6 Mergers That Ought to Happen

Target: Netflix
Acquirer: Apple or Amazon

Netflix Inc. (NASDAQ: NFLX) is not a new name on lists of would-be buyouts that the investing community has speculated about. One serious hurdle is a nosebleed valuation of about 100-times earnings. Netflix dominates its space in online TV and movie content, and it is creating its own content to protect its brand. Netflix now counts over 57 million members and is nearing a footprint in 50 countries.

Amazon has made media and content efforts of its own here, and the latest news is that Apple Inc. (NASDAQ: AAPL) is prepping a launch of a new subscription model of its own for online TV viewing. Should Apple just buy the company rather than go it alone? Obviously it would be easier for Apple to buy Netflix than for Amazon to do so, due to Apple’s endless billions of dollars in cash. Still, Jeff Bezos probably would not mind owning the brand either. This is far from our first time pondering a Netflix acquisition, but it remains a deal that may never come about.

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Netflix stock was recently trading at $420, with a 52-week trading range of $299.50 to $489.29. The stock has a consensus analyst price target of $443.72. Recent price targets have been issued for Netflix from Evercore at $380 and Morgan Stanley at $553. Netflix has a market cap of $25 billion, compared to Apple at $740 billion or Amazon at $173 billion. Oppenheimer recently called the weakness a buying opportunity.

Target: MagicJack VocalTec
Acquirer: Vonage

It almost seems unbelievable that the legacy phone carriers, which are focused on wireless these days, never bought up the VoIP players out there. Maybe there would have been FCC, FTC or Department of Justice pushback. But what seems amazing even more is that the number one and number two players in Internet telephony have not banded together rather than face so much churn and customer acquisition costs. Their marketing costs could come down handily by offering either brand or both brands under one roof. They are not identical in customer bases and in the interface, but they are close enough that customers could choose platforms under one roof and on one bill. As of December 31, 2014, MagicJack VocalTec Ltd. (NASDAQ: CALL) had an estimated 2.75 million active subscribers. Vonage Holdings Corp. (NYSE: VG) said that it had 2.47 million subscriber lines at the end of 2014.

Vonage recently completed a deal to buy Telesphere, and the company has said that it expects to complete one or more acquisitions in 2015 that would be accretive to revenue. Vonage recently announced its intent to acquire Simple Signal for about $25 million. Would MagicJack be too much of a leap? Or does the overseas headquarters pose any regulatory challenges?

MagicJack VocalTec was recently trading at $6.85, in a 52-week trading range of $6.50 to $25.37. The consensus price target is $15.50. It has a market cap of $125 million, compared to Vonage’s cap of about $950 million.

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Merger of Near Equals: T-Mobile and Sprint

The merger of T-Mobile US Inc. (NYSE: TMUS) and Sprint Corp. (NYSE: S) is a merger that was already expected to happen, but it was given a thumbs-down view by U.S. regulatory powers. AT&T Inc.’s (NYSE: T) effort to acquire T-Mobile also failed, and AT&T had to pay a $4 billion break-up fee. Still, Sprint and T-Mobile are effectively tracking stocks as they stand now. Sprint claims to have 56 million customers, and T-Mobile was recently shown to have about 55 million customers.

One has to wonder how profitable it can be for Sprint and T-Mobile to keep trying to suck away subscribers from AT&T and Verizon Communications Inc. (NYSE: VZ) at any cost that can be conceived. Price wars are great for consumers, but not necessarily for the companies involved. If one of the companies were to run into a serious financial issue, then regulators might be unable to say they still want four major wireless carriers.

T-Mobile was recently trading at $32.35, within in a 52-week trading range of $24.26 to $35.50. Sprint has been trading at $5.09, in a 52-week range of $3.79 to $9.76. T-Mobile has a consensus analyst price target of $37.00 and Sprint has a consensus price target of $7.28. Comparatively, T-Mobile has a market cap of $26 billion, versus Sprint and its market cap of $20 billion.


There is one other unfortunate issue that can always get in the way of a merger, and that is cash stuck overseas. Some companies have balance sheets that are loaded with cash, but that cash is kept overseas and would get taxed at 35% if repatriated.

Dream mergers are easy to imagine, but what is not easy is coming up with a list of would-be mergers that actually could receive regulatory approval, now or later. It is also difficult conceiving what prices would actually be approved by both sides, as favorable for sellers and accretive or defensive for the acquirer.

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It seems that the days when private equity groups are willing to pay billions for companies are over. It is now much harder to buy a company only to leverage a company up and sell it back in an initial public offering.

These proposed mergers would make financial sense for the companies involved — depending on the price. Under no circumstances should these dream mergers be interpreted as active rumors of pending deals.