With Carl Icahn breathing down its neck, Netflix’s board has adopted a stockholder rights plan, called a poison pill, that makes a hostile takeover much harder for the corporate raider who just acquired about 10% of the company.
Icahn blasted the move, which companies use to ward off unwanted advances, as “an example of poor corporate governance.”
Netflix said it will hand out one new “right” for each outstanding share of Netflix common stock in a move “intended to protect Netflix and its stockholders from efforts to obtain control of Netflix that the board of directors determines are not in the best interests of Netflix and its stockholders.”
Rupert Murdoch’s News Corp. set up a poison pill in 2005 to keep Liberty Media’s John Malone from increasing a 19% stake in the conglom.
The plan calls for Netflix to issue one right for each current share of common stock outstanding at the close of business on Nov. 2. The rights will become exercisable anyone acquires 10%, or 20% in the case of some institutional investors, in a transaction not approved by Netflix’s board. Icahn purchased a large number of Netflix shares on the open market in September and October. Netflix said it wouldn’t trigger the poison pill for any deal approved by its board, which is led by founder and chairman Reed Hastings.
Rights can be exchanged for shares of new common stock as well as a new class of preferred stock. The move is called a poison pill because it swamps the market with new shares and can make a takeover prohibitively expensive.
Icahn called the Netflix plan “particularly troubling due to its remarkably low and discriminatory 10% threshold.”
The investor, 76, revealed his Netflix stake in SEC filings last week and said he bought in because considers the stock undervalued.
Since his high-profile takeover of TWA in 1985, Icahn has built a career and a massive fortune buying chunks of companies across various industries and pressuring management to change strategy or sell.
In his comments Monday, Icahn said Netflix “is one of the few companies that continues to ignore the fact that the shareholders have strongly expressed their wishes through a majority vote to de-stagger its board. As one of the company’s largest shareholders we are concerned about the poor corporate governance at Netflix that these and other actions reflect.”
Staggered boards elect only a handful of directors at annual meetings each year. That makes it tougher for dissident shareholders to field an alternate slate to push for change.
The rights expire Nov. 2, 2015. Netflix may need that long. Icahn tried for more than two years to take over Lionsgate before giving up and cashing out in August of 2011.
In 2006, with a 3% stake of Time Warner in hand, he and banker Bruce Wasserstein published and presented with much fanfare a lengthy tome on how the company could create value by splitting in four, and calling for a $20 billion buyback. He signed a truce after Time Warner agreed to the buyback, hefty cost cuts and further discussions. The conglom later split off AOL and Time Warner Cable.
A stake in Blockbuster that Icahn bought at about that time was “the worst investment of my life,” he said after the video rental chain went bankrupt.
While he tends to make managers shudder, shareholders generally like his crashing the party since it can put a company in play or hasten a shift in strategy, hopefully, but not always, for the better. Netflix stock jumped 20% when Icahn’s investment was announced last week. It closed up 1.74% Monday at $78.24.
Investors worry about Netflix’ ability to keep growing subscribers with exploding competition in streaming video. They also fret about heavy spending on overseas expansion that’s eating into profits. Netflix CEO Reed Hastings is convinced that international growth is a valuable long-term strategy. He thinks recent choppy subscriber numbers are due in part to strategic missteps last year that alienated subs that can be won back.