Netflix's Big Bet

A Solid Fourth Quarter, Shaky Reaction

Netflix posted a narrow earnings beat and hit 325 million subscribers in the final quarter, 23 million more than a year earlier. Revenue landed slightly above expectations, helped by a strong content slate, including the final Stranger Things season.

Yet shares fell as investors focused on the looming Warner Bros deal and Netflix’s decision to suspend share buybacks to help fund it. When a firm buys its own shares, the price tends to go up, so investors were not happy about the pause.

The message from Wall Street: a decent quarter, but risks ahead feel bigger.

When M&A Negotiations Turn Ugly

Netflix is locked in a battle with Paramount Skydance over Warner Bros Discovery. After the Warner Bros board decided to go with Netflix’s offer, Paramount launched a hostile bid of $30 per share paid in cash.

To counter this, Netflix changed its original cash-and-stock bid to an all-cash offer of $27.75 per share, giving Warner Bros enterprise value of $82.7 billion.

At stake are major franchises like Harry Potter, DC Universe (including Superman and Batman), and Game of Thrones.

Why the Board Prefers Netflix’s Offer

Warner board says Netflix’s proposal is the safer, cleaner option. Paramount has extended its hostile bid, aimed directly at shareholders, until February 20, giving it more time to convince investors.

Here’s how the deals compare:

• Structure: Netflix buys the studios and HBO, not the cable networks, which would be spun off and owned by WBD shareholders. Paramount would buy the whole firm.
• Equal antitrust risk: the board sees no material difference between the two deals in winning regulatory approvals.
• Breakup fees: Netflix and Paramount both offer $5.8B. It’s insurance to Warner Bros, in case the deal gets scuppered.
• Goliath vs. David: Netflix is an investment-grade company with a market cap of around $400bn. Paramount’s in the junk-bond league and has a $13bn market cap.
• The Ellison factor: Paramount is backed by centibillionaire Larry Ellison, whose son, David Ellison, leads the company.

Why Netflix Heads Lose Sleep Over YouTube

On the earnings call, Netflix co-CEO Ted Sarandos made an unusually blunt point: YouTube and other big tech rivals have redefined television.

“TV is not what we grew up on. Oscars and the NFL are on YouTube”, he said.

“Amazon owns MGM. Apple is competing for Emmys and Oscars, and Instagram is coming next."

Netflix sees itself competing with big tech for talent, ad dollars, and viewer attention. The Warner Bros deal, Sarandos argued, is part of keeping pace in this new world.

Big Debt, Bigger Ambitions

If approved, the Netflix-Warner merger would leave the combined company with roughly $85 billion in debt, slightly less than a Paramount tie‑up would create. Netflix says its investment‑grade credit rating and simplified all‑cash structure give Warner shareholders more certainty. Still, regulators are expected to scrutinize the deal, and Netflix’s stock has fallen more than 15% since the merger was announced, hence the switch to an all-cash deal­­.