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Netflix adopts 'poison pill' in response to Carl Icahn's interest

After learning of Icahn's 10% stake, Netflix adopts a shareholder rights plan to halt hostile takeovers. Icahn calls it 'an example of poor corporate governance.'

November 05, 2012|By Dawn C. Chmielewski and Joe Flint, Los Angeles Times
  • Carl Icahn.
Carl Icahn. (Mark Lennihan / AP )

Netflix Inc. adopted a stockholder rights plan to thwart hostile takeovers a week after activist investor Carl Icahn announced that he had acquired a 10% stake in the company.

Netflix said the move was intended to protect the video subscription service and its shareholders from outside bids for control that the board of directors determined was "not in the best interests" of the company or its investors.

The billionaire Wall Street investor, who last week said he had no complaints about Netflix's management, issued a broadside calling the move "an example of poor corporate governance."

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Netflix's plan, known to investors as a "poison pill," would be triggered if an individual or group tried to buy a sizable chunk of the Los Gatos, Calif., company without approval from Netflix's board. If that happened, Netflix could use a technical maneuver to flood the market with new shares and make any takeover attempt extremely expensive.

Netflix said it would issue a dividend distribution of one right for each outstanding share of common stock, which would be exercisable only if a hostile suitor or investor acquired 10% or more of the company. The plan will be in place for at least three years.

Icahn called Netflix's plan "particularly troubling" because of its "low and discriminatory" threshold. The billionaire disclosed Oct. 31 that he had taken a 10% stake in the video subscription company through stock and options.

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"As one of the company's largest shareholders we are concerned about the poor corporate governance at Netflix that these and other actions reflect," Icahn said in a statement filed Monday with the Securities and Exchange Commission.

Icahn also took issue with the subscription service staggering the terms of its directors, with one-third of members up for reelection every year. This would prevent an outside investor who sought to wrest control of the company from its management from proposing an entirely new slate of directors.

For decades, Icahn has been a thorn in the side of certain media companies, most recently movie and television studio Lions Gate Entertainment Corp. and Hollywood's venerable Metro-Goldwyn-Mayer Inc. In 2010, Icahn bought up debt in the bankrupt MGM with the goal of merging the struggling company with Lions Gate. But those talks collapsed over how to value each studio, and Icahn sold most or all of his shares in both companies.

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With that, he appeared to have washed his hands of the entertainment industry. But Icahn now says he has invested in Netflix because he believes that its stock is undervalued and that the company is well positioned to play a leading role in the media landscape of the future.

"All the habits are changing. You're going to have distribution changing the whole entertainment business, and they have the greatest platform," Icahn told the Los Angeles Times last week.

Media analysts predict that Icahn will try to take control of the company in a bid to sell it.

"Due to the fundamental changes facing the business today, including increased domestic competition and rising content costs, we believe other shareholders would be willing to partner with Icahn in his efforts to force a sale," Barclays analyst Anthony DiClemente wrote.

Netflix's stock, which approached $300 a share in July 2011, has been buffeted by the company's unpopular price increase and a scuttled plan to separate its traditional DVDs-by-mail business from its newer video-streaming service in fall 2011. More recently, Netflix has experienced slower subscriber growth in its domestic streaming service than forecast. The stock closed Monday at $78.24, up $1.34, or 1.7%.

DiClemente wrote that Netflix Chief Executive Reed Hastings has been reluctant to sell the company, and expressed skepticism that a potential buyer would find more value in purchasing Netflix than in building a content offering.

dawn.chmielewski@latimes.com

joe.flint@latimes.com

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