Up 826% in 10 Years, Is Netflix About to Make an $83 Billion Mistake?

In less than two decades, Netflix (NASDAQ: NFLX) went from a doubted industry innovator to a dominant force in the global media and entertainment landscape. Its shares reflect the monster success it has achieved, soaring 826% in the past decade (as of Jan. 28).

But is Netflix about to make an $83 billion mistake?

Image source: Netflix.

This merger proposal is kind of a big deal

Netflix refreshed its offer to take over certain assets of Warner Bros. Discovery, now making it an all-cash deal at $27.75 per share. Based on data from Dec. 4, this puts the equity value of the proposed transaction at $72 billion. Netflix will use cash on hand of $20 billion and take on debt of $52 billion. Adding in the target's studios and streaming net debt pushes the deal size to an enterprise value of $82.7 billion.

This is a material transaction. Netflix's market cap is currently $357 billion. A move of this size is out of the ordinary for the company.

Historically, Netflix has expanded mainly via organic growth. It has avoided large deals, which makes it stand out in the industry. Walt Disney spent $71 billion in 2019 to buy certain assets of 21st Century Fox. Amazon bought MGM for $8.5 billion in 2022. Last year, Disney received the 33% stake in Hulu that it didn't own for $9 billion in total.

Netflix has also been hesitant to step into the live sports waters, a strategy it has warmed up to. Tech giants like Amazon, Alphabet, and Apple aren't sparing any expense in this regard.

The company argues that this transaction will benefit all stakeholders. This includes consumers, people who work in the entertainment industry, and investors.

Will the WBD investment pay off?

Netflix's leadership hopes to realize $2 billion to $3 billion in annual cost savings by the third year post-close. And they believe that in year two, the deal will be accretive to earnings per share.

But is that enough to justify a nearly $83 billion price tag? Netflix executives deserve some credit for building the business into the streaming leader.

However, investors should be critical about the company being able to achieve an adequate return on such a big spending decision. The odds aren't stacked in Netflix's favor. Data from KPMG shows that 57% of mergers and acquisitions between 2012 and 2022 destroyed shareholder value in the two years following the transaction's close.

Since this proposed deal was announced on Dec. 5, Netflix shares have fallen 16%. The market clearly has a downbeat view of the proposal.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.