And Now for the Bonus Round…What are the Two Ways Netflix Delivers Movies? Merger and Acquisition Audit Assessment and Proposal for the Netflix Corporation by L JANS & Associates, LLP, Lead Consultant A PowerPoint Presentation to Meet Partial Requirements for Managerial Finance 300 A Course Professor: Mr. William Sarsfield Members of L JANS and Associates, LP: Hiu Man Chan (Alicia), Jenny, Licia, Nina, & Scott Friday, May 06, 2011
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And Now for the Bonus Round…What are the Two Ways Netflix Delivers
Movies?
Merger and Acquisition Audit Assessment and Proposal for the Netflix Corporation
by L JANS & Associates, LLP, Lead Consultant
A PowerPoint Presentation to Meet Partial Requirements for Managerial Finance 300 A
Course Professor: Mr. William Sarsfield
Members of L JANS and Associates, LP: Hiu Man Chan (Alicia), Jenny, Licia, Nina, & Scott
Friday, May 06, 2011
Table of Contents:
I. Executive SummaryII. Organizational Profile Facts and Figures: Netflix and Targeted
EnterprisesIII. Statistical Market Data and Information: DVD Rental and Internet
Streaming for Consumer and IndustryIV. Du Pont Model Report AnalysisV. Balance Sheet Report AnalysisVI. Liquidity and Probability Metrics Report AnalysisVII. Consultant’s Closing Audit Assessment and Final RecommendationVIII.Open Session: Q & AIX. References
Disclaimer: Some of the names and events in this report are fictitious and their sole purpose is ancillary in nature to actual data and information under analysis.
Portraying the role and function of an accounting consultancy firm, we, L JANS and Associates, are attempting to provide auditing and M & A evaluation services, at the request of our client, Netflix.
In addition to performing a comparative auditing assessment between Netflix, Inc. and the Comcast Corporation, Netflix has also made a formal request to execute due diligence evaluation analysis for two potential acquisition candidates: Redbox Automated Retail (a subsidiary of Coinstar, Inc.) and Blockbuster, Inc.
Before our final recommendation is rendered and officially submitted, L JANS & Associates will describe the current financial and overall health of the company, as it is compared against both its preferred targets and industry.
Consultant’s Goals and Objectives:
1. Provide primary and secondary auditing services for client
2. Execute and create a comparative performance analysis portfolio
3. Perform due diligence analytics on acquisition targets, including contingency plan suppositions
4. Deliver closing arguments and final recommendation
Executive Summary
I. Organizational Profile Facts and Figures: Netflix and Targeted Enterprises
Netflix Company Portfolio:
◊ Movie rental provider of DVDs and online streaming
◊ Founded in 1997 in Scotts Valley, CA., by Marc Randolph and Reed Hastings
◊ Netflix maintains the largest library of online content
◊ DVD By-Mail Subscription base currently covers both U.S. and Canada
Companies Involved in Report Netflix, Inc. Comcast Corp
Redbox Automated Retail, LLC (Wholly-owned
subsidiary of Coinstar, Inc.)
Blockbuster, Inc. (Wholly-owned
subsidiary of DISH Network Corporation)
Headquarters Address:
100 Winchester CircleLos Gatos, CA 95032
United States
One Comcast Center Philadelphia, PA 19103-2838
USA
One Tower Lane Suite 1200 Oakbrook Terrace, IL 60181
United States 1201 Elm Street Dallas,
TX 75270 USADate of Incorporation:
August 1997 , DE, United States
December 2001 , PA, United States Founded in 2004
October 1989 , DE, United States
Number of Employees: 4,329 102,000 CoinStar: 2,585 48,000
Chief Executive Officer: Reed Hastings, Chairman
& CEO Brian Roberts, CEO
Coinstar: Paul Davis, CEO: Redbox: Mr. Mitch Lowe,
President Bruce Lewis, SVP & CFOGross Revenue: $2.2 billion $38 billion Coinstar: $1.6 billion $3.5 billion
◊ Google’s Chrome OS plugins will become available for like users to stream video on Netflix in 2011
◊ Real-Time Entertainment traffic accounted for 45.7% average daily content downloading in N.A.
