Netflix Makes a Blockbuster Deal for Warner Bros. But Is It a Win for Investors?

Netflix (NASDAQ: NFLX) won the business version of the Squid Game on Friday, beating out Paramount Skydance, Comcast, and possibly others in a bidding war for the Warner Bros. streaming and studios assets of Warner Bros. Discovery (NASDAQ: WBD).

The deal isn't a total surprise. WBD had put those assets, which include the Warner Bros. film and TV studios, HBO, and HBO Max, up for auction after Paramount repeatedly tried to acquire the company, and Netflix was rumored to be among the interested parties, though it had dismissed questions about it on earnings calls.

Netflix is now the biggest entertainment company in the world by far, with a market cap of more than $400 billion, and the company that was dismissed by a former Warner Bros. boss as the "Albanian army" is clearly strengthening its grip on the industry with the deal. With the broadest reach and the deepest pockets in the industry, it makes sense that Netflix emerged victorious.

Netflix will pay $82.7 billion, including debt, in a combination of cash and stock for the Warner Bros. assets, which values the equity at $72 billion.

In the press release announcing the deal, Netflix co-CEO Greg Peters said, "This acquisition will improve our offering and accelerate our business for decades to come."

Image source: Netflix.

Will it pay off for Netflix?

Investors mostly shrugged off the announcement. As of late Friday morning, Netflix stock was down nearly 3% in volatile trading, a sign investors are skeptical of the deal, or perhaps that they believe that Netflix is overpaying.

The acquisition values Warner Bros. Discovery at $27.25 a share, above its closing price of $24.54 on Thursday, but does not include its Global Networks division, which is made up of the Discovery assets and cable channels like CNN and the Food Network, which will be spun off into its own publicly traded company before the Netflix deal closes. Importantly, the merger will need to pass through a regulatory gauntlet before it's official, and Netflix said it isn't expected to close until 2027.

Blockbuster mergers like this one have long been fraught with pitfalls, especially in the media industry, and Warner Bros. has been a white elephant for several buyers in the past. AT&T's acquisition of Time Warner resulted in billions of dollars in market value destruction, and Warner Bros. Discovery has been a laggard on the market since its formation in 2022 as well.

Forged in the early days of the internet, the AOL-Time Warner merger became known as one of the worst deals in history.

More recently, in the streaming industry, Disney's acquisition of Fox's entertainment assets has often been regarded as a mistake, and Disney stock has underperformed since the deal.

Netflix has also historically avoided acquisitions. It's occasionally purchased a small complementary asset like comic-book maker MillarWorld, or a mobile gaming company, but M&A is not in its DNA. Co-founder and former longtime CEO Reed Hastings generally dismissed the idea, saying at one point, "That's what made us successful for the last 14 years is we've done no M&A."

To some extent, the Warner Bros. acquisition may be a chess move to keep those assets out of the hands of a rival, but it's a high price to pay to play defense. Additionally, assets like Warner Bros., which has a content library spanning a wide range from The Wizard of Oz to the Harry Potter series to DC Comics properties like Superman and Batman, don't come up very often, and the opportunity may have been too enticing to pass up.

What it means for investors

At this point, the merger seems to create more questions for Netflix than answers. For example, it's not clear if the company will fold the HBO Max streaming service into Netflix or allow it to remain independent. Netflix also said it would continue to release Warner Bros. movies in theaters, though historically Netflix has released movies only in a limited way, to qualify for awards.

At this point, the deal seems neutral for Netflix, and there's a lot of uncertainty around it. The timing is somewhat odd, as Netflix's business has been on fire lately. It certainly doesn't need Warner Bros. to be successful, but the content library, brands, studio, and real-world assets sparked a bidding war for a reason. They have a lot of value and can go toe-to-toe with the properties of Disney, Netflix, or any other entertainment titan.

Given its global reach and business momentum, Netflix does seem well positioned to leverage Warner Bros.' potential, but executing on that goal won't be easy, and it certainly isn't guaranteed that the deal will pass regulatory muster. It could be several years before we know if the deal is successful.

Jeremy Bowman has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.