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A Raider Targets Netflix

Target of Opportunity
Illustration: Carl Wiens

"It makes a great acquisition candidate," says activist investor Carl Icahn, setting up a showdown over -- and possible sale of -- the $4 billion-plus company.

Could Netflix soon have a new owner? In the wake of the revelation Oct. 31 that Carl Icahn has purchased nearly a 10 percent stake in the video rental service, a showdown between the corporate raider and Netflix CEO Reed Hastings over the direction of the company is all but certain. After all, when Icahn, 76, takes a stake in a company, proxy fights, management shake-ups, strategy changes, spinoffs and, in a few cases, outright sales ensue. Icahn bought a position in Blockbuster in 2005 and joined its board of directors. By the time he quit five years later, he had lost about $95 million, and some say his maneuverings helped bankrupt the company. But his other media investments have been far more lucrative, including raking in $165 million on MGM in less than a year in 2012, he says. He also made $75 million investing in Time Warner, encouraging management to buy back shares, cut costs and spin off Time Warner Cable. And he made $5 million in a 2011 fight over Lionsgate and $110 million on game maker Take-Two.

With Netflix, Icahn isn't saying what he has in mind specifically, though he presumes other companies might want to purchase the leading streamer of premium content, which boasts 30 million subscribers.

"It makes a great acquisition candidate because of their subscription base," Icahn tells THR. "But it should be up to the shareholders, not the board, to decide that."

As of Nov. 9, Netflix shares were selling for $77.90, and the company sported a market capitalization of $4.33 billion. Icahn purchased his stake for an average of about $60 a share and had made about $108 million in paper profit thus far.

But Hastings immediately signaled Nov. 5 that the investment was not welcome by adopting a "stockholder rights plan" designed to prevent Icahn from wielding too much influence. Under the plan, known as a "poison pill," shareholders can buy a new series of preferred stock should someone -- like Icahn -- acquire 10 percent of Netflix's outstanding shares. The move irked Icahn.

"I don't know Reed Hastings," he says. "We're gonna meet. I can't tell you when, but we're gonna meet soon. I'm a little unhappy concerning what happened with the poison pill. It's an abrogation of corporate governance. There's just no reason for it."

Even after a 14 percent surge in the stock on Oct. 31, when Icahn's 9.98 percent stake (about twice the position Hastings has) was disclosed, Netflix shares have fallen 75 percent in the past 18 months, so it practically was preordained that an activist shareholder like Icahn would take notice.

Before Icahn even revealed his stake, though, rumors were flying that Netflix might be exploring a sale, especially because Hastings said Oct. 9 that he would not seek reelection to Microsoft's board of directors when executives gather for their annual shareholder meeting Nov. 28. Hastings is quitting Microsoft -- the theory goes -- because the software giant is interested in acquiring Netflix.

"Netflix may hold significant 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, mobile and traditional industry," said Icahn in a regulatory filing announcing his stake.

While the general consensus is that Icahn would love to see Netflix acquired so he could turn a quick profit, analysts have had trouble pinpointing a suitor. BTIG's Richard Greenfield calls it "highly unlikely" that Amazon would purchase Netflix, and Google, which showed interest in acquiring Hulu in 2011, likely doesn't want Netflix because it marks a departure from the ad-based business model embraced by its YouTube asset.

Greenfield also dismisses Apple as a potential buyer because it "has shown little interest in subscription-based models," and he says Microsoft, which already features Netflix on its Xbox, might not be a good fit because it would want Netflix streaming to play only on its own system. "We suspect consumers would simply hate Microsoft rather than switch their devices to get Netflix," he writes.

Time Warner, News Corp., CBS and Disney also aren't likely to buy Netflix -- at current valuations, it would fetch a $5 billion-plus price, and the Hollywood congloms are making a fortune selling content to Netflix. And though Comcast might want Netflix, such an acquisition wouldn't get past regulators in the wake of its NBCUniversal purchase, says Greenfield.

For those reasons, Michael Pachter of Wedbush Securities says Icahn is "completely wrong" about there being buyers for Netflix.

Nonsense, says Icahn: "I believe in the activism model. And Netflix is worth a lot more than it's selling for. Let's just leave it at that."