Welcome back to Dry Powder.

Netflix’s underwhelming Q2 presents an excuse to consider a tantalizing hypothetical: Will anyone attempt to buy Netflix? The streaming giant is currently discounted some 70 percent from its peak valuation—a veritable bargain—but at $90 billion, there are only a handful of companies with the dry powder to make a play. Or, perhaps, is there a less conventional acquirer waiting in the wings?

Bill

The former hypothetical once seemed unfathomable, of course. But the specter of the possibility has percolated as a result not only of Netflix’s recent market vulnerability, but also its just-announced partnership with Microsoft, whose Xander technology platform will support its forthcoming ad-based tier. (Xander, once the brainchild of Randall Stephenson and John Stankey at AT&T, was orphaned off to Microsoft when the telecom divested its media assets, most notably Direct TV and WarnerMedia.) After all, Netflix is the only pure play in the newly repriced streaming market, outside of Hulu, which will likely be folded into Disney and the Disney bundle soon enough. Netflix’s repriced market capitalization is around $90 billion, and so it’s competing with companies worth ten to 25 times that amount with cash reserves in the tens, if not hundreds, of billions. These are fascinating times, indeed.

In some ways, Netflix is actually quite vulnerable to a takeover. First, of course, its stock is down about 64 percent in 2022, despite recovering a bit during the past few days. When a company with 220 million or so monthly paying subscribers is having a fire sale—simply because some Wall Street analysts are disappointed that it can’t generate endless growth—that sounds like a rare opportunity to scoop up a once-out-of-reach franchise for pennies on the dollar. Indeed, what once was worth more than $300 billion is now trading around the aforementioned $90 billion mark, and could probably be had for around $100 billion, or so, with the requisite premium. Sure, some will say that Netflix is still a falling knife and that the smart money, having been burned by the stock earlier this year, is staying far away. The streaming landscape is far more competitive now.

Yet Netflix is still by far the largest and most valuable streaming service and if the second quarter results proved anything, it’s that the ending of this story is far from written. Netflix management is now predicting it will add subscribers in the third quarter. What’s more, once Netflix starts allowing advertising on its platform—as seems all but certain in 2023 at this point—and does something about freeloaders, there is a vast new vein of revenue and profits awaiting its shareholders.

Netflix, like Twitter, also has no natural defenses against a takeover. Its three largest shareholders, which control a combined 20 percent stake in the company—Vanguard Group, BlackRock and Capital Management—are large, institutional investors with a fiduciary responsibility to, essentially, take the money and run, if offered. Its officers and directors as a group own a mere 2.4 percent of the company, in the same range as the Twitter officers and directors. And that is only because Reed Hastings, the Netflix co-founder and visionary, owns 7.6 million Netflix shares, or 1.7 percent of the company. It’s enough ownership to make him a billionaire, but not enough to thwart a takeover, or even to put up a fuss about one.

Aside from Hastings, the Netflix board owns a mere 0.7 percent of Netflix’s stock. And unlike some other big technology companies, Netflix does not have a dual-class stock structure, or a staggered board, or a poison pill. At its shareholder meeting in June, Netflix recommended that its shareholders vote to repeal the supermajority provisions in its charter that make it more difficult for shareholders to act in unison. The votes have not yet been publicly announced, but it’s likely those provisions will be eliminated, further reducing the barriers to a takeover.

At a likely purchase price of $100 billion or more, there are not many companies that are actually in a position to buy Netflix. That said, I can envision a few clear potential buyers, with both the strategic interest and the financial wherewithal to get a deal done. None of these four need to own Netflix, but chances are that, at some point soon, Netflix will no longer be trading at 70 percent below its high. It seems to me this is as good a moment as any to pounce on Netflix, assuming it’s in your strategic sights.

There is also a strategic rationale for the combination, given that Apple has made a major commitment to creating content for its own streaming service, Apple TV, which has had a surprisingly large impact in a relatively short period of time. It scored 52 Emmy nominations for shows such as Ted Lasso and Severance, putting Apple TV fourth on the list of Emmy nominations behind HBO, which collected 140 nominations, Netflix with 105 nominations, and Hulu, with 58 nominations. (Having said that, nominations may not be the best measure of success, only a measure of success.)

In any event, Apple TV has become an important player in the streaming wars. My Puck partner Dylan Byers recently noted that it was gunning to acquire an N.F.L. rights package on top of the ten-year deal it recently signed with M.L.S. and a Friday night package with M.L.B. Combining Netflix and Apple TV would make it the streaming powerhouse, with a content spend of something like $25 billion a year. Wow.

We all know that Apple operates in its own hermetically sealed universe and doesn’t need, or probably want, anything new strategically to achieve its goals or to satisfy its shareholders. They should be, and are, pretty happy, all things considered. Also, Apple’s largest acquisition to date is still its 2014, $3 billion deal for Beats, the headphones and consumer electronics company. To say that acquisitions are not part of Apple’s culture or its strategy is an understatement. Still, Netflix is a good strategic fit while also being relatively affordable. It’s a long-shot for sure, if only because such a dramatic acquisition does not appear to be in Tim Cook’s nature, even if he has in Eddie Cue a brilliant executive who could integrate the business units. Anyway, he doesn’t need my advice.