◊ “Social Apponomics”: Netflix’ $1.3 billion online movie rental service with 15 million subscribers
2. HTTP
4. Netflix
7. YouTube
1. BitTorrent
0. Flash Video
0. RTMP
0. iTunes
10. Facebook
3. Gnutella
0. Xbox Live
22.70%
20.61%
9.85%
8.39%
6.14%
6.13%
2.58%
2.44%
2.12%
1.61%
Downstream Percent of Traffic: Year-End 2010
Downstream Percent of Traffic
U.S. Internet MD & I Continued…
◊ Achieves the highest % differential increase between upstream and downstream among ranking qualifiers
◊ Three-tiered downloading bandwidth approach: Low, Middle, High
◊ Once a 1:1 ratio, dollar-to-video time (hourly) for subscription packages; Now, unlimited video streaming at no additional charge
Applic
atio
n
1 BitT
orre
nt 4
2 HTT
P 1
3 Gnu
tella
9
4 Net
flix
2
5 Sky
pe 0
6 SSL
0
7 You
Tube
3
8 M
GCP 0
9 PPStre
am 0
10 F
aceb
ook
8-75.55%
83.66%
-81.04%
374.88%
0.00% 0.00%
298.79%
0.00% 0.00%
-0.81%
Netflix: Top-Ten Internet Traffic Performance Analysis: Year-End 2010
Percentage Difference in Ranking (Upstream vs. Downstream) ± Series2
U.S. Internet MD & I Continued…
◊ Netflix shares are held by 570 institutions: Accounting for 87.05% of all shares held.
◊ Among the top 5-10 institutions are the following: ▪ Vanguard Group, Inc. ▪ American Centuries Companies, Inc. ▪ State Street Corp ▪ Blackrock Institutional Trust Company ▪ Bank of New York Mellon Corp
◊ Irrational Expectations: Investors reaction to the company’s new subscription price increase
◊ Stock price increased 219% in 2010
Du Pont Model Report Analysis
◊ Product paradigm shift from DVDs to online movie and TV shows streaming
◊ Content obtained from studios via fixed-fee licenses, revenue-sharing pacts, & direct purchases.
◊ Added 8 million subscribers in 2010, bringing total to 20 million
◊ In 2010, revenue catapulted up 29%: Net income up 39%
Return on Investment Capital (2010) = NOPAT ÷ Total Net Operating Capital
= 170,185 ÷ 244,762 = 70%
Solvency and Profitability MRA Continued…
◊ Five-year deal reached with Paramount, Liongates, and MGM worth nearly $1 billion to stream movies
◊ As a result of the deal, annual expenses related to new deal expected to increase to $200 million from $117 million a year earlier
◊ Acid Test Ratio slid ▼36.2% in 2010 from a year ago, because of the addition to current liabilities
Solvency and Profitability MRA Continued…
◊ Rapid growth of E-Commerce compared to traditional brick-and-mortar facilities has impacted companies like Redbox, Inc. because of product design and limited distribution channel
◊ Blockbuster offers “Total Access” which enables customers to rent movies online, reducing accrual cost liabilities associated with enhanced inventory control and decreased wages
Solvency and Profitability MRA Continued…
◊ Netflix reported positive net operating profit after taxes and free cash flow for 2010
◊ Conversely, Comcast saw a significant negative total in FCF; nearly half was attributed to an aggregate of new acquisitions during 2010
◊ Although business status is active, Blockbuster incurred negative output for both NOPAT and FCF, as a direct result of preliminary stage of Chapter 11
Solvency and Profitability MRA Continued…
ROIC and M/B Visual Recap
Solvency and Profitability MRA Continued…
◊ Netflix’ migration strategic plan transitioning legacy business model (DVD retail) to contemporary business model (Internet streaming) elevates current debt ratio, from previous years, above industry standard
◊ In contrast, fledgling DVD rental market coupled with a limited distribution pipeline results in higher debt ratio for Redbox against the industry standard
7.449.58
3.55
0
4.8
9.6
5.7 4.5
2010 Financial Ratio Comparison: Company vs. Industry
Profit Margin: Company Profit Margin: Industry
70.5%
33.4%63.4%
120.4%
51.9% 53.9% 51.9% 65.2%
2010 Financial Ratio Comparison: Company vs. Industry
acquisition targets with regards to sales, or COGS, to inventory
2.6
0.33
1.15
2.21
10.3
1
2.1
2010 Financial Ratio Comparison: Company vs. Industry
Total Asset Turnover: Company Total Asset Turnover: Industry
Solvency and Profitability MRA Continued…
Netflix Current Ratio Performance Record:
◊ Netflix efficient SOP (standard operating procedure) throughout its entire supply chain, accompanied by newly increased subscription rates
Netflix ROE Performance Record:
◊ Netflix management decision not to remit dividend payouts
◊ Current stock price 52-week high of $297.35
Netflix, Inc.
