Roku stock rumors have been circulating lately due to reports that Netflix is interested in buying the firm. In certain ways, the pairing makes sense. Roku provides users access to their streaming services through its platform, and its market capitalization has fallen more than $50 billion from its peak.

However, as neither Roku (NASDAQ:ROKU) nor Netflix (NASDAQ:NFLX) has confirmed the claims, this is just speculation. Still, considering the advantages of such a merger may be an interesting exercise, so let’s look at how it might work.

Netflix benefits

Netflix may be interested in acquiring Roku for a variety of reasons. To begin, Netflix has announced intentions to offer an ad-supported version of its service as early as this year. However, flipping a switch to turn advertisements on isn’t as simple as it sounds. Netflix will have to invest in developing the ability to deliver advertisements to audiences and market that inventory to marketers. Roku has significant expertise in this area, which would aid Netflix in its goal. Instead of building it from the ground up, Netflix may save time by acquiring this infrastructure through Roku rather than constructing it in-house.

Roku’s system is already the No. 1 television operating system in North America. This scale would also give Netflix access to valuable data on what consumers watch from rival services. In addition, it would lessen the competitive risk for Netflix since it would benefit from the success of other streaming services on the Roku platform. It might even prioritize its own service above rivals if it effectively utilizes the platform.

Deal roadblocks

Roku has over $2 billion in cash and equivalents on its balance sheet, which is a good thing from a financial standpoint. On the other hand, Netflix has about $6 billion in cash with almost $15 billion of debt. That’s one of the difficulties in closing this deal.

Although the strategic benefits mentioned above entice Netflix to pursue Roku, raising the cash is another issue. As of this writing, Roku has a market capitalization of $10.7 billion. Netflix would have to pay a premium to acquire Roku, effortlessly reaching $13 billion or more in total cost. The firm doesn’t have enough cash on hand for an all-cash offer. Furthermore, with its debt level already at the upper end of management’s target range of $10 billion to $15 billion, leadership is probably reluctant to incur any more debt to finance the acquisition.

Future predictions

Because of this, a combined cash and stock offer or an all-stock deal are both possible options for Netflix. Nevertheless, given that shares of Netflix have dropped over 75% from their all-time high, such alternatives have drawbacks. Moreover, Roku’s side may be hesitant to sell after the even more severe 85% percent decline in its stock last year.

All of it suggests little truth to the Netflix and Roku stock rumors.

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