NFLX

Does Netflix Have a "Hidden Agenda" With Microsoft?

What started out as a tough year for investors in Netflix (NASDAQ: NFLX) could be turning around. After a disastrous first quarter -- with its first subscriber loss in more than a decade -- the streaming pioneer slowed the hemorrhaging in the second quarter, losing far fewer subscribers than it predicted, which sent the stock into rally mode.

The challenges forced Netflix to reconsider its longtime resistance to offering a lower-priced, ad-supported subscription plan aimed at customers who are more price sensitive. After months of rumors, Netflix confirmed that it is partnering with Microsoft (NASDAQ: MSFT) as its "global advertising technology and sales partner," in a choice that absolutely no one saw coming.

In the wake of that decision, it's being suggested that Netflix might have something up its sleeve, and the theory is intriguing, to say the least.

A partnership choice out of left field

Needham analyst Laura Martin suggested that Microsoft isn't necessarily the best choice for an ad partner, as it's only been in the digital advertising business for about a month, though that requires some context.

Microsoft announced plans to acquire ad-tech platform Xandr from AT&T back in December, but the deal only closed in June, supporting Martin's claim that Microsoft has little experience in digital advertising. She takes issue with the fact that this puts Netflix at a disadvantage and will delay its plans to bring its ad-supported tier to market by the end of this year.

Martin further suggests "a hidden agenda at play here may be that Netflix wants Microsoft to buy them." She said that by choosing the least likely ad-tech partner, Netflix betrayed its "hidden agenda" and that "it could be that Netflix is looking for an exit."

Here's how Martin believes it will play out: "So it could be here that really the play is that Netflix is trying to get closer to Microsoft in hopes that after Microsoft digests its Activision [Blizzard (NASDAQ: ATVI)] acquisition, it turns next and buys Netflix, which would be a complementary kind of video content, premium video content, like Activision is in the video game space."

Another curious thing about Netflix's decision is that the streaming pioneer hasn't yet hired an executive to spearhead its ad sales. A company would normally hire its ad exec first and have that person choose an ad-tech partner based on specific needs and the nuances of its business -- not the other way around.

While this all makes a certain amount of sense, there is one colossal reason to believe a deal of this magnitude will never happen: the cost.

A heavy price

With Netflix's market cap running north of $96 billion (as of this writing), the company's investors would require a hefty premium in order to agree to such a deal. A buyout premium normally ranges from 25% to 40%, suggesting a total cost of between $120 billion to $134 billion. For context, Microsoft's deal to acquire Activision for $68.7 billion was the largest all-cash tech deal in U.S. history, resulting in a 45% premium to the stock price prior to the announcement.

Even with its fortress-like balance sheet with $105 billion in cash and equivalents, it hardly seems likely Microsoft would pony up such a steep price -- even for a prize as big as Netflix.

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Danny Vena has positions in Activision Blizzard, Microsoft, and Netflix. The Motley Fool has positions in and recommends Activision Blizzard, Microsoft, and Netflix. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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