A major business transaction has been in the news the past week – namely the proposed acquisition of Warner Brothers Discovery by Netflix. This transaction has quickly turned into a real-life movie with plenty of drama and suspense in the days since it was announced (spoiler alert – this is likely to continue for months to come).

A client asked a few interesting questions about the transaction that I will cover herein. This post does not cover all of the specifics of the deal and all the implications. There are considerable news articles that do just that – as does this episode of The Daily from the New York Times released this week.

Let’s dive in to the few client questions:

There’s now news of Skydance now putting forth a “hostile offer” – what does “hostile” mean?

In most (but not all) mergers and acquisitions, buyers work with the target company’s board of directors to present their offers and negotiate final terms. That is what happened in this deal – at least at first. A variety of suitors were pursuing Warner Brothers Discovery (WBD) – including Netflix and Paramount Skydance. Last Friday, WBC announced they had accepted Netflix’s offer of $83 billion (for the movie and streaming services only, leaving behind the television channels).

Paramount Skydance did not take the rejection well. On Monday, they announced a hostile offer for WBD. It’s called “hostile” since the offer goes direct to shareholders and bypasses the WBD board and management.

In its offer, Paramount is offering WBD $30 per share, all cash ($108 billion). $108 billion is better than $83 billion right? Not so fast. Paramount is attempting to buy the entire business (including the tv channels which include CNN) whereas Netflix’s offer is only for the streaming and studio divisions.

If more than 51% of WBD shareholders take this tender offer (ie: offer to exchange their WBD shares for $30 cash), Paramount will have control of the company and can undo the Netflix deal and buy the entire entity themselves.

How are shareholders going to evaluate the deal?

As noted above, it’s not a simple exercise as each offer is for different businesses (Netflix is buying a portion, Paramount is buying it all). Therefore, the choice comes down to the value assigned to the difference – ie: the cable/tv business. Paramount is valuing that portion of the business at $2.25 per share (Their $30 per share offer less Netflix offer of $27.75 per share = $2.25 difference). If shareholders believe that tv business is worth more than that, the Netflix offer is better as cable channels would be left behind to be monetized separately.

Shareholders may also evaluate qualitative reasons to choose who they’d prefer to be the owner. For instance, there is some concerns that Netflix buying WBD will harm theatrical releases (as their focus is TV/streaming). Other shareholders may have a preference determined by the management of the two suitors. Many factors can come into play!

Doesn’t the WBD Board have to accept the Paramount’s increased offer?

The board had a fiduciary obligation to act in the best interest of WBD shareholders. This would include consideration and evaluation of all legitimate purchase offers – including this latest offer from Paramount. It stands to reason the board remains confident in its evaluation of the offers and still believes Netflix’s offer to be superior. However, there may be updates on this evaluation as time progresses and the two deals are potentially “sweetened” from here.

What are the potential regulatory issues?

In addition to the hostile offer, there is an incredible amount of regulatory issues at play. In the US, all public company merger and acquisition activities need to be approved/reviewed by the federal government. These rules and approvals are required to guard against a variety concerns, including antitrust reasons (ie: potential monopolies and unfair competitive positioning for businesses).

WBD owns considerable streaming assets via its HBO business line. If Netflix is successful, they will have over 30% share of the streaming market. However, Netflix is arguing that streaming should not the the relevant denominator but rather the evaluation should take into account all available TV/media viewing options including streaming, as well as network TV, YouTube, and Tik Tok. According to Nielsen, Netflix is sixth when it comes to total TV watching (YouTube in #1). After adding in HBO and HBO Max, Netflix would only rise to 9% of TV viewing (well behind other major brands like Disney).

There is also a large unknown regarding President’s Trump involvement in this decision. It’s no secret the President has a close relationship with the Ellison family but he is also close with Netflix Co-CEO Ted Sarandos. One thing is certain – the regulatory evaluation will take time and has real consequences (Netflix will owe $5.8 billion if deal is ultimately blocked)

Goes without saying, this media company acquisition is providing some real-world drama usually reserved for the big screen. Stay tuned – this story is far from over!