Then there is Amazon, which has a market value of around $1.2 trillion these days, with about $66 billion of cash on hand. With a price-to-earnings ratio of 55, Amazon could easily digest Netflix from a financial perspective. And like Apple, Amazon is also trying to make an impression in the streaming wars. It has not yet been as successful as Apple TV, at least from an Emmys perspective, but with its nearly $9 billion acquisition of MGM Studios and its ongoing investment in content creation—some $13 billion in 2021—for its 150 million Amazon Prime customers in the United States, Amazon is forging full-steam ahead. Adding Netflix to its offering would instantly leapfrog Amazon to the top of the heap.

But is that where Andrew Jassy, the new-ish Amazon C.E.O., and Jeff Bezos want to be? Jassy, after all, made Amazon’s cloud business, AWS, a massive success, and seems particularly focused these days on Amazon’s core e-commerce and logistics business. He has shown interest in Amazon Prime, but is the time right for an Amazon-Netflix deal with the paint barely dry on the MGM acquisition? Again, I think the strategic and financial fit has merit, but does Jassy and his team have the bandwidth for something of that size? To me, it feels kind of brilliant, especially since, unlike Apple, Amazon has proven itself pretty adept at doing big deals. My vote doesn’t count of course, but if Andy were to ask me, I’d say go for it.

And, in fact, the Activision deal makes Netflix even more desirable for Microsoft as a metaverse play. What’s the difference anymore, really, between someone whose eyeballs are glued to, say, Call of Duty, and someone whose eyeballs are glued to Squid Game? The lines between various forms of content are blurring rapidly. And there would be a huge complimentary fit between those that are attracted to Activision’s gaming content—the younger crowd—and those 220 million subscribers that are attracted to Netflix’s content and can afford its monthly fee.

This seems like a beautiful combination to me, made all the more so by Netflix’s recent, and somewhat surprising, choice of Microsoft to help it implement its digital advertising strategy. Brad Smith, the president of Microsoft, already sits on Netflix’s board, and Hastings previously sat on the Microsoft board from 2007 to 2012. Why not just bring the whole thing in-house, Satya? Activision is a smart deal for Microsoft but the combination of Activision and Netflix would be a blockbuster and put Microsoft in a position to be a serious player in the race to create content, and to generate new revenue and profits for years to come.

Of the three potential strategic buyers—Apple, Amazon and Microsoft—I actually don’t think a combination of Netflix with any of them would raise the hackles of the antitrust division of the Justice Department, given the intense level of competition that exists in the streaming space from the likes of Disney, Warner Bros. Discovery, Comcast, Paramount Global, AMC and Hulu, among others. To be honest, despite the impressive strides made by both Apple TV and by Prime, they are still just bit players in the streaming wars compared to the Big Boys. Streaming content is hardly their main focus as companies and, accordingly, I don’t see the Justice Department interfering should any one of them decide to buy Netflix.

Indeed, Microsoft is an even smaller player, veritably non-existent in the space, and one assumes that any hypothetical deal could offer a slight bargain to consumers without screwing over talent. Of all the things that Microsoft might worry about in owning Netflix—the management team’s focus needs to be on closing and integrating Activision or in expanding its cloud business or developing new, sticky software—an antitrust battle would be the least concerning.

Yes, even discounted 70 percent, Netflix is pricier at 17x earnings than what Warren has been busy scooping up lately, Occidental Petroleum, which trades at only 9x earnings (and that is after the stock is up nearly 100 percent this year, thanks largely to Warren’s buying power). Still, Warren loves a franchise with a moat around it, and it's hard to argue that with 220 million subscribers and huge amounts of cash flow—whether it’s $6.5 billion, or more—that Netflix doesn’t have a franchise. What’s more, one can no longer argue that Warren is technology-averse, since Apple is by far Berskhire’s largest public company holding, worth around $155 billion, comprising some 43 percent of his portfolio. Sure, Netflix has plenty of competition, as we’ve been discussing, and much of it is well-capitalized competition. But this is America; we thrive on competition. Every company in Warren’s portfolio has competition, plenty of it.

I can just imagine what some of my former M&A colleagues at Lazard, Merrill Lynch and JPMorgan Chase are thinking about this little thought experiment. They are probably chuckling to themselves that it’s ideas like these that prove how limited my skills were as a banker and that I am far better off writing about Wall Street than being on Wall Street. (Even I would agree with that sentiment.) Still, I think any one of these proposed Netflix suitors make both economic and strategic sense. Netflix’s results so far this year show that, all things considered, its days as a Wall Street darling are probably over and that it would be better off as a private company tucked inside one of these three, or four, companies. In 2020, Reed Hastings wrote a book about Netflix and the “culture of reinvention.” And Netflix did successfully reinvent itself after a boneheaded decision, in 2011, to split the company into two pieces, quickly reversed. Can Netflix reinvent itself yet again? That is the burning question on Wall Street’s mind.

In his book, Hastings quoted one of Steve Jobs’s more profound thoughts: “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma, whatever.” Time to trust in a new future for Netflix, Reed.