Comcast Corp
Redbox Automated Retail, LLC (Wholly-owned subsidiary of Coinstar, Inc.)
Blockbuster, Inc.
1.65
1.08
0.77
1.13
1.1
1.1
1.1
1.4
2010 Financial Ratio Comparison: Company vs. Industry
Current Ratio: Industry Current Ratio: Company
Netflix, Inc.
Comcast Corp
Redbox Automated Retail, LLC (Wholly-owned subsidiary of Coinstar,
Inc.)
Blockbuster, Inc.
65.75
8.35
11.92
0
14.06
7.2
11.4
26.9
2010 Financial Ratio Comparison: Company vs. Industry
Return on Equity: Industry Return on Equity: Company
Solvency and Profitability MRA Continued…
I. Opinions:
Liquidity and profitability positions are moderately conservative to proactive aggressive and comfortably aligned with corporate business model.
Current integration measures for existing by-mail subscription services to VOD long-run is plausible and should be accelerated.
Because online subscription service over the Internet is experiencing steady yet substantial growth well above industry average, existing short- and long-range migration strategic planning should maintain current course directive for global expansion.
II. Recommendations:
The company’s new migration directive to boost its online presence, in conjunction with a waning DVD rental market, is not conducive to the functionality of a brick-and-mortar business model. Therefore, we recommend that management should not move forward with its acquisition plan of Redbox Automated Retail, LLC.
Because substantial increases in online product and marketability leverage is projected long-run, we highly suggest that all current considerations and long-range plans to acquire Blockbuster, Inc., upon a successful emergence from Chapter 11, should move beyond the exploratory phase to tactical, to specifically capitalize on Blockbuster’s elaborate and expansive distribution network
Consultant’s Opinions and Final Recommendations
Consultant’s Closing Audit Assessment and Final
Recommendation
…“Uuum, Netflix Watch Instantly and DVD?”
“And you are co-o-o-rrect!” “Whoo hoo!”
Open Session: Q & A
Source References: Literary Sources:
Troy, L. Ph.D. (2010 Edition). Almanac of Business and Industry Financial Ratios.
Chicago: CCH Group
Strategy + Business Magazine (Spring 2011, Issue 62- ). The Coming Wave of Social
Apponomics. New York: Booz & Company
Web Sources:
Businessweek.com (N/A). Investing. Retrieved June 06, 2011, from http
://investing.businessweek.com
Sagepub.com (N/A). Sage Online Search. Retrieved June 06, 2011, from
http://0-online.sagepub.com.library.ggu.edu
ReferenceUSA.com (N/A). Reference USA Search. Retrieved June 06, 2011, from
http://0-www.referenceusa.com.library.ggu.edu
Charlie Rose.com (N/A). Guest Interviews: Reed Hastings, CEO of Netflix. Retrieved