1. ACQUIRING NETFLIX
The race between Apple Inc. & Alphabet Inc.
ABSTRACT
Whichof these twotechindustrymogulsis
betterfinanciallypositionedtoacquire the
mostattractive entertainmentstreaming
company?
Marc Roper
BU 5120

2. Outlook
This report is a financial evaluation of two technology moguls and their time trailing
financial statements of 2015. The companies that we will be looking into are Apple Inc. and
Alphabet Inc., or more commonly known as Google. The analysis will take a look at most of the
important financial ratios, as per Ehrhardt & Brigham introduce in their 5th edition text. The
ratios, as we will see, were computed in respect to their own financial reports issued for their
own respective most recent twelve-month fiscal year ended. We will also look to the industry
averages for comparative critiques of the company’s performance. Once this analysis is
complete we will then dig deeper into a theoretical merger and acquisition scenario; the
question we wish to discover is who would be better positioned to acquire Netflix Inc. if this
corporation were up for sale? This will be done by evaluating Netflix’s value for a sale,
computing WACC values, proposing how to raise the capital and conclude who is better
leveraged, Apple or Google, to acquire the movie streaming company. The report will then
come to a close when we acknowledge a few more qualitative motivators as to why one
company may push harder to absorb Netflix into their corporate structure. Through the
process, we have to keep in mind that this is strictly theoretical; but so are most acquisitions
before the due-diligence is performed. Netflix is net up for sale at this point in time, but if it
were, these two corporations might seemingly be the only two who could realistically push to
absorb Netflix.
Ratio analysis
Initially, what is very striking is the large variation in the market cap between Apple and
Google, and subsequently the advantage both corporations have above Netflix in this regard. It
appears as Apple manages their assets (i.e. their turnover ratios) much better relative to the
other two; that being said Apple does provide much more hardware products within their
services that most likely contributes to this. Whereas Google and Netflix likely don’t require
such an abundance of assets or as many plants, machinery and equipment as their service
doesn’t require the production piece anywhere near Apple’s requirements. We should note
Google’s highly leverage debt to assets ratio, indicating their position of debt strongly

3. represents their asset totals. Note that a few calculations are incomplete because Google and
Netflix did not report any inventories in their financials. This seems very odd, as I would expect
each company to hold some level of inventories, yet within these reports it appears as though
neither are reporting any inventories. Thisis alsomay be byproductof theirservice beingmore
software oriented.
When considering the debt to equity ratios, we see a slight advantage for Google
relative to Apple, which makes sense because we already know how deeply financed through
debt Google is. Both companies show very similar net profit margins, indicating that their
capital structures similarly prove successful relative to their operating methods; this could have
something to do with their strong reliability as a company and hence low interest rates. Apple
holds an edge when discussing ROA and an extreme advantage in their ROE. Both of these stats
are peculiar. In the case of ROA, this seems odd because the liabilities to assets ratio hinted
that Google was not as intensely leveraged in liabilities. Yet Apple seems to be using their
smaller collection of assets more efficiently than Google. And when discussing ROE, Apple is
Ratio Apple Google Netflix
Market Cap 578.58 B 244.69 B 39.59 B
Current 1.11 4.67 1.54
Quick 1.08 N/A N/A
Total Assets Turnover 0.80 0.51 0.66
Fixed Assets turnover 10.40 1.87 39.09
DSO 48 days 68 days N/A
Inventory Turnover 64.43 N/A N/A
Debt to assets 25.46% 53.06% 25.73%
Debt to Equity 61.95% 65.03% 118.05%
Market Debt 10.08% 13.04% NA
Liabilities to Assets 58.91% 18.40% 78.21%
TIE 97.18 NA 2.07
Net Profit Margin on Sales 22.85% 21.80% 1.81%
Operating Profit Margin 30.48% 25.82% 4.05%
BEP 24.52% 13.13% 2.69%
ROA 18.38% 11.09% 1.20%
ROE 44.74% 13.59% 5.52%
P/E 12.36 16.61 394.41
EV/sales 2.61 3.17 5.92
Dupont 44.74% 13.59% 2.94%

