When Carl Icahn put together a nearly 10% stake in digital video veteran Netflix (NASDAQ:NFLX) last year, the company cooked up a "poison pill" provision. Designed to make hostile takeovers crazy expensive, the plan would have caused massive dilution of Netflix shares if Icahn's holdings crossed the 10% threshold.
Well, Netflix just tossed that poison pill in the incinerator. The expiration of the plan was accelerated to yesterday, which is a cancellation with a new name.
So the takeover defenses have been lowered. Does that mean Netflix is totally up for grabs now?
Yeah, no. Not at all, actually.
For one thing, Netflix shares have more than tripled in value in 2013. The company comes with a $21.8 billion market cap and $21.1 billion in enterprise value, making it far from the easy $5 billion takeover target it was a year ago. From this angle, the poison pill is just not necessary for keeping buyout sharks away anymore.
For another, Icahn has taken half of his chips off the table, cashing in 50% of his Netflix investment at a 457% gain. From Carl Icahn's perspective, that investment paid off even if he never forced Netflix management's hand into a buyout. And since he was the only activist investor pushing for a takeover in the first place, Netflix lost another reason to keep a poison pill.
Finally, crushing up a poison pill might sound like a prelude to a buyout -- but only in theory. In practice, it's more of a sign that management no longer feels threatened by activist investors and corporate raiders.
A quick search found four companies that threw out their poison pills early, just like Netflix.
Jet chartering service Atlas Air Worldwide (NASDAQ:AAWW) started a poison pill in 2009 "during a period of turmoil," only to cancel it a year later when the risk of hostile takeover attempts had waned. Shares of Atlas have fallen 20% since the cancellation, while the S&P 500 surged 66% higher, but Atlas is most certainly an independent company today.
Strategic Hotels & Resorts (UNKNOWN:BEE.DL) raised its takeover defenses in 2008 in order to ward off opportunistic raiders amid general market turmoil. The REIT, which specializes in high-end hotels, extended its poison pill last year as the "lingering economic uncertainty" never went away. Six months later, in May 2013, the extension was cut short. No real explanation, but you could take this action as a vote of confidence in an improving economy. The stock has gained 14% in the seven months since, just ahead of the S&P's 11% improvement. No takeover bids here.
Networked storage specialist Brocade Communications Systems (NASDAQ:BRCD) kicked out its poison pill plan in 2007, following an annual policy review that found it unnecessary. The company has often been the subject of buyout speculation in a rapidly consolidating storage market, but is still standing alone. Brocade shares have only gained 3% since the plan change, trailing the S&P 500's 29% returns.
And then there's cancer drug developer Pharmacyclics (UNKNOWN:PCYC.DL). This stock had been trading like a roller coaster when the poison pill quietly got the kibosh, and continued to trade sideways for another couple of years. Then Pharmacyclics' cancer treatments made some headway in FDA proceedings led by leukemia drug Ibrutinib, sending the stock on a rocket ride. Pharmacyclics' returns of 2,500% since the plan change make the S&P 500's 45% jump look like dead money. And Pharmacyclics may work together with some big partners, but remains a separate business to this day.
So no, there's no reason this change in Netflix's takeover defenses would lead to an actual buyout. Netflix is doing just fine on its own, and while some additional cash reserves never hurt, CEO Reed Hastings has a sustainable business plan going on already. And at its current $27 billion size, you'd need a huge pile of cash to even consider making a hostile move on Netflix.