Netflix's (NFLX 0.07%) ongoing attempt to acquire the studio and streaming assets from Warner Bros. Discovery (WBD 0.76%) hit a new wrinkle on Wednesday. Suitor Paramount Skydance (PSKY 0.55%) increased its hostile takeover bid to $31 per share yesterday. After an initial review of the deal, Warner Bros. said its board of directors "could reasonably be expected" to view the deal as "superior" to the deal on the table from Netflix.
Wall Street and Hollywood are both waiting for Warner Bros. to issue a definitive proclamation. Netflix had agreed to a seven-day period -- requested by Warner Bros. -- for Paramount to submit its "best and final offer." If it ultimately decides that Paramount is offering a better deal, Warner Bros. will give Netflix a four-day window to match the deal, under the terms of its previous agreement.
This leaves Netflix with a conundrum. Should the company increase its offer and risk a protracted bidding war, or simply walk away from the deal? Netflix shareholders are betting it's the latter, sending shares higher today.
Image source: Netflix.
The odds of success
Once Paramount entered the fray, the odds of Netflix winning decreased with each passing day. If it were to raise the stakes, it could be paying more than it believes Warner Bros. is worth. Netflix has a long and documented history of walking away from content deals that it believes are too expensive, so there's a distinct likelihood that's what the company will do now.
Mergers and acquisitions are complicated at the best of times, and history is rife with examples of corporate marriages that failed or ended in a messy divorce. Noted finance professor Aswath Damodaran famously said that acquisitions are "the most value-destruction action a company can take." That's especially true after a bidding war.
Accounting professors Feng Gu and Baruch Lev analyzed 40,000 acquisitions that occurred between 1980 and 2022 in their book, The M&A Failure Trap: Why Most Mergers and Acquisitions Fail and How the Few Succeed. They concluded that between 70% and 75% of those tie-ups failed. Furthermore, the larger the deal and the more debt used to finance the acquisition, the lower the likelihood of success. By that measure, the Warner Bros. deal already has two strikes against it, no matter who wins.
In an interview, Gu offered his assessment. Considering the "humongous size of the proposed deal," it will be a "major challenge for the acquirer to get value out of it." He went on to note that while the "success of acquisition is uncertain, debt service is certain."
NASDAQ: NFLX
Key Data Points
On a final note, the U.S. Department of Justice (DOJ) reportedly launched an investigation into Netflix, citing antitrust concerns: "The proposed acquisition of Warner Bros. Discovery, Inc. by Netflix Inc., that may substantially lessen competition, or tend to create a monopoly." The DOJ sent requests to producers and filmmakers across Hollywood, asking for input by March 23. Regulatory approval of the deal was never a given, and things have only gotten more dicey for the streaming giant.
Investors clearly had concerns about the acquisition, as Netflix stock has declined steadily since the deal was announced on Dec. 5, losing 24%. However, reports of a higher bid from Paramount Skydance have sent Netflix shares up more than 8% since news of the revised offer hit the wire yesterday.
Given the challenges that come with such a deal, the hostile takeover bid by Paramount, and the revised offer, it's probably best for Netflix to simply walk away from the deal. Prediction markets suggest the company will do just that, with Polymarket implying a 49% chance that Paramount closes the deal, compared with 37% for Netflix (as of this writing).
As previously mentioned, the uncertainty surrounding the acquisition has weighed on Netflix stock, creating an opportunity for investors. In fact, at 32 times earnings, the stock's valuation has fallen to a near three-year low, while its business prospects remain robust.
That's why Netflix shareholders are cheering the higher bid from Paramount.
