The gloves are off. Carl Icahn threw them to the ice like a hockey brawler, getting ready to throw punches at Netflix .

When Icahn built a nearly 10% stake in the video veteran over the summer, it was done via proprietary call options. That was a capital-efficient way to create a large interest in the company, but didn't come with any voting powers. It would take some more capital to convert those calls into regular stock shares, which would then let Icahn wage proxy wars to rebuild the Netflix board of directors and influence where the company is going.

Well, Icahn has taken that crucial step. According to an SEC filing, all of the Icahn sphere's call options were converted into stock on Monday. The written put options that were paired with the calls have been terminated, too. No more Mr. Synthetic Long -- the group's 9.98% share of Netflix votes has now been activated. Sit back and enjoy the fireworks.


The cost base of the options was about $58 per share, so Icahn could simply sell his freshly minted shares right away for a quick 40% profit on his $324 million investment. Not bad for a quick hit. But he didn't. So this is where the gloves hit the ice.

A hostile takeover would be a long and difficult battle here, given the one-two punch of a staggered board of directors plus a brand-new poison pill. Expanding that just-below 10% position any further would instantly dilute Icahn's holdings to kingdom come, and the three director cohorts make it impossible to clean out the boardroom in a single strike anyhow. So it'd be expensive and take at least two years.

Dueling banjos
Icahn keeps professing his love for Netflix's 27 million domestic streaming customers. To his mind, it makes perfect sense for Amazon.com , Microsoft , or even Verizon to buy Netflix rather than throwing money after their homegrown digital video platforms. Hitching the Netflix wagon to a bigger and richer warhorse with global ambitions and deep pockets would unlock a ton of value for the buyer.

He's not wrong. All of this is true.

On the other hand, CEO Reed Hastings believes that shareholders would be better served in the long run if Netflix remains independent. The company may not have billions of dollars in cash reserves, but Hastings insists that he's got enough cash stored and incoming to realize his worldwide growth plans. A quick buyout premium now would look paltry next to the long-term value he's creating.

So Icahn may be right, but Hastings is righter in my view.

Where's the competition?
My Netflix shares are not a get-rich-quick gamble but a long-term investment. I believe in the Netflix take on digital video, where the company has carved out a very specific and lucrative subscription niche while everyone else is fighting over table scraps using pay-per-view models.

  • Amazon is competing, kind of, but the Prime plan really treats video as an expensive marketing ploy for the e-tailer's main store.
  • Mr. Softy expects you to buy a digital copy of The Artist for $15 (standard definition) to $20 (high-def), with no option to just rent. This caters to a totally different market than the Netflix all-you-can-eat buffet, where The Artist is included in the $9 monthly fee.
  • We don't even know exactly what Verizon plans to do in the digital video space until its joint venture with Coinstar's Redbox division finally rolls out. But it's a fair bet that it'll be just another piecemeal rental service, and not a crazy subscription plan.

Carl Icahn seems to agree that Netflix holds a unique position in the digital video space, but he's got different ideas on how to provide shareholder value. The gloves are off, and I can't wait for Icahn to start throwing punches. This fight might get more entertaining than anything streaming at Netflix.

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

The article Carl Icahn Ain't Kidding Around With Netflix Anymore originally appeared on Fool.com.

Fool contributor Anders Bylund owns shares of Netflix and has created a bull call spread on top of that position. He holds no other position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Microsoft, Amazon.com, and Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, and Coinstar. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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