Is Netflix Making Itself An Attractive Takeover Target?

Sep.21.11 | About: Netflix, Inc. (NFLX)

By Paul Quintaro

On Monday, Netflix (NASDAQ: NFLX) announced that it was set to divide its business into two.

Netflix would split into a new version of Netflix, strictly providing streaming content, and Qwikster—built around shipping movies and video games through the mail.

While the split in pricing had be known for quite some time, the split in individual services was unexpected.

Back when the split in pricing was announced in July, consumers became relatively upset. It may have been the primary catalyst behind Netflix’s upward revision in expected cancellations of its service last week.

If consumers wanted to keep streaming and renting a single DVD at a time, it would cost them nearly $16 a month, rather than the previous $10.

Yet, Monday’s announcement may have added insult to injury.

Now, consumers hoping to continue receiving both services must not only pay more, but must also manage their services through two separate websites and two separate movie queues.

Clearly, Netflix is actively working to divide its business, but why?

Bloomberg published an article on Tuesday morning citing analysts who argued that Netflix would sell Qwikster, or spin the company off.

Is this likely?

Qwikster may continue to be a profitable endeavor for quite some time. Still, technological trends are moving against it.

Regardless of management competency or brand recognition, Qwikster’s business seems likely to shrink going forward. Netflix’s CEO himself forecasts a 10% decline in the business year-over-year into the future. As broadband access and affordability increase, the demand for physical media appears likely to diminish.

Thus, who would want to purchase Qwikster? Unless it can be acquired for a significant discount, why would investors or another company acquire a business that may become completely irrelevant in less than a decade?

Is it more likely that Netflix’s streaming service will be the target of a takeover bid?

Why would Netflix sell off the one portion of its company that is poised to grow? Perhaps it is because it cannot grow—at least not in its present state.

Last month, Starz broke off contract negotiations with Netflix. Despite the fact that Netflix purportedly offered Starz a new contract ten-times the size of its previous one, Starz refused to accept a deal.

The ideal end game for Netflix is to offer a service that can stream all movies at all times. Right now, Netflix is far from this goal, with a catalog primarily composed of older movies and television shows. The loss of the deal with Starz will only further reduce Netflix’s offerings.

To accomplish that goal, Netflix will presumably have to secure more content contracts. If it cannot even extend its deal with Starz, how can it be expected to secure broader deals with larger content providers?

It may be advantageous for Netflix to have a large parent company—a media company, or a company that already has broad dealings with movie studios.

A parent company with strong media connections may allow Netflix to better facilitate deals with new content providers. That may provide the most value overall—both to Netflix’s shareholders and its subscribers.

On Wednesday morning, Netflix hit a new 52-week low near $128 a share, down from a lofty $304 just over two months ago. Will the company mount a successful turnaround, or is it setting up to be an ideal takeover target?

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