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Reed Hastings' wakeup-call: Carl Icahn isn't beating around the bush on why he's been...

Reed Hastings' wakeup-call: Carl Icahn isn't beating around the bush on why he's been stockpiling up shares of Netflix (NFLX), revealing in an interview his opinion that there’s going to be acquirers that want to buy it and it's just a matter of corporate governance. That last bit may be a reference to a push by a group of shareholders for board declassification and the right to call special meetings. (Bloomberg TV interview)
Comments (16)
  • realitybiter
    , contributor
    Comments (219) | Send Message
     
    Netflix is a joke and hopefully they figure it out.

     

    The entire movie distribution ecosystem is in flux and NFLX has an opportunity to become lead dog.....unfortunately, they are fat, dumb and happy simply serving regurgitated episodes of "Family Guy." I challenge them and consumers to answer "why are movies that I really want to see not available on netflix?"

     

    The answer is because Reed offers crappy deals to content providers. My suggestion- quit trying to fit content providers needs into your dysfunctional system:

     

    1) Offer a PPV model that compensates content providers handsomely. $25k flat fee FOREVER blows for unlimited viewing. No Indy film maker would take this deal. Redbox, at least, buys 30 or 40 thousand copies at a fair price....

     

    2) Your database sucks. Search sucks. Reviews are irrelevant/non existent.

     

    Reed Hastings should go. He did a great job disrupting the brick and mortar shops, but NOTHING else. What was that? 8-10 years ago? He has squandered years not taking advantage of the opportunity laid at his feet. Hire some hotshot from Apple who knows how to build a real ecosystem, but is incapable of sitting at the table because seats are already taken. The movie industry is begging for it and whoever captures it will make piles.

     

    What kind of CEO publishes public letters chastising fund managers for shorting their stock (ooops, they were right!)?

     

    asr: CEO's that are twisted on their own BS.
    1 Nov 2012, 01:40 PM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    There is no doubt that corporate governance at netflix is a joke. However, Icahn only owns 1% of voting stock. The rest of his holdings are call options. He will have to pony up almost $200MM and exercise his options and hold the shares through the annual meeting if he wants to vote his other 9% of company stock.
    1 Nov 2012, 03:28 PM Reply Like
  • dgulick
    , contributor
    Comments (1391) | Send Message
     
    Can you give some examples of what about Netflix's corporate governance you don't agree with, and ways that it could be improved? Also, would you be willing to disclose your position?

     

    Disclosure: Long NFLX
    1 Nov 2012, 05:36 PM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    There are many. to name a few

     

    1) staggered/classified board of directors
    2) combined Chair and CEO rather than split offices
    3) nflx board ignoring prior shareholder proposals that won a majority of the vote to allow a reasonable % of shares to call a special meeting.
    4) The Corporate Library, an independent investment research firm, rated Netflix “High Concern” in Takeover Defenses and “Moderate Concern” in Executive Pay.
    5) substantial equity compensation without true performance threshold requirements before vesting.
    6) Three of Netlix' 7 directors owned no direct stock or only 256 shares.
    4 Nov 2012, 02:48 AM Reply Like
  • dgulick
    , contributor
    Comments (1391) | Send Message
     
    Does "High Concern" in Takeover Defenses mean that they have sufficient defenses in place, or not enough? Which do you deem to be the better attribute?

     

    Seems like everything you mention would make a management change easier, something that I, as a shareholder, would not feel is in my best interest. I bought precisely because of my belief in the management and the future value that they are creating. If you don't have faith in the managements ability to execute, then short, or buy the competitor. (Btw, Andrew, you failed to disclose your position).

     

    Would you have considered Blockbuster's corporate governance to be adequate back when Carl drove that company into bankruptcy?
    5 Nov 2012, 04:42 PM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    high concern means that their are excessive takeover defenses - almost all have academically been proven to hurt not help shareholder value.

     

    Allow me now to add to may list of disenfranchising entrenching bad governance moves - adoption of a poison pill with an inordinately lower 10% threshold for 13D filers vs 13G filers. A shareholder is to be punished or kept on tighter leash for expressing views for change. - ridiculous.

     

    Shareholders don't change managements - board of directors do. Most of the things I mention would require Directors to be more responsive to company's true owners - shareholders.

     

    If CalPERS or CalSTRS or most other pension and retirement funds of size don't have faith in mgmt they don't have the option to sell. They have to perpetually hold all of these stocks as exposure to the market. They have a fiduciary obligation to speak out and take action to improve the performance of their holdings.

     

    Carl didn't drive blockbuster into bankruptcy, a failed business plan and mgmt did. If Netflix goes same route, it certainly isn't Icahn's fault.

     

    We are not long this stock. We are presently short NFLX US 11/9/12 72.5 put and long a greater quantity of NFLX US 11/17/12 75 puts. Furthermore, we may buy or sell any of these securities and others of NFLX at any time.
    5 Nov 2012, 10:05 PM Reply Like
  • dgulick
    , contributor
    Comments (1391) | Send Message
     
    We can agree to disagree on Carl's role in the Blockbuster failure. Carl forced Antioco out (who recognized the threat from Netflix, and by Reed's own words, had them in "checkmate" with the online/return to the store model) and put Keyes in (who neglected it for short-sighted cost issues and also had an epic lack of understanding of the changes in media distribution that was already underway). So the "failed business plan and mgmt" was entirely Carl's doing in my opinion.