4. returning much more on their larger portion of equity than Google is in the market, even as
Apple has more than ten times the number of outstanding common shares1. This signals a
justifying use of Apple’s large equity investments. This would be my assumption, yet the debt
to equity ratio somewhat disproves. It also appears that one of the few advantages in this ratio
analysis Google holds over Apple is in the price-earnings ratio. As a result, Google is more
effectively allocating its cost of operations and assuming a less risky investment for investors;
although the margin is admittedly small. Lastly, the enterprise-to value-of-sales ratio points out
that both corporations have a fairly similar corporate valuation in respect to the health of their
sales.
Because of their market cap, their relatively large ROE value, their slight advantage in
ROA and large cash holdings, I would have to expect that Apple is the more properly positioned
company (at least from basic financial critiques) to acquire Netflix in this theoretical acquisition.
Yet Google’s desire to be innovative and push industry limits can’t be overlooked. Some
important industry average ratios can be seen the attached appendix for further comparison.
Assumptions & Valuations
An important step now is to identify certain assumptions we will be making in the
business acquisition. Most importantly this means determining how both Apple and Google will
be organizing their capital for the buyout. We should note now that some of the values here
are certainly subject to some scrutiny, but they were determined mostly from historical market
averages, while keeping in mind of the general successful path of both tech tycoons.
First off, since both corporations have obviously already had large initial public offerings
of stock. Thus, our analysis will assume that the only way they will be raising capital is through
issuing new 30-year bonds. In this assumption for Apple, we will hold constant any current
stock or preferred stock; while not assuming any repurchase agreements from the company.
We will also assume that the new bonds to be issued for the purchase of Netflix Inc. shall be
1 Valueline.comshows shares outstanding2016;Apple 5.5 Billion & Google345.5 Million

5. done so in addition to all current long-term 30-year debt that is already withstanding. Our
analysis will look into a pro forma, if you will, of three different levels of debt issuance, and
what that would require as far as cash and bonds (which can be seen in later tables or
accompanying excel spreadsheets). For a coupon rate of the to-be-issued debt, marketwatch2
recently acknowledged Apple issuing 30-year bonds at a fixed 2.642% rate. As a result, we will
carry this rate through as we expect another debt issuance to have similar rates as recent
historical rates. We will be holding any short term debt that the company has constant through
our evaluation. As for our return on short term debt, we will carry through the same 2.642% as
our 30-year bond rate. This may be on the high end of return levels for short-term debt, but at
least we know that this acts as a ‘worst-case’ scenario, hence results can only improve from
what we are inferring. We will be assuming a marginal tax rate of 40%, similar to most large
scale firms. For simplification, we will not include any preferred stock options into our analysis
moving forward. As for common stock, we will hold it constant as well, without any buy-back
plans. To calculate the approximately return on common equity, we will be using the dividend
method, taking into effect the respective dividends and fiscal year ending stock quotes from
Apple in 2015 and 20143, which is equal to 11.36%.
When discussing Google, a new set of assumptions will be taken into consideration. In
February of 2016 morningstar4 reported that Google issued a large amount of long term debt,
30-year debt at a rate of 3.375%. As a result, we will be using this rate on the debt issued by
Google for our evaluation. We will be holding short term debt constant, as well as common
stock, again with no expirations or repurchases. We will also assume that there will be no
preferred stock available in this analysis. As for the return on our common stock, Google has
complicated the process of using the dividend method, since they have not reported issuing any
dividends for their most recent fiscal years.5 Because of this, we will consider the CAPM model
to determine our required return on common equity. To do so, we will make the assumption
2 Marketwatch.com financial information website;historical debtissuanceof recent Apple activity
3 Note that Apple Inc,has a fiscal year endingSept.26 2015, and Sept.27 2014
4 Morningstar.com,financial information website; Aplhabet Inc 2016 debt issuance
5 Note Google has fiscal years endingDec.31,2015 & Dec.31, 2014

