3-Year Bridge to Netflix
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Carl Icahn's quest to obtain a controlling position in troubled Netflix (NASDAQ: NFLX) has been thwarted, at least for now and unless he wants to continue paying up for his stake. Netflix has chosen a 'poison pill' approach in an attempt to block a hostile takeover from Icahn, who has already come dangerously close to obtaining a controlling 10 percent-plus stake with 9.98 percent ownership of the company.
As a result of Netflix's defensive move, which it seemingly launched without a shareholder vote, investors can increase their respective ownership stakes by acquiring newly issued shares as Icahn's position surpasses 10 percent, a strategy that is designed to liquidate a potential hostile bidder's claim to the company all the while making it more pricey for him to gain the controlling stake.
The company takes a similarly defensive stance in its explanation of the strategy, telling The Wall Street Journal that it was a "reasonable" decision in light of what appears to be an obsession with Netflix's stock by Icahn. The company's poison pill strategy, which went into effect on November 2 upon the support of the company's board of directors, will remain intact until 2015. Perhaps that is the time frame in which Reed Hastings, Netflix's chief executive, believes he can turn the company around.
The poison-pill strategy was launched on the heels of Icahn's disclosure that he was owner of some 5.5 million Netflix equity shares and call options, or 9.98 percent, according to an SEC filing, a reveal that to date provided a much-needed 10 percent boost to Netflix shares.
Netflix's stock has plummeted 73 percent since its 2011 highs. Icahn believes part of Netflix's problem -- in conjunction with the company's inability to maximize shareholder value -- is the way that corporate governance is structured. He favors an annual election of board members over of the tiered approach that Netflix currently uses. In response to Netflix's 'poison pill defense, Icahn issued the following statement in a regulatory filing:
"...any poison pill without a shareholder vote is an example of poor corporate governance, and find the pill Netflix just adopted is particularly troubling due to its remarkably low and discriminatory 10% threshold. We also note that Netflix is one of the few companies that continues to ignore the fact that the shareholders have strongly expressed their wishes through a majority vote to de-stagger its board. As one of the company’s largest shareholders we are concerned about the poor corporate governance at Netflix that these and other actions reflect." (Carl Icahn/13-D SEC Filing)
Of course, the springboard for the decline in Netflix shares has been the company's blurred vision for the business. Only a little over one year ago, Netflix attempted to re-brand itself, raise prices and divide the company into two separate businesses consisting of its DVD rentals and its streaming Internet and subscription service, a plan that was eventually rescinded but not before costing Netflix customers and investors. Netflix is feverishly attempting to rebuild its customer base, but recently conceded that these efforts are more challenging than had been anticipated.
Icahn flew under the radar in a recent fight for control at Tyson Foods, but returned to the spotlight in his approach not only for control at Netflix but also truck manufacturer Oshkosh Corporation (NYSE: OSK). The Wall Street Journal points out that OshKosh launched a similar poison-pill strategy to Netflix when Icahn's position in the truck company came dangerously close to 10 percent. The company has been hurt by tough global economic conditions and tight lending standards that have suppressed access to capital for its customers. OshKosh is in the midst of pursuing a recovery strategy that involves international expansion into the emerging markets, where it expects to generate more than one-quarter of its revenues by fiscal year 2015.
It is the goal of an activist investor to initiate change in a company that they believe is failing to maximize shareholder returns. This does not always lead to an eventual takeover, as was the case when Bill Ackman was pushing a turnaround plan for discount retailer Target (NYSE: TGT), which didn't seem to need much turning around. Among other things, Ackman wanted Target to convert the land that it owned into Real Estate Investment Trusts (REITs), a strategy that -- while becoming more common-place for non-real estate companies -- never materialized. Since Ackman backed off of the big-box retailer in 2009 after failing to garner enough support for a change to the board of directors, Target shares have advanced 61 percent.
For his part, Icahn appears to be in the early stages of fighting for change at both Netflix and OshKosh Corp, battles that may continue at least until the Spring when the season for annual shareholder meetings commences.
The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep pocketed, rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These kinds of issues are a must know for investors, which is why The Motley Fool released a brand new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to both buy and sell the stock. They’re also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.
Fool blogger Gerelyn Terzo does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.