- Netflix shares gained substantially after rumors that Apple might be interested in a merger with the company.
- But many investors and analysts have been quick to dismiss such a possibility.
- But is Apple buying Netflix such a moot point?
Rumors that Apple (NSDQ:AAPL) might be interested in acquiring a media company, with Time Warner (NYSE:TWX) and Netflix (NSDQ:NFLX) being mentioned prominently, helped Netflix shares finish almost 13% up in the month of May. The speculations began when the Financial Times reported that Apple's executive Eddy Cue floated the idea of buying Time Warner at a meeting with Apple's head of corporate strategy sometime late last year.
That report suggests that Apple might not be content merely licensing third-party content and would be interested in owning its own content library. Several bankers suggested that Netflix is a more likely target for Apple than Time Warner since an Apple service built on Netflix would allow Apple to support a wider range of content makers. Other media companies including Comcast -A (NSDQ:CMCSA), Fox, Viacom -B (NSDQ:VIAB) and CBS (NYSE:CBS) would not be good acquisition targets for Apple due to their dual-share structures that favor their founders or family ownership. Time Warner and Walt Disney are the two media companies that do not have such a complex structure.
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Many analysts and investors have dismissed the possibility of Apple acquiring Netflix, and have likened it to similar merger reports with the likes of Tesla (NSDQ:TSLA), GoPro, and Fitbit . The crux of their argument is that Apple has routinely focused on buying small, young companies which it integrates into its ecosystem rather than big companies such as Netflix or Tesla with their own solid corporate cultures. Not to mention that Netflix sports a stratospheric valuation.
But is Apple buying Netflix such a moot point?
The Case for Apple Buying Netflix
Apple has never been a highly acquisitive company, with its purchase of Beats Audio for $3B standing as its biggest acquisition to date. Many of Apple's acquisitions were smaller ticket companies which it purchased for less than $1B. But Netflix is a different animal. The largest video streaming company in the world currently sports a market cap of $42.8B. Throw in another 25% control premium and maybe $10B in off-balance sheet obligations and Apple would probably have to cough up north of $65B for Netflix, by no means chump change even for the smartphone giant.
Apple certainly has the wherewithal to buy Netflix if it really wanted to. With a cash hoard in excess of $200B and rapidly growing every quarter, Apple is spoilt for choice when it comes to putting its cash to good use. But even more importantly, Apple recently hinted that it might be more keen on M&A activity when CEO Tim Cook said during the company's annual shareholder meeting:
"In times when equity values are falling there's great opportunity to [buy companies]."
Although Netflix is by no means cheap, trading at a PE ratio of 338 and 7.4X sales, the shares are down 14.4% YTD. So maybe this would be a good time for a company like Apple to pick it up.
And it's not like Apple would not appreciate the new revenue stream that Netflix would provide. The company's intention to roll out its own TV subscription, though delayed, is a clear acknowledgment of the need to find new avenues for growth as its iPhone business matures. By acquiring Netflix, Apple would in the process bring in-house people with unparalleled talent in the cloud and content delivery systems, two key areas that Apple has struggled to master.
In any case, acquiring Tesla, with a market cap of $33.9B which is considerably less expensive than Netflix, would be much harder due to Tesla's by-laws. If Apple attempted a hostile takeover of Tesla, it would be unable to change any board members or effect any major changes without Elon Musk's approval. So basically Tesla would remain an independent unit operating inside Apple, something that Apple would certainly not be comfortable with.
So as expensive as Netflix is, it would still be a good fit for Apple, and its interest in entering the media space. Apple would have its work cut out while trying to acquire Netflix, but this is an interesting merger for investors to ponder.