Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Carl Icahn Ain't Kidding Around With Netflix Anymore

The gloves are off. Carl Icahn threw them to the ice like a hockey brawler, getting ready to throw punches at Netflix (NASDAQ: NFLX  ) .

When Icahn built a nearly 10% stake in the video veteran over the summer, it was done via proprietary call options. That was a capital-efficient way to create a large interest in the company, but didn't come with any voting powers. It would take some more capital to convert those calls into regular stock shares, which would then let Icahn wage proxy wars to rebuild the Netflix board of directors and influence where the company is going.

Well, Icahn has taken that crucial step. According to an SEC filing, all of the Icahn sphere's call options were converted into stock on Monday. The written put options that were paired with the calls have been terminated, too. No more Mr. Synthetic Long -- the group's 9.98% share of Netflix votes has now been activated. Sit back and enjoy the fireworks.

The cost base of the options was about $58 per share, so Icahn could simply sell his freshly minted shares right away for a quick 40% profit on his $324 million investment. Not bad for a quick hit. But he didn't. So this is where the gloves hit the ice.

A hostile takeover would be a long and difficult battle here, given the one-two punch of a staggered board of directors plus a brand-new poison pill. Expanding that just-below 10% position any further would instantly dilute Icahn's holdings to kingdom come, and the three director cohorts make it impossible to clean out the boardroom in a single strike anyhow. So it'd be expensive and take at least two years.

Dueling banjos
Icahn keeps professing his love for Netflix's 27 million domestic streaming customers. To his mind, it makes perfect sense for (NASDAQ: AMZN  ) , Microsoft (NASDAQ: MSFT  ) , or even Verizon (NYSE: VZ  ) to buy Netflix rather than throwing money after their homegrown digital video platforms. Hitching the Netflix wagon to a bigger and richer warhorse with global ambitions and deep pockets would unlock a ton of value for the buyer.

He's not wrong. All of this is true.

On the other hand, CEO Reed Hastings believes that shareholders would be better served in the long run if Netflix remains independent. The company may not have billions of dollars in cash reserves, but Hastings insists that he's got enough cash stored and incoming to realize his worldwide growth plans. A quick buyout premium now would look paltry next to the long-term value he's creating.

So Icahn may be right, but Hastings is righter in my view.

Where's the competition?
My Netflix shares are not a get-rich-quick gamble but a long-term investment. I believe in the Netflix take on digital video, where the company has carved out a very specific and lucrative subscription niche while everyone else is fighting over table scraps using pay-per-view models.

  • Amazon is competing, kind of, but the Prime plan really treats video as an expensive marketing ploy for the e-tailer's main store.
  • Mr. Softy expects you to buy a digital copy of The Artist for $15 (standard definition) to $20 (high-def), with no option to just rent. This caters to a totally different market than the Netflix all-you-can-eat buffet, where The Artist is included in the $9 monthly fee.
  • We don't even know exactly what Verizon plans to do in the digital video space until its joint venture with Coinstar's (NASDAQ: OUTR  ) Redbox division finally rolls out. But it's a fair bet that it'll be just another piecemeal rental service, and not a crazy subscription plan.

Carl Icahn seems to agree that Netflix holds a unique position in the digital video space, but he's got different ideas on how to provide shareholder value. The gloves are off, and I can't wait for Icahn to start throwing punches. This fight might get more entertaining than anything streaming at Netflix.

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 are must-know issues for investors, which is why we've 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 buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2121244, ~/Articles/ArticleHandler.aspx, 10/28/2016 12:12:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,230.54 60.86 0.33%
S&P 500 2,137.29 4.25 0.20%
NASD 5,221.49 5.52 0.11%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 11:56 AM
NFLX $128.49 Up +2.02 +1.60%
Netflix CAPS Rating: ***
AMZN $784.43 Down -33.93 -4.15% CAPS Rating: ****
MSFT $60.38 Up +0.28 +0.46%
Microsoft CAPS Rating: ****
OUTR $0.00 Down +0.00 +0.00%
Outerwall CAPS Rating: **
VZ $48.41 Down -0.14 -0.28%
Verizon Communicat… CAPS Rating: ****