I was following the news about Netflix and Warner Bros. Discovery. It looked like a done deal. Netflix was set to acquire Warner’s valuable studio and streaming assets like HBO and DC Comics. It seemed locked in.
Then Paramount showed up with a truckload of cash.
This got me thinking. What actually happens when a signed merger gets crashed by a better offer? This isn’t just a business school hypothetical. It’s a high-stakes process with clear rules that finance and accounting professionals need to understand. Let’s break down what’s happening.
The Two Offers Head-to-Head
First you have the original deal. Netflix and Warner Bros. had a signed agreement. Then came the disruption. Paramount bypassed the board and made an offer directly to shareholders. This is what’s known as a “hostile” bid.
The two offers are fundamentally different.
- The Netflix Deal: Offered $27.75 per share for only the studio and streaming assets. The payment was a mix of cash and stock. This would leave Warner Bros. Discovery to continue on with its linear cable networks. The big risk here is regulatory. Netflix is already the number one streamer and buying a direct competitor like HBO Max raises major antitrust flags.
- The Paramount Bid: Offered $70.00 per share for the entire company. The payment is 100% cash. This is a massive premium over the Netflix offer. Paramount argues their deal is cleaner, offers shareholders more certain value (cash vs. stock), and has a better chance of getting past regulators since they are a smaller player in streaming.
The Board’s Legal Problem: Revlon Duties
The Warner Bros. board is now in a difficult position. Even though they signed a deal with Netflix they can’t just ignore Paramount.
This is because of something called “Revlon Duties.” It’s a legal precedent from Delaware law, where most large US companies are incorporated. The rule is simple. Once a company is for sale the board’s primary legal obligation is to get the best possible price for its shareholders.
They must seriously consider Paramount’s much higher all-cash bid. If they don’t they open themselves up to shareholder lawsuits for failing their fiduciary duty.
The Play-by-Play of a “Deal Jump”
When an interloper like Paramount tries to buy a target that already has a deal in place a specific process kicks off.
- The “Fiduciary Out”: Most merger agreements have a clause that allows the target’s board to accept a “Superior Proposal.” This gives them an out if a significantly better offer comes along.
- The Determination: The board and its financial advisors must officially determine if Paramount’s offer is truly superior. They weigh the price against factors like regulatory risk and the certainty of closing the deal.
- Matching Rights: If the board declares the Paramount bid superior they must give Netflix a chance to respond. Netflix will have a set period, maybe a few days, to match or improve upon Paramount’s offer. They could increase their price change the structure or walk away.
- The Breakup Fee: If Warner Bros. ultimately walks away from the Netflix deal they will have to pay a penalty. This breakup fee could be around $2 billion. It’s a consolation prize for Netflix for their time and effort. In this scenario Paramount would effectively cover this fee as part of its acquisition cost.
History Lessons in Deal Jumping
This isn’t the first time a major deal has been interrupted. We’ve seen this play out before with different results.
- Occidental vs. Chevron for Anadarko (2019): Chevron had a deal to buy Anadarko. Occidental jumped in with a higher all-cash hostile bid. Chevron refused to get into a bidding war and walked away with a $1 billion breakup fee. Occidental won but many analysts argue they overpaid.
- JetBlue vs. Frontier for Spirit Airlines (2022): Spirit Airlines had agreed to merge with Frontier. JetBlue launched a hostile all-cash offer at a huge premium. Spirit’s shareholders chose JetBlue’s cash but the deal was ultimately blocked by a judge on antitrust grounds.
- QVC vs. Viacom for Paramount (1994): In a case involving one of our current players Viacom was set to buy Paramount. QVC launched a hostile bid starting a bidding war. Viacom eventually won but had to pay a much higher price.
Key Takeaways
The fight for Warner Bros. is a fascinating real-world example of complex M&A strategy. It highlights several key truths about how these deals work.
- A Signed Deal Isn’t Final: Until a deal closes it is vulnerable to competing offers especially if there is a significant price difference.
- Shareholder Value is King: The concept of fiduciary duty and specifically Revlon Duties legally forces a board to prioritize the best financial outcome for its owners.
- Process Matters: There is a structured playbook for deal jumping involving board reviews matching rights and breakup fees.
- Regulators Get the Final Say: Both deals face intense regulatory scrutiny. A higher price doesn’t matter if the government won’t approve the merger on antitrust grounds.
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