An Unlikely Suitor for Netflix

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the last six months, we have seen a number of large buyout offers, many of which investors believed were impossible. We’ve seen offers for Dell, Best Buy, and also Sprint, all three large, but especially Sprint and Dell with market caps over $20 billion. Therefore, the M&A scene is full of possibilities and large deals are in works. This leads me to wonder if Netflix (NASDAQ: NFLX) may be attractive to any potential suitors.

The Competitive Streaming Business

In one year, Netflix has increased in value by 150%. The company is involved in the video streaming and DVD rental businesses. During its last quarter it grew 17% year-over-year (yoy) and is projecting up to 30 million total members by the next quarter. The company has the greatest presence in the streaming business with various content deals and continues to produce growth.

Netflix is in an industry that is loaded with competition. Its largest competitors are Hulu, Coinstar, and Amazon, but then AT&T, Google, and Apple are just around the corner in the streaming business. Yet still, all are chasing Netflix, and as a result, there is a great deal of opportunity in both advertising and in business expansion for Netflix as an acquisition target.

Netflix & its Unlikely Suitor

Netflix trades with a market cap of $9.10 billion, so although it would be a large acquisition, it’s not outside the realm of possible when you consider other large acquisitions. In the past Netflix has been considered a potential acquisition of Apple, Microsoft, and Google. While all three are possible, and make sense, I think another likely suitor is Yahoo! (NASDAQ: YHOO), a company that could show interest.

On Thursday, Yahoo announced that it had gained exclusive rights to Saturday Night Live’s 38-year archive. The deal sounded strange, like something we would’ve seen from Netflix or Amazon, yet it caused us to remember that Yahoo! does have a presence in the online video business.

It is estimated that Yahoo! served 331 million videos to 43.6 million unique visitors in the U.S. in February. However, Yahoo! has virtually no mobile reach, which is where Netflix comes into play, as it has both the presence and the technology to excel in both the mobile/tablet space. So while the partnership may sound unlikely, it actually makes sense and could lead to a great deal of synergy between the two companies.

If Yahoo! was to show interest in a company such as Netflix, the question would be whether or not Yahoo! could afford or if it could pay a premium for Netflix. Yahoo! is a $28 billion company with just $3 billion in cash and short-term investments. The company has no debt, and after a one-year 63% return, its stock is also valuable. Therefore, if Yahoo! were to ever make a bid for a company such as Netflix it would have to be aggressive in the debt markets, offer shares, unload its cash, use its $6 billion in retained earnings, and even then it might still need a partner.

Conclusion

Here’s the thing: Yahoo! is a second-place company, but after seeing recent changes to the site’s layout and to other services, I think it’s reasonable to suggest that CEO Marissa Mayer has first-place aspirations. An acquisition such as Netflix could definitely give the company a boost, open new advertising outlets, expand its online video business, and give Yahoo! a mobile presence.

The bottom line: Yahoo might not acquire Netflix, but it still needs to attack each of these three key problems in which Netflix provides a solution. My suggestion is to stay tuned, don’t be surprised if it occurs, and know that with the streaming business becoming so competitive, that one of the large tech giants will snatch Netflix at some point in the near future. 


Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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