Market Exit Positioning: Lessons From Netflix on Prepping Your Company for Acquisition

Brandon Hickie

September 30, 2011

Netflix Splits Streaming and Mail-in Business into 2 Companies

A few months ago, I wrote a series of blog posts to educate entrepreneurs and startup company executives on exit options and how to plan ahead for a market exit. In that series of entries, I spoke at length about how to identify potential acquirers and integrate their IT needs into their company’s long-term product development strategy. I did not, however, discuss market exit positioning and the process of prepping your company for acquisition when the time comes. This blog post will examine this crucial part of the market positioning process by reviewing Netflix’s market repositioning move to purportedly prepare itself for a potential Amazon acquisition.

Below are 6 market positioning takeaways that all entrepreneurs and startup company executives should be aware of as they prepare their company for an acquisition:

  1. Understand why a target acquirer might be interested in your company and identify what key assets it is most interested in, so that you can showcase them. Key assets could range from people to patents to exclusive distribution contracts to customers to product development capabilities. By knowing what an acquirer is most interested in, your company will be able to best position and restructure its organization to make it more appealing for the targeted acquirer. Netflix realized that the key assets that Amazon is interested in are the streaming business assets, brand, Reed Hastings and customer base, so it restructured the company to showcase these key assets and make the company more appealing.
  2. Make sure that all key assets are transferable to an acquirer. Sometimes contracts are non-transferrable between organizations, so verify all key contracts are transferable. Knowing this information will allow your company to be more transparent about these issues in the negotiating process. It is best to consult your company’s lawyer about these matters. This is a very important issue in a potential Netflix acquisition by Amazon as most of Netflix’s key assets are in the form of contractual rights to streamed movies.
  3. Evaluate any legal concerns that could prevent the transaction from happening and evaluate how the organization could be reorganized to facilitate the transaction. Identify whether or not the deal could potentially trigger an antitrust investigation or any other regulatory issues. If so, see if restructuring your company in some way or another could potentially alleviate some of these concerns. Regulatory concerns will often scare off potential acquirers, so it is smart to try and resolve any concerns before the negotiating process begins.
  4. Identify any structural or tax issues that could negatively impact a target acquirer’s interest in your company. Several US states require all companies with assets located in them to pay taxes on their earnings, so it is important to evaluate whether or not an acquisition of your company would create additional tax liabilities for their organization and make the deal prohibitively expensive without some major restructuring. Your company can pre-emptively resolve this issue by finding a way to reorganize the company in a manner that minimizes the additional state tax liability exposure. For example, many analysts suspect that last week’s Netflix reorganization of its streaming and mail-in DVD divisions into separate companies was an attempt to resolve any tax concerns that Amazon might have in acquiring their streaming business.
  5. Try to structure your debt in a manner that will make it easy for an acquirer to take it on and manage it alongside any other debt they may have. Being as transparent as possible with all debt obligations will make the acquirer more comfortable with your company’s financial situation. This will help speed-up the deal process as well. This is an important issue for Netflix to deal with in eying Amazon as a potential acquirer as Netflix has a significant debt load that it has taken on in order to position its streaming business for success. Given Amazon’s low debt business model, it is important that Netflix can demonstrate that most if not all of its debt was taken-on to build its streamed movie database.
  6. Prepare your company’s financials, so that they could easily be integrated into a public company’s financials. The last thing that a target acquirer wants to deal with is messy or incorrect financial records that could cost them huge penalties at quarterly and annual filings, so take the time to integrate public company accounting standards into your accounting practices.

By prepping the company for the acquirer prior to negotiations, you will increase the target buyer’s perceived value in your company, mitigate their fears of integration problems and also signal that you are serious about the negotiations. This will increase the likelihood of the deal happening and speed-up the negotiation process as the reorganization and strategic positioning moves should resolve some of the target acquirer’s key acquisition concerns. However, make sure that your company will be sustainable and well positioned to continue forward with its business in the event that a deal does not happen.

If you are interested in learning more about market exit strategies, I recommend reading my blog post on 3 market exit positioning lessons that can be learned from Motorola’s successful sell-off of its Motorola Mobility division to Google.

Brandon Hickie

Marketing Manager, Pricing Strategy

<strong>Brandon Hickie</strong> is Marketing Manager, Pricing Strategy at <a href="">LinkedIn</a>. He previously worked at OpenView as Marketing Insights Manager. Prior to OpenView Brandon was an Associate in the competition practice at Charles River Associates where he focused on merger strategy, merger regulatory review, and antitrust litigation.