6. that the risk-free rate is equal to 2.69%6; which is what the 30-year Treasury bonds were being
issued at according to CNBC financial. The risk-premium of the market typically shows historical
averages between 3% and 7%. As a result, we will be using a 6% rate, signifying a higher end
return for an industry that shows largely positive cash flows and profit margins. As for the beta
value, Value Line7 reported a 1.0 beta value for Google; also a justification for the high market
risk-premium level. Therefore, our return on common stock will be a rate of 8.69%.
When it comes to valuing the Netflix corporation, there are certainly a few methods of
doing so. The simplest and most straightforward method we will use in our analysis is to
assume that both Apple and Google will approach their buy-out proposals by assuming over
50% of the company’s equity; as a result, they become the majority shareholders and position
themselves to dictate operations or further, buyout the company entirely. Consequentially, we
will consult Netflix’s market cap of nearly $40 billion. Since the market cap is the product of the
closing stock quote and the company’s outstanding shares, the logic here is that both Apple and
Google will raise capital to purchase $20 billion in Netflix stock. However in mergers and
acquisitions we realize shares are typically purchased at a premium; which in this proposal we
will hold true at a premium of 25%8. For this reason, the acquisition of Netflix will cost both
corporations $25 billion USD, which will be supplied net of cash payments from their holdings
and newly issued debt. It’s here where Apple holds a distinct advantage. Their cash and cash
equivalents make Google’s cash holdings look miniscule9. As we will suggest three situations of
varying debt levels for both Apple and Google to contemplate how they raise their capital, the
scenarios are more than likely to put greater strain on Google, as it will deplete their cash
holdings much more significantly, and contribute to a much higher debt leverage. The
suggested capital structures, cash and cash equivalents, as well as the calculated WACC for each
scenario for both Apple and Google are as follows:
6 CNBC financial information
7 Valueline.comfinancial information,PSUportal
8 After consultation of half-dozen largescale,successful M&A’s,ranges of 20-30% premiums appeared most
common; hence the decision to proceed ata premium rate of 25%
9 Keep in mind these are in reference to each company’s respective fiscal year endingin 2015 statements

7. Apple Inc. Moderate Debt Issue More Debt Issue Lower Debt Issue
Cash & equivalents $21,120 m USD $21,120 m USD $21,120 m USD
Proposed Cash
Payout $10,000 m USD $7,500 m USD $12,500 m USD
Current LT Debt $53,463 m USD $53,463 m USD $53,463 m USD
New Debt Issued $15,000 m USD $17,500 m USD $12,500 m USD
WACC 7.53% 7.45% 7.60%
Google Inc. Moderate Debt Issue More Debt Issue Lower Debt Issue
Cash & equivalents $9,169 m USD $9,169 m USD $9,169 m USD
Proposed Cash
Payout
$7,500 m USD $5,000 m USD $8,000 m USD
Current LT Debt $1,995 m USD $1,995 m USD $1,995 m USD
New Debt Issued $17,500 m USD $20,000 m USD $17,000 m USD
WACC 7.68% 7.58% 7.70%
Quantitative & Qualitative Concluding
If we are making a calculated investment decision from the two tables above, we can
clearly see the weighted average cost of capital (WACC) in all situations favors Apple Inc. over
Google when contemplating raising this level of capital. By this we mean that based on the
capital structures (described in our assumptions) each scenario would force both corporations
to be in, Apple has favorable advantage in raising capital at a cheaper rate than Google.
Furthermore, we quickly realize, as stated earlier, the noticeable abundance of cash that Apple
has at their disposal. This disadvantage was taken into consideration for Google when
proposing reasonable amounts of long term debt to issue in effort not to cripple their leveraged
position. Clearly in this acquisition process, any reasonable level of debt issued would require a