     

    Thanks for disclosing your position, it's interesting that you are frustrated by their "poor corporate governance" when you are short the stock. Wouldn't it be good for you if Carl can't "improve shareholder value"? I think your position says all that needs to be said.
    6 Nov 2012, 04:59 PM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    you obviously don't know me and my extensive history of promoting good corporate governance. I am more vociferously doing so in investments we are long. http://bit.ly/Xjytda
    7 Nov 2012, 09:02 AM Reply Like
  • dgulick
    , contributor
    Comments (1391) | Send Message
     
    Congrats on your recognition by NACD. But you seem to be defending the record of Carl Icahn (aka Gordon Gecko!), a ruthless investor who has made massive short term profits by destroying long term value (not in all cases, of course, but more often than not).

     

    "high concern means that their are excessive takeover defenses - almost all have academically been proven to hurt not help shareholder value. "

     

    Can you give some examples, or a good reference? From my own investing I've found quite the opposite to be true. Thanks.
    7 Nov 2012, 12:20 PM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    I am not defending or attacking Icahn's 'record' one way or another. I have attacked, and quite thoroughly, the corporate governance at Netflix.

     

    I have set forth, below, plenty of examples to educate oneself regarding excessive takeover defenses hurting shareholder value including those that argue changes to such defenses brought about by activists create greater returns than those proposed via advisory shareholder vote.

     

    "Corporate Governance and Acquirer Returns"
    http://bit.ly/T3URSX

     

    "The Powerful Anti-takeover Force of Staggered Boards: Theory, Evidence, and Policy"
    http://bit.ly/RFP3R2

     

    "Why Firms adopt antitakeover arrangements"
    http://hvrd.me/T3UUOv

     

    "The Ethical Implications of Ignoring Shareholder Directives to Remove Antitakeover Provisions"
    http://bit.ly/RFP3Al

     

    "Activism and the Shift to Annual Director Elections"
    http://tigger.uic.edu~rguo/WP_dboard_2012.pdf

     

    "The Market for Takeover Defenses"
    http://bit.ly/T3UUOB
    7 Nov 2012, 02:39 PM Reply Like
  • Peter Matias
    , contributor
    Comments (92) | Send Message
     
    The fact that Icahn holds the other nine percent in options is irrelevant, other than that they are cheaper to hold before exercise. They become stock solely at his discretion.

     

    I'm more interested in knowing how he acquired them with a 36.05 strike; exchange traded? Flex options? Employee granted? Who wrote them?

     

    And was the stock purchased first and then the options, or did he add the stock after and why? To reach some preordained threshold before acting?

     

    In it's current state $NFLX will fail, if change needs to be forced, so be it.
    4 Nov 2012, 05:57 AM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    they become stock only after paying up $150MM for the shares and dealing with the put options he sold against the calls that become exercisable. IBank likely wrote the options. you will have to check out his 13d filing for details of the timing of the purchases. I find it irrelevant.

     

    Agree that business model at nflx is flawed. corporate governance there is too. the latter contributed to the former.
    4 Nov 2012, 11:02 AM Reply Like
  • Peter Matias
    , contributor
    Comments (92) | Send Message
     
    Yes, we know you have to pay for the stock when you exercise a call, that's obvious.

     

    And exercising calls doesn't require Icahn to "deal with" the short puts at all, as if that complicates matters. The puts make it cheaper to hold either position, until he gets put the stock which then further increases his ownership stake. They were not "sold against" the calls because they don't hedge them.

     

    As to the other questions I wasn't trying to convince you of their relevance, but the answers would provide clues to his endgame none the less.
    4 Nov 2012, 06:04 PM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    Exercising the calls does require Icahn to 'deal with' the short puts;

     

    read the 13d. The puts "expire on the earlier of September 4, 2014 or the date on which the corresponding American-style call option described above in this Item 6 is exercised. The agreements provide that they settle in cash"
    5 Nov 2012, 10:10 PM Reply Like
  • Peter Matias
    , contributor
    Comments (92) | Send Message
     
    So he exercised the calls on Monday and therefore the puts expired on Monday as well. How DID he "deal with" them??

     

    Correct-- he did nothing, and had to do nothing, Just as the 13d stated: the puts expired.

     

    The put HOLDER was the one that had to "deal with" them. Either let them expire, or exercise them and write Icahn a check for the amount that NFLX was trading above the put strike. Even a Summer intern could have made that decision correctly.

     

    So my original point stands: the fact that he held some of his stake as options was indeed irrelevant because they did, in fact, become stock at his sole discretion, your objections to the contrary notwithstanding.
    22 Nov 2012, 10:22 AM Reply Like
  • Andrew Shapiro
    , contributor
    Comments (1879) | Send Message
     
    Having exercised and now owning the shares, he can more easily sell them out into the market, should he choose to take substantial trading profits. He can sell a full % before triggering a filing obligation clock that lasts and additional 10 days. Could easily sell 1/2 and maybe his entire position out into the market on some positive news day and be gone before his filing of departing hits the wires and the stock price collapses.
    22 Nov 2012, 05:47 PM Reply Like
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