Corporate raider will optimise OTT. Simples.
November 1, 2012
Remember Corporate Raiders? The very name sounds so 90s, doesn’t it? These swashbucklers of the corporate stock markets believed in a kind of financial engineering that, by the lights of the more modern and esoteric techniques of debt packaging and trading, seem both simple and benign.
It didn’t always seem that way back then. The classic approach was to find an under-performing business with good cash flow and then buy it with expensive ‘junk’ debt, then use the company’s own cash to pay for the debt while radically cutting costs and/or breaking up the business for sale. Also, it often seemed a one-way ticket. The raider bought some shares, the price went up because of who they were, then they backed out and pocketed a profit.
The operation often looked like asset stripping, and often it was. But raiders would argue they could only predate on companies failing to maximise returns to shareholders. Certainly, it could be argued, their lurking presence meant managers became less relaxed about taking a ‘high on the hog’ ride on the back of lazy institutional stockholders.
As well as financial engineering, the other thing raiders brought was a cool logic and a chess player’s eye for unfolding competitive situations and looming, profitable, consolidation.
This brings us to Carl Icahn’s ‘raid’ to purchase 10 per cent of Netflix. His logic is:
- The hype factor has recently been removed from Netflix’ price as it has had to remind the market of the reality of slowing subs and higher content costs (the stock price dropped over 15 per cent on this reminder). Correct.
- But Netflix still has a vast base and a dominant market share both of which bring an impressive cash flow. Correct.
- A number of major companies are entering the OTT market as they see it at as a strategic imperative; Verizon, Microsoft, Google, Amazon etc. Correct.
- They are all aware the costs in terms of content are rising and being driven higher by the number of players now competing. This will lengthen the investment period and reduce margin long term. Correct.
- They also recognise the branding and marketing costs of taking on Netflix in a war of attrition will be immense. Correct.
- Therefore, there is a high motivation to consolidation in this market and Netflix is the #1 target. Correct.
- When it goes on the block there will be several rich competing buyers ensuring a high price is achieved. Correct.
- A 10 per cent shareholder in Netflix will make an enormous stack. Correct.
The corporate raider’s top talent is not to worry about whether the target is hi-tech, or sexy content, or boring minerals or food crops. They only care what the target company is like now, what is its market like now, what will its market be like in a year or two, and what opportunity does that present? Simples.