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Netflix, Twitter and Disney's M&A appetite

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Netflix, Twitter and Disney's M&A appetite

The Mouse seems to be hungry.

Rumors are swirling that Walt Disney Co. might be seeking a new line of businessby setting itssights on or , two high-profile digitalproperties that have faced questions about user growth.

But while Twitter has long been floundering, concerns aboutNetflix are far more recent — and perhaps more fleeting.

The streaming giant at the outset of 2016 its service in 130 newinternational markets, but it missed its guidance of 2.5 million new members in thesecond quarter, falling short by almost 1 million. Whilethe company's executives blamed the shortfall on price increases and headwindsassociated with the Olympics, investors bid shares down sharply after therelease. For the year-to-date through Sept. 30, the last trading day prior towhen the Disney deal rumor broke, Netflix stock was down nearly 14%. The dealspeculation seemed to trigger a turn in sentiment, and the stock gained nearly4% between Sept. 30 and Oct. 4.

Looking at the financials, Netflix's Oct. 4 market cap stoodat just under $50 billion, a few billion dollars less than Disney's $52.5billion in total 2015 net operating revenue. Disney's Media Networks segmentwas the company's largest, accounting for nearly half of its total revenue. Incomparison, Netflix's $6.78 billion in total 2015 revenue would put it slightlybehind Disney's Studio Entertainment segment but ahead of its Consumer Productsdivision. The streaming company's $305.8 million in net operating income wouldfall well below that of either Disney's studio or consumer products segment,but ahead of its interactive media segment. By contrast, Twitter's $2.22billion in 2015 net operating revenue would beat Disney's smallest revenuedriver, its interactive media segment, but Twitter delivered a loss of $450million in 2015 compared to the Disney interactive segment's net operatingincome of $132 million.

Also, Netflix investors seem less interested in a potentialchange given other growth drivers. Netflix shares climbed sharply during Oct. 5trading after the company signed a 10-movie deal to screen its original films inluxury theater chain iPic Entertainment's venues. Earlier in the year, thecompany also signed a deal with Comcast Corp. to integrate the service with the MVPD'sset-top boxes, and another such tie-up includes a partnership with Disneyitself. In September, Netflix became the exclusive for new movies from Disney'svarious studios.

Considering such initiatives, FBR & Co. analyst BartonCrockett speculated that Netflix will likely remain on its own for theforeseeable future.

"Over time, we expect more consolidation in video, asscale offers advantages in breadth of content and spending capacity. Moreover,a sports-heavy Disney could be a nice complement to an entertainment- andkids-heavy Netflix that already features Disney content. But contemplation of apotential pairing would make more sense to us in three years when Disney's payTV deal with Netflix comes up for renewal, and Netflix's growth trajectory hasnormalized. If Disney buys either company, an acquisition would weigh as one ofthe largest ever conducted by the Mouse House," Crockett said in an Oct. 5note.

Twitter investors seem thirstier for a strategic alternative.Shares of the social media company launched over 27% between Sept. 22 and Sept.27 when rumors that Disney along with Salesforce.com and might bid on thecompany. But Twitter investors have been dealing with uninspired user growthfor many quarters. That metric slipped into the single digits in the secondhalf of 2015 and posted below 5% in the past two quarters. The declines ingrowth came despite an array of initiatives, product updates, cross-mediapartnerships and enhanced video integration.

If Disney did buy Netflix or Twitter, a deal would likelyclock in as one of the biggest in Disney's history. The largest acquisitionDisney has made in the past 10 years was Pixar in 2006 at $7.56 billion.

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