2 Reasons to Buy Netflix Stock After Its Failed Blockbuster Acquisition

It’s finally over. The saga of Netflix’s (NFLX 0.10%) attempted massive acquisition of Warner Bros. ended with the streaming specialist walking away, unwilling to match the (in Netflix’s opinion) prohibitively high offer made by another one of Warner Bros.’ suitors, Paramount Skydance.

The market cheered Netflix’s decision by sending its stock soaring on the news. The streaming leader could have unlocked significant value from Warner Bros.’ rich media asset portfolio over time. Still, Netflix got to the top of the streaming industry on its own.

Several positives that emerged from Netflix’s decision to give up on Warner Bros. make the stock attractive. Here are two of them.

Image source: Getty Images.

1. Public perception matters

Netflix’s proposed acquisition raised antitrust concerns. Several lawmakers expressed serious objections, fearing that the deal would make the company far too big and powerful.

Regulators were not the only ones with reservations. Some media industry insiders and at least one union representing media writers were fiercely opposed to this acquisition. Had Netflix decided to move forward, it still would have needed regulatory approval from relevant U.S. authorities.

It might have taken time and a very public, very ugly battle with some well-known and influential lawmakers. Netflix might have come out of it with a deep library of characters and films, but with a somewhat tainted image. Perhaps things would have settled down eventually – time heals all wounds, or so they say.

Even so, now that Netflix has backed out, it’s avoiding all that mess. This is good for the company’s public perception and, ultimately, for its brand name, which remains one of its prized assets.

Expand

NASDAQ: NFLX

Netflix

Today’s Change

(-0.10%) $-0.10

Current Price

$99.08

Key Data Points

Market Cap

$418B

Day’s Range

$97.40 - $99.87

52wk Range

$75.01 - $134.12

Volume

2.3M

Avg Vol

51M

Gross Margin

48.59%

2. Avoiding massive debt

The total equity value of Netflix’s proposed acquisition of Warner Bros. would have been $72 billion, which the streaming leader would have paid in cash. The transaction would have added significant debt to the company’s balance sheet.

Now that Netflix has walked away, it will avoid that problem. In addition, it got a $2.8 billion termination fee for its troubles. Of course, this isn’t a recurring source of revenue. Still, it’s worth noting that it accounts for about 23% of the company’s fourth-quarter sales.

This must be weighed against the opportunity cost Netflix will incur as a result of missing out on this acquisition. As the company’s management said, “This transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.”

Netflix has achieved tremendous success, thanks to its content-creation process, and now it can resume that strategy with more financial flexibility than it would have had if it had acquired Warner Bros. Meanwhile, there’s still a large opportunity in the streaming industry, as evidenced by the fact that, as of December, streaming accounted for less than 50% of TV viewing time in the U.S.

Netflix’s future remains bright, now that the sun is setting on this episode for the company. The stock is still worth holding for the long term.