Netflix shares rose from the dead on Halloween after feared corporate raider Carl Icahn bought a ten percent stake in the company. And that was a financial stake, not the anti-zombie kind.
Icahn is not known as a patient investor with an eye towards improving a company's business prospects. His game is to stimulate a sale or a break-up of the company's assets in order to earn a handsome return on his intervention.
His strategy hearkens back to the early days of the financialization of the US economy, when greenmailers, as they were then called, first discovered their dominant strength vis a vis entrenched managements who embraced the quaint notion that their job was to build value for the long term.
Icahn is one of the few survivors from that era. Most of the others served or are serving time in jail for securities laws violations (remember when that was actually a real possibility?) or have retired to enjoy their riches.
His involvement signals the beginning of the end game for Reed Hastings, Netflix's founder. Just as Netflix drove DVD retailers out of business, so streaming video on the net is hastening Netflix's demise. The company has tried to address the concern by selling a downloadable package of its own, but pricing strategy missteps alienated tens of thousands of customers and reduced confidence in management's capability, let alone their understanding of the market.
To build on the Halloween theme, Icahn is generally out for management's blood and invariably gets his pound of flesh. JL
Troy Wolverton reports in Knight Ridder via Bloomberg:
In a move that sent Netflix (NFLX) shares zooming -- and likely sent company CEO Reed Hasting's blood pressure through the roof -- corporate raider Carl Icahn announced Wednesday he's taken a 10 percent stake in the subscription video company. Icahn says Netflix is undervalued and indicated in a regulatory filing he thinks the company ought to explore a sale or other ways to boost its value.
"I believe that there is going to be great consolidation between Netflix and, everybody's read about it, Amazon or Microsoft or Verizon or Google (GOOG), there are so many possible combinations," he said in an interview with Bloomberg TV.
Netflex representatives did not respond to emails requesting comment. But analysts said it was unclear how Icahn could help Netflix or what the company could do to appease him. And Michael Pachter, a financial analyst who covers Netflix for Wedbush Securities, warned that Icahn's interest could distract managers and harm the company.
Representatives for Icahn Capital, Icahn's investment company, did not return a call seeking comment. The investment company is "considering ways for (Netflix) to maximize shareholder value but (has) reached no conclusion," it said.
Following the announcement, Netflix's stock rose as much as 22 percent before closing regular trading up $9.66, or 14 percent, to $79.24.
Few -- if any -- companies are likely to be interested in buying Netflix, Pachter said. The one company that might make a good fit is Amazon.com, he said, but added that Amazon has already launched its own streaming media service.
"Icahn is clearly misguided," Pachter said. "Unfortunately, he's convinced that he's right, and he's going to try to impress that on Reed Hastings."
The end result: "I think (Hastings) is going to focus Netflix on selling itself rather than on building its business," Pachter said.
In his filing, Icahn announced he's acquired a 5.5 million-share stake in Netflix, largely through the purchase of call options, which give him the ability to buy Netflix's shares at a later date at a set price. Icahn's companies amassed the stake largely over the past two months, according to the filing.
The Icahn Enterprises chairman often pushes for immediate change at companies in which he invests. In his battle with the board of Oakland-based Clorox earlier this year, he wanted the board to sell the company or step down. His battle with Clorox proved unfruitful, but his efforts paid off at Motorola: Icahn fought to have the company split off its hardware business, which was eventually purchased by Google for $12.5 billion.
The legendary investor, who gained notoriety with his takeover of TWA in 1985, is no stranger to Silicon Valley. As a Yahoo (YHOO) investor, he pushed for the Sunnyvale company to accept Microsoft's 2008 buyout offer, then launched a proxy fight against the Yahoo board after it turned down the $33-a-share offer. Icahn ended up with a board seat at Yahoo, but departed just over a year after becoming a director.
Long a darling of Silicon Valley and Wall Street, Netflix saw its stock plunge and its CEO ridiculed after a series of missteps last year. The company lost a deal to distribute movies from Sony and Disney, put in place a steep price hike and announced plans to split off its DVD business. It later backed off from that last effort, but not before it lost thousands of customers.
In recent months, the company's financial results have been weighed down by the continued decline of its profitable DVD business and by a costly international expansion.
Netflix has struggled to rebound. The company's stock price has fallen from near $300 a share at the time of the pricing change to a low of $52.81 this year.
Currently, Netflix is operating at close to break-even, noted Brett Harriss, a financial analyst at Gabelli & Co. For its bottom line to improve, its streaming business must generate enough profits to make up for the declining profits of its DVD business, he said.
But whether Hastings or anyone else can do that "remains to be seen," Harriss said.
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