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Netflix Takeover Rumors Stoke Stock, Enrich Executives

28 Dec, 2009 By: Erik Gruenwedel

Perennial Wall Street darling Netflix Inc. is once again end-of-year analyst fodder for acquisition by big-pocket suitors such as Amazon, Microsoft, Apple, Google and cable giant Comcast.

Shares for the Los Gatos, Calif.-based online DVD pioneer Dec. 28 rose nearly 2% as analysts such as TheMotleyFool.com and Zachs Investment Research, among others, all but implored interested parties to act and consummate a deal.

Fool analyst Rick Munarriz said Amazon, which generated record holiday sales, including selling a record 110 items per second, or 9.5 million items worldwide, Dec. 14, is the most logical suitor since it once envisioned renting DVDs online.

“Netflix also trades at a substantially lower earnings multiple than Amazon, making the deal accretive to Amazon,” Munarriz wrote in a note.

Zachs, in a note, said Netflix’s subscriber base of more than 11 million members would benefit Amazon.

“We are impressed by the company’s debt-free balance sheet,” Zachs said. “Netflix is sitting on $155.5 million in cash and short-term investments.”

Indeed, Netflix shares jumped 6% in July when similar rumors about an Amazon acquisition surfaced.

Marianne Wolk, analyst with Susquehanna Financial, said there was a 50% chance for a third-party acquisition of Netflix over the next five years. “We see a multiyear window of opportunity for Netflix to build a larger, more significant presence in the digital video market,” Wolk wrote in a note.

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, said that despite the apparent symbiotic potential with Netflix for Amazon, the online behemoth has more pressing issues, including the specter of sales tax in revenue-starved states it does business, which is all of them.

“Microsoft has previously been mentioned, but I doubt it will be interested in acquiring a physical DVD distribution business, though the digital business is attractive but priced too high just to get that piece of the business," Woo said. "I doubt a media company would be interested in acquiring [Netflix] as there would be too much conflict."


An Amazon representative wasn’t immediately available for comment, and Netflix, as a rule, does not make statements regarding market speculation. 


Separately, Netflix released compensation plans for key executive officers in 2010, including CEO Reed Hastings, who will receive $2 million in annual stock options, $167,000 in monthly stock options and a base salary unchanged at $500,000, according to a regulatory filing.

Perhaps due to burgeoning value of the Netflix shares, which trade a whopping 32 times estimated share earnings, the company said monthly stock options would be calculated at 20% (not 25%) of the fair market value of the stock on the grant date. Each monthly grant is made on the first trading day of the month and is fully vested at a price equal to the value on the date of grant.

CFO Barry McCarthy will receive $850,000 in annual stock options and $70,000 in monthly options on a base salary of $600,000. Leslie Kilgore, chief marketing officer, will earn a base salary of $775,000, and an annual stock option of $775,000, and $64,500 in monthly options.

Neil Hunt, chief product officer, will earn $36,000 in monthly stock options, more than $433,000 in annual options on a base salary of $866,667. Finally, Ted Sarandos, chief content officer, will earn $900,000 in base salary, $600,000 in annual stock options and $50,000 in monthly options.


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