer, CEO of Charlotte Lane Capital, told TheWrap. “I’m surprised we haven’t seen a whole lot of speculation on it.”
There are financial and legal reasons that may partly explain why suitors aren’t eagerly lining up to take advantage of Netflix’s hard times. Plus, finding a viable buyer in this market is getting increasingly difficult.
The complications of acquiring Netflix right now
The simple fact of the matter is it’s always difficult, though not impossible, to acquire a company at less than its 52-week high share price point, which was north of $700 for Netflix back in November and now hovers around $200. This isn’t a concrete rule — Twitter is down 45% from its 52-week high yet still in the midst of a sale — but often a guiding principle.
“That is the psychological anchor,” David Offenberg, associate professor of entertainment finance at LMU’s College of Business Administration, told TheWrap. “That’s where the shareholders are stuck and they’re not going to want the company sold for less than that price.”
As soon as Netflix stock hit that pinnacle, a 12-month clock began to tick in which co-CEOs Reed Hastings and Ted Sarandos would feel disinclined to entertain offers under that price point (not that they’ve shown any interest in selling anyway). In addition, some analysts feel Netflix’s stock price may have swung too far in the opposite direction following Wall Street’s recent 180 on streaming and the company is now arguably undervalued.
In the United States, shareholders can sue a company and its directors for approving an acquisition at a price that’s deemed too low. They may not win, but it’s doubtful Netflix wants to add yet another shareholder lawsuit to its ledger. The goal of a CEO in this case is to maximize shareholder value, and investors have multiple avenues to recoup a higher price in response to a low-ball takeover attempt.
Even if a company could get Netflix to budge, there’s a mountain of logistical challenges to climb before a realistic sale could even begin to materialize.
“Netflix is a far different animal than other media companies or the giant tech platforms,” Steve Birenberg, founder of Northlake Capital Management, said. “It is not an easy swallow from an operational or strategic perspective. There is also the management challenge. Do you want to bring Reed and Ted in your tent? What are the implications if you don’t?”
What needs to happen for Netflix to become a viable takeover target
If there’s a company out there interested in buying Netflix, it’s anxiously awaiting this upcoming November when a new, presumably much smaller, 52-week high share price point will be set. In other words, forgetting Netflix’s recent sky-high valuation is a key wheel-greaser in any M&A scenario. “Before long, it’s just going to be an artifact of history that no one is going to remember,” Offenberg said of the envy-inducing November stock high.
Wettlaufer echoed a similar sentiment, explaining that the share price would “need to stay down for a long time to essentially beat the embedded feeling in Hastings that ‘We deserve better.'”
In a year, Netflix might be a quality candidate for a leveraged buyout if the company’s planned ad-supported tier takes off and it starts consistently generating free cash flow. Any buyer would need to saddle the target with a ton of debt that could be paid down with consistent revenues . But in that scenario, the stock price would likely surge on the strength of the advertising-based video on demand (AVOD) model’s success, potentially making a sale too expensive yet again. And the wheel keeps on turning.
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Who would actually buy Netflix?
This is the $100 billion-plus question. Whoever may want to acquire Netflix would need to mesh its existing business with the streamer’s audience, production capabilities, technology and workforce without running into antitrust problems with the European Union, the Federal Trade Commission and the Department of Justice. On paper, that’s as difficult as negotiating a peace between Johnny Depp and Amber Heard.
Wettlaufer believes Amazon could swap stock and pay an 80% premium for Netflix to close the deal. Given the overlaps between the two streamers and the fact that Netflix already runs on Amazon Web Services, it could work. Netflix would provide Prime Video with an unrivaled market share. Yet Amazon uses Prime Video as an added value element for its Prime membership and the company doesn’t necessarily need Netflix for that strategy. Plus, another multibillion-dollar acquisition after MGM might turn regulatory heads.
Apple could theoretically acquire Netflix and build a much better bundle of services that might sell more devices and bring more services to its current giant install base. For all its quality, Apple TV+ is young and sure could use a bigger back catalog of content. But massive acquisitions have never been Apple’s modus operandi.
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“Anybody who is big enough to buy Netflix would have a hard time buying Netflix with the exception of Apple,” Offenberg said. “But I don’t get the sense they want to.”
Google already has YouTube and seems content with user-generated programming after forays into the scripted realm have failed to ignite. Meta (né Facebook) is similarly focused on unscripted video content. Disney still has debt from the Fox acquisition and has seen its own stock fall in recent months. Microsoft is all in on gaming.
And Sony, with a market cap and enterprise value only slightly larger than Netflix right now, is making money hand over fist with its filmed entertainment division positioned as Hollywood’s go-to content supplier in the streaming wars. The only legacy Hollywood studio without its own streaming platform seems better positioned to stay out of the fray.
This isn’t just a Netflix issue either. Paramount Global, Lionsgate and AMC Networks are all companies in the media space that were expected to be acquisition targets in recent years, yet none of them are close to a sale publicly. Why? One reason (of many) is because they are all so far down from their 52-week share price highs. This could slow acquisitions in the general media space and consolidation in streaming overall, with Netflix front and center.
“The bottom line is Netflix is a huge fish that is difficult to swallow and there are few buyers that make obvious sense,” Birenberg said.
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