Why David Zaslav and the WBD board favored Netflix in a turbulent time

After a few marathon days of phone and video calls, emails and text messages, Netflix’s $82.7 billion deal to acquire Warner Bros. and HBO Max to purchase Thursday evening around 10 PM ET.

But there was no chance for high fives or a group meeting among the executives of the newly engaged media giants. Today, sales negotiations were conducted largely remotely via telephone and electronic communications, with Netflix and WBD executives and legal teams spread across New York, Los Angeles, Washington, DC and other locations.

One of the final hurdles in securing the original deal was WBD’s insistence that Netflix commit to a record $5.8 billion in case the deal met resistance, regulatory or otherwise.

Opposition to the deal gathered quickly and fiercely, from unions, consumer watchdogs and politicians on both sides of the aisle. “This merger must be blocked,” the Writers Guild of America urged on Friday.

Finally, about six weeks after Paramount CEO David Ellison’s pushy overtures put the studio in the game, the Warner Bros. board got a deal. Discovery what it wanted: an established, market-leading buyer with a solid financial foundation and a clear strategic need to get the best out of Warner Bros. and get HBO.

At first glance, the Netflix deal appears to be an echo of the AOL-Time Warner transaction that closed in January 2001. A high-flying beacon of what was then called “new media” buys an old entertainment company with brands that seem ripe for exploitation in new ways.

Of course, AOL’s acquisition of Time Warner was nothing short of disastrous. The merger’s big thesis unraveled in just a year after the dot-com crisis and the September 11 terrorist attacks. This time, the Netflix acquisition marks the (near) conquest of Southern California’s most dynamic industry by one of the world-renowned tech giants to emerge from Northern California.

WBD’s board leaned toward the Netflix offer because the company has such a strong balance sheet. The stock has been one of the most consistent and sustainable performers during a turbulent decade in media and entertainment. Unlike AOL in 2001, when its growth was driven by offering simple dial-up Internet access, Netflix has a strong underlying business model that cannot easily be outpaced by new technology or undercut by competitors. After all, TV shows and movies are very sticky — just ask any “Bridgerton” or “Strangers Things” fan.

Netflix’s long-term view contrasts with that of Paramount Skydance, which began its pursuit of WBD shortly after Skydance Media sealed its $8 billion acquisition of Paramount Communications. It’s a sign of the times that the parent company of Paramount Pictures and CBS – two entertainment institutions that have been around for more than 100 years – is a bigger risk than a much younger company that has been in the original programming game for about a dozen years.

Paramount Skydance faces an uphill climb to turn around the fortunes of its studio and existing cable networks and restore strong free cash flow. The company also has more debt on its balance sheet than Netflix, relative to its earnings power. All of these factors were a consideration for the WBD board. How would Paramount fare in the event of a black swan for the macroeconomy?

The lack of certainty there helped convince WBD board members that Netflix was the better and safer option for shareholders than Paramount or even Comcast, the studio’s third contender in the whirlwind bidding process that began in earnest in early November. The process quickly crystallized into a test of wills between two Davids: Ellison and WBD CEO David Zaslav. There has been endless talk in the industry that Zaslav was looking for a deal that would give him a high-level executive position in the resulting company. Ellison blasted the WBD leader in a legal letter sent to Zaslav on Thursday, accusing him of “abandoning the appearance and reality of a fair transaction process” to steer the deal to Netflix.

WBD’s board members had already been put off by Paramount’s unsolicited offer and the rumor in Hollywood and DC that only Ellison and his familial connections to the Trump White House would be able to get regulatory approval for such a large merger.

But Donald Trump is known for working on his phone, and Netflix co-CEO Ted Sarandos is certainly in his contacts. President Trump respects Netflix’s rise from rags to riches as a modern American business success story. And while Trump often expresses hostility toward Hollywood as a bastion of sensitive liberalism, the reality is that he has long been fascinated by the industry, especially after becoming a TV star via NBC’s “The Apprentice.”

Sources close to the situation emphasize that even in Hollywood, ego takes a back seat to business logic when the enterprise value exceeds $82 billion.

Netflix and WBD leaders, including Zaslav, are preparing to make a strong case for the consumer benefits of the deal and the positive impact the expanded company will have on the creative community.

Zaslav, Sarandos and Netflix co-CEO Greg Peters are preparing for a long fight. Leaders predict a shutdown of as much as 18 months, given corporate oversight and political backlash.

There are points to be made for elected officials on the left and right by opposing another major media merger. That could set off a protracted battle in Washington with the Federal Trade Commission and the Justice Department. The FCC is not expected to have a role in this review due to the nature of the assets involved – WBD does not own television stations (a la Paramount) or cable systems (a la Comcast).

Sources said the Netflix and WBD teams are confident that it will be difficult to prove under antitrust rules that the expanded company is anything close to a monopoly power in the content market — especially at a time when Netflix, HBO and others have real competition for the hearts and minds of younger viewers, like YouTube and TikTok.

In their initial presentations about the deal Friday, Netflix and WBD emphasized how little overlap there is between the companies. Netflix has stated that it plans to acquire the studio operations of HBO Max and Warner Bros. as independent companies under the Netflix tent. Anyone who has lived through a Hollywood merger in recent decades knows that no matter what is said at the moment, the long-term arc of any company leans toward streamlining, efficiency and eliminating layoffs. Consolidation will ultimately impact some on the list of veteran senior executives spread across Netflix, Warner Bros. and HBO.

However, for the highest executive at WBD, the future seems to be increasingly coming into focus. Sarandos and Peters are firmly installed as co-CEOs of Netflix. Zaslav has told friends and colleagues that he is focused on completing the merger and creating a healthy Warner Bros. and deliver HBO Max to Sarandos when it’s time to hand over the keys.

If the deal goes through as outlined to investors today, Zaslav will ultimately lose his position as CEO, but he will gain many, many millions (as will a host of senior WB and HBO executives via stock options), as well as the satisfaction of having left on his own terms.