Tax reform has led to massive cash savings for corporate entities of all sizes. Those massive cash savings have fueled a red-hot M&A market, and an even hotter rumored M&A market. It seems every analyst keeps throwing their biggest and best M&A idea out there. Then, another acquisition happens, and more M&A rumors pop up.
Most recently, Media Tech Capital Partners' Porter Bibb predicts that blue-chip tech giant Microsoft Corporation (NASDAQ: MSFT ) is going to try to acquire red-hot streaming company Netflix, Inc. (NASDAQ: NFLX ).
Talk about a bold prediction. Microsoft is a big player in cloud. Netflix is the big player in streaming. Both companies are huge, and an acquisition would surely cause huge ripple effects everywhere.
But will Microsoft buy Netflix? I doubt it. Here's why:
Will Microsoft Buy Netflix? Why It Could Happen
Bibb's logic for the acquisition thesis is pretty straight-forward.
Everyone wants to get into the red-hot streaming space, Microsoft included. But Microsoft, unlike its other big-tech peers Amazon.com, Inc. (NASDAQ: AMZN ), Alphabet Inc (NASDAQ: GOOG ) and Apple Inc. (NASDAQ: AAPL ), hasn't made any moves in the space.
Instead, Microsoft remains hyper-focused on building out its still burgeoning cloud businesses. Microsoft wants to maintain that focus, so the company doesn't really have the time or effort to make a big splash in streaming.
But they do have the resources to do so. With more than $130 billion in cash on the balance sheet and an infinite number of more financing resources, Microsoft has enough firepower to pull off a big acquisition.
Thus, in order to keep the company's cloud momentum going but also make an entry into streaming, Microsoft's best move may be to acquire Netflix.
This all makes a ton of sense. Plus, Microsoft just acquired LinkedIn for $26 billion a few years back. That deals has paid off handsomely for MSFT, so the company's most recent M&A experience has been a pleasant one. That always helps.
There is also the fact that Microsoft doesn't have any streaming ties, which could make this deal work. An acquisition by Apple, Facebook, and Amazon could potentially cause a lot of operational confusion. After all, each of those tech giants already operates a streaming business. Thus, Netflix management would be forced to accommodate those already existing streaming services in the event of an acquisition.
That isn't the case with Microsoft. There isn't any streaming business there already, so in an acquisition, Netflix would have free reign over all thing streaming, much like it does today.
Will Microsoft Buy Netflix? Why It Probably Won't Happen
Everything about this deal sounds good.
Until we talk about the price tag.
Netflix is a $140 billion company trading at 125-times trailing EBITDA. Leaving everything else out, a $140 billion company trading at 125-times trailing EBITDA isn't the most ideal acquisition target.
Moreover, Netflix has been on a roll recently and is marching towards world domination. Thus, shareholders and management won't accept any buyout offer that doesn't feature a huge premium.
Microsoft paid a near 50% premium to purchase LinkedIn. If you apply that same premium to Netflix, you are now talking about a takeover value north of $200 billion.
You are also now talking about something entirely outside of the Microsoft wheelhouse. LinkedIn was Microsoft's biggest acquisition in company history by a mile, and that was a $26 billion takeover. Acquiring Netflix would likely require almost 10-times as large of a buyout.
Plus, who is to say that Netflix wants to be acquired? Reed Hastings and company seem to have things figured out on their own. Why would they look to sell? Moreover, NFLX stock has been the best-performing large-cap stock over the past several quarters. So shareholders are very happy. Why would they want to sell?
Bottom Line on MSFT & NFLX Stock
All in all, while a Microsoft acquisition of Netflix makes the most sense in the Amazon/Apple/Facebook/Alphabet group, it's still a long shot.
At the end of the day, Netflix is killing it on its own and the stock continues to surge to new highs. Why would management or shareholders want to sell?
As of this writing, Luke Lango was long AMZN, GOOG, and AAPL.
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