Netflix is planning to acquire Warner Bros. for $83 billion. Since they announced plans to do so, their stock price has declined by 15%—a drop of $66 billion in market cap. Short-term stock gyrations are a lousy indicator of long-term outcomes.
However, large datasets from thousands of companies over many decades are an excellent predictor. That’s bad news for Netflix, because 70 to 90% of large mergers and acquisitions are a failure over the long term. Longitudinal analyses show that 7 to 9 times out of ten, large acquisitions reduce shareholder value.
So, either the logic behind the combination of assets or the methods and management of merging the companies will have to radically outperform past acquisitions to be successful.
When I was VP of Digital Media at Amazon, we acquired the “Netflix of Europe” — a company called LoveFilm. Then, my team and I undertook the task of managing this company and later integrating it with our Prime Video technology and team.
LoveFilm was a fraction of the size, scale, and complexity of Warner Bros., but it was still a brutal problem for my entire organization that dragged on for at least two years.
Here are the three headwinds that Netflix will have to overcome more effectively than 70-90% of their peers:
1. Cultural Clash: Both Netflix and Warner Bros. possess strong, well-established corporate cultures. Reconciling these different management methods and decision-making processes is an unwelcome challenge that is rarely executed successfully. It often results in years of organizational thrash, dismantling prior decisions, restructuring, and talent attrition before a unified entity emerges.
2. Technical Integration: Talk to anyone who has gone through one of these (like me), and they will tell you that the process is long, miserable, and soul-sucking. Nearly all of your engineering and product development resources will spend 12 to 24 months on integration, not innovation.
3. The Long-Term Value: Warner Bros. is, without a doubt, a valuable asset. Who wouldn’t want to own their massive film library and amazing franchises like Game of Thrones!? But like any asset, it is only worth buying at or below a certain price, and there is an opportunity cost to consider. Would Netflix be better off plowing the $83 billion purchase price into its own original movie and series development budget?
Acquiring Warner’s large library will account for a lot of viewing hours for sure. But those movies and series have been binge-watched by the masses on HBO Max, Netflix and Prime Video for more than a decade.
The primary driver for customer acquisition and retention in streaming is new releases, new hits, and new franchises. The price is definitely not worth it if the capital and organizational bandwidth required for this merger reduce the company’s volume of original new releases and hits.
Successful mergers like Exxon + Mobil are rare; they succeeded because they were able to achieve massive back-office efficiencies in a commodity business.
Amazon acquired more than 50 companies during my 15 years with the company. The majority were a failure—they wasted money and precious management bandwidth. But some were a success: the ones providing new, separable capabilities (such as Amazon’s acquisition of Kiva or Audible) that could continue to operate in parallel.
When an acquisition mirrors an existing business—as is the case with Netflix and Warner Bros.—the duplication of effort and the tax on productivity often outweigh the initial strategic benefits.
