Is This the End of the Line for Netflix?

Netflix (Nasdaq: NFLX  ) may have finally gone too far.

The leading video service operator has adopted a stockholder rights plan this morning.

On the surface, it may not seem so bad. Poison pills are introduced when a company wants to make sure that any potential buyout takes place on the board's terms. Despite all of the flowery and complicated technical language, the end result of the otherwise worthless rights that are exercisable into preferred stock is that hostile takeover attempts can be shooed away.

Heck, even the name -- stockholder rights plan -- makes it seem as if it's in the best interest of its shareholders.

It's not.

Despite the moniker, this is really about the preservation of the board. As Carl Icahn has established a nearly 10% stake -- ringing the dinner bell for potential buyers -- Netflix wants to protect itself. The board is saying that it's the one that can determine what's best for the company, even if an offer would materialize that would appeal to the owners of more than half of outstanding shares.

A stockholder rights plan makes it harder for a company to take out a company with a headstrong board, and isn't that what may cost Netflix shareholders in the end?

Last month's chatter of Microsoft (Nasdaq: MSFT  ) -- or anyone else, really -- buying Netflix wasn't entirely farfetched, but now it may get stickier. It has the potential to be embarrassing for the interested buyer. In short, it may cost today's stakeholders an exit strategy at a reasonable premium.

Obviously Netflix's board isn't going to turn down a great buyout offer, especially if it's done through the board. However, what Netflix is ultimately doing today is drawing a dangerous line in the sand. If the stock price isn't higher come early next year -- ahead of its springtime annual shareholder meeting -- investors will want blood. They can blame the rights plan as a deterrent, even if no one actually stepped up with an offer to snap up the company.

Investors will want a regime change, and if their aim is true -- and if Icahn is still around, he'll make sure that it is -- they will probably get it.

The clock is officially ticking on Netflix.

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Longtime Fool contributor Rick Aristotle Munarriz owns shares of Netflix. The Motley Fool owns shares of Microsoft and Netflix. Motley Fool newsletter services recommend Microsoft and 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.


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  • Report this Comment On November 05, 2012, at 4:29 PM, 123spot wrote:

    I don't know, Rick. I wish Marvel could have survived as an entity of its own. Spot

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