Netflix said last week it could work with Carl Icahn, but now its managers are girding for battle.
The Web video-rental service said today that it is preparing what is commonly referred to as a poison pill, in an effort to fend off attempts from outside companies from making a hostile bid to takeover Netflix. The statement below does not name investor Carl Icahn, but after the billionaire and former corporate raider acquired just under 10 percent of Netflix's shares last week, it's obvious he is the motivation for this action.
The Netflix board of directors approved the plan on November 2, the company said in a statement. Netflix shares were flat in early morning trading.
A shareholder rights plan, also known as a poison pill, is a type of defensive tactic used by a corporation's board of directors against a takeover. It was widely used during the 1980s when guys like Icahn made fortunes from hostile takeovers. The plan is designed to make it prohibitively expensive to acquire a significant amount of shares and to discourage those seeking a takeover from buying shares on the open market.
The plan would kick in if an individual investor accumulated 10 percent of the company's shares or if an institutional investor acquired 20 percent, Netflix said.
Netflix management must take these measures because it has little credibility left with investors. Under the stewardship of CEO Reed Hastings, Netflix has lost 75 percent of its' value over the last 15 months. That said, Icahn doesn't have a great track record in technology or in video rentals.
According to the recently released book "Netflixed," Icahn helped steer the Blockbuster video chain off a cliff by badgering former Blockbuster CEO John Antioco, who was leading a comeback, into quitting. The man Icahn supported to replace Antioco scuttled his predecessor's programs and Blockbuster went bankrupt two years ago.
Below is the statement that Netflix just released:
Netflix announced that its Board of Directors adopted a stockholder rights plan (the "Rights Plan" or "Plan") and declared a dividend distribution of one right ("Right") for each outstanding share of Netflix common stock.
The Rights Plan is 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, and to enable all stockholders to realize the long-term value of their investment in Netflix. The Rights Plan is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board of Directors.
Pursuant to the Plan, Netflix is issuing one Right for each current share of common stock outstanding at the close of business on November 2, 2012. Initially, these rights will not be exercisable and will trade with the shares of Netflix's common stock. If the Rights become exercisable, each Right will entitle stockholders to buy one one-thousandth of a share of a new series of participating preferred stock at an exercise price of $350 per Right.
The Rights will be exercisable only if a person or group acquires 10% (or 20% in the case of institutional investors filing on Schedule 13G, as described in the Rights Plan) or more of Netflix's common stock in a transaction not approved by Netflix's Board of Directors.
If a person or group acquires 10% (or 20% in the case of 13G institutional investors) or more of Netflix's outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's exercise price (subject to adjustment as provided in the Plan), a number of shares of Netflix's common stock having a then-current market value of twice the exercise price.
In addition, if after a person or group acquires 10% (or 20% in the case of 13G institutional investors) or more of Netflix's outstanding common stock, Netflix merges into another company, an acquiring entity merges into Netflix or Netflix sells or transfers more than 50% of its assets, cash flow or earning power, then each Right will entitle the holder thereof to purchase, for the exercise price, a number of shares of common stock of the person engaging in the transaction having a then-current market value of twice the exercise price. The acquiring person will not be entitled to exercise these Rights.
Netflix's Board of Directors may redeem the Rights for $0.001 per Right at any time before an event that causes the Rights to become exercisable. The Rights will expire on November 2, 2015, unless the Rights have previously been redeemed by the Board of Directors.
Additional details about the Rights Plan will be contained in a Form 8-K to be filed by Netflix with the U.S. Securities and Exchange Commission.
Update 9:35 a.m. PT In response to Netflix's move, Icahn issued a statement critical of Netflix for choosing the poison pill route: "This morning the Issuer announced its adoption of a poison pill. The Reporting Persons believe any poison pill without a shareholder vote is an example of poor corporate governance, and find the pill Netflix just adopted is particularly troubling due to its remarkably low and discriminatory 10% threshold. We also note that 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."