8. large commitment form Google’s cash holdings; something the company would have to
consider whether they would be willing to do this with the prospect of owning Netflix’s revenue
stream. This would undoubtedly be reflected in ratios such as net profit margin, ROA and ROE,
as Google’s net income would be substantially reduced; which would be more negatively
affected within Google’s ratios as opposed to Apple’s ratios. For these simple reasons, and
considering the assumptions we have laid forward, we would have to determine that in this
case the hardware, phone and laptop kingpin, Apple, is considerable better positioned to push
to acquire Netflix.
This is not to say Google wouldn’t be able to handle such an acquisition. The simple
crippling fact remains Google’s relatively low cash holdings amount. In this such a proposed
merger and acquisition, we would be dealing with the largest buy-out in history. As a result, for
Google to do so, as we can see in the proposed scenarios, they would also have to issue among
the largest one-time debt amounts in history. Even with the financial security and strength of
Google, such an investment seems a little foolish. Not to mention they already possess
YouTube under their corporate structure. YouTube offers similar rental services, albeit maybe
not as nearly profitable as Netflix; and consequentially would potentially deter any motivation
to enter into the Netflix platform.
Almost in direct opposition to this point, one would have to believe that with all their
hardware products and sales that Apple is looking for some sort of avenue to get into the real-
time streaming platform for film and television. Of course, AppleTV is widely popular, but the
potential to own their own streaming service within the AppleTV apparatus provides even
greater revenue opportunities. Even more so, imagine the streaming capabilities if Apple made
such a product available through its iTunes library. We’ve also previously identified that Apple
is well positioned as far as their cash holdings to take on such an adventure. And if those who
look at Netflix’s most recent statement and are skeptical about their future success; most of the
costs related to Netflix’s new endeavors are very heavily tied up in new investments to develop
and produce original material. Which would be in opposition to the traditional pay-for-
streaming-rights. By being encompassed under the wing of Apple’s financial resources, a few

9. years of aggressive spending and production would more easily be tolerable since costs could
be balanced by revenues from existing business platforms. Not to mention, Apple’s existing
capital tied up in long term bonds is fairly substantial. Again, with their cash position, issuing
the suggested levels of debt doesn’t seem too daunting of an additional to this existing long
term debt. And finally, in consideration of most recent happenings with the price of Apple’s
stock10, it seems as the corporation would be well served to pursue some business adventure
that can rejuvenate investor pizzazz. Even the buzz around a potential Netflix acquisition would
absolutely rally current stock prices; imagine the reaction to an actual acquisition.
The bottom line of reality is that Netflix is not for sale currently. However, if they were
to listen to the winds of the market, they may be best served to do so in Apple’s general
direction as this company could certainly provide the return on a purchase that Netflix owners
would desire.
10 Marketwatch, see Tomi KilgorearticleMay 2016 article,Applestock downward trend

10. Appendix
financial ratios relative to respective industry
Ratio Apple tech equipment industryGoogle internet info industryNetflix CATV industry
Market Cap (Total) 578.58 B 12,032 B 244.69 B 5,581 B 39.59 B 2,841 B
Current 1.11 4.67 1.54
Quick 1.08 N/A N/A
Total Assets Turnover 0.80 0.51 0.66
Fixed Assets turnover 10.40 1.87 39.09
DSO 48 days 68 days N/A
Inventory Turnover 64.43 N/A N/A
Debt to assets 25.46% 53.06% 25.73%
Debt to Equity 61.95% 48.10 65.03% 9.40 118.05% 119.20
Market Debt 10.08% 13.04% N/A
Liabilities to Assets 58.91% 18.40% 78.21%
TIE 97.18 NA 2.07
EBITDA Coverage 11.78 NA N/A
Net Profit Margin on Sales 22.85% 16.30% 21.80% 17.30% 1.81% 5.80%
Operating Profit Margin 30.48% 25.82% 4.05%
BEP 24.52% 13.13% 2.69%
ROA 18.38% 11.09% 1.20%
ROE 44.74% 31.20% 13.59% 12.00% 5.52% 16.40%
P/E 12.36 17.10 16.61 49.60 394.41 40.40
EV/sales 2.61 3.17 5.92
Dupont 44.74% 13.59% 2.94%