With the recent cratering of Apple’s stock price, armchair financial pundits are speculating that the company should be more aggressive in acquiring other companies to spur the company’s growth. At the top of the list of proposed companies is Netflix.
I’ll share my thoughts below, but a recent post on Investopedia by Richard Saintvilus explored the idea of Apple buying Netflix:
Shares of Netflix, Inc. (NFLX) have been under pressure, falling more than 13% over the past month, driven by a combination of the company’s mixed first quarter earnings results and tepid second quarter guidance. NFLX stock closed Friday at $90.84 and is now down some 20% in six months.
From a complimentary and growth standpoint, Netflix fits all the criteria Cook has cited for an M&A candidate. And Netflix, whose streaming service now spans 190 countries, can easily accelerate Apple’s growth in services to offset the slumping demand in Apple’s iPhones and its other core products.
Can Apple afford Netflix? With $231 billion in cash and marketable short-term investments and long-term marketable securities, Apple can buy Netflix six times. Not to mention, Apple can raise billions more in cash at cheap interest rates, which gives Cook tons of financial firepower to seal a deal. How much would it cost?
Netflix CEO Reed Hastings would be forced to listen to any deal that offers a 35% premium or higher. And while Netflix stock price is at around $90, the base price for a deal would probably start at the mid-range of its 52-week high price, which is $111 per share. Add a 35% premium to $111 and Netflix can be bought right now for an even $150 per share or around $53 billion.
Netflix’s original programming isn’t worth $53 billion
On the surface it might look like it’s a good idea for Apple to buy Netflix, but I think it would be madness on Tim Cook’s part if he actually did it. Netflix simply doesn’t have enough to offer Apple to warrant paying billions and billions of dollars for it.
Netflix does have some good original shows such as Daredevil, Marco Polo, House of cards and others. The company has been very busy trying to build its library of original programming, and that has proven to be a very smart move by CEO Reed Hastings.
But none of this programming warrants paying anywhere near $53 billion dollars for the company. Apple could take much less than that amount and create its own original shows. Buying Netflix would be a shortcut to obtaining such programming, but it would be a very expensive one indeed!
Netflix’s subscriber base also isn’t worth $53 billion
One of the other arguments some folks have made is that if Apple buys Netflix, it would immediately obtain Netflix’s subscriber base, which is now more than 75 million according to recent reports.
But Apple itself already has hundreds of millions of customers using its hardware and software products. If it launched its own version of a Netflix type streaming media service, it could easily surpass the number of Netflix subscribers in very short order.
So why would Apple want to waste billions of dollars to acquire a company with a much smaller customer base than its own? It doesn’t make much sense to me.
Apple needs to launch its own Netflix service
While I think it’s a bad idea for Apple to buy Netflix, I said a while back that Apple should create its own streaming media service. And what I said then is just as true now, Apple needs its own version of Netflix.
Instead of creating such a service, Apple has wasted years trying to negotiate with cable TV channels and networks to create some sort of Internet bundle of TV channels. Who cares about TV channels in 2016? Many people just want good shows and movies, and don’t care a whit about networks and channels.
Thankfully, Apple seems to have finally begun to understand this. A recent report by Variety indicates that Apple has been shopping around for original content that it can use on its own Netflix type streaming media service.
We’ll have to wait and see what comes of Apple’s efforts to create its own TV shows, but it’s a much better move for the company than wasting $53 billion by buying Netflix.
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