Image: Netflix DVD envelopes © Justin Sullivan, Getty Images

Corporate raider Carl Icahn called Netflix (NFLX) Chief Executive Reed Hastings on Halloween with a message that no executive wants to hear: His company was about to be put in play.

During the brief call, Icahn told Hastings that he stood to become one of Netflix's largest shareholders after acquiring a nearly 10% stake. The two agreed to meet in New York.

Hastings and Icahn are squaring off over the future of Netflix, a pioneering video-streaming company whose business is under attack by (AMZN). Within two days, Hastings, 52, rallied Netflix's six other directors behind a "poison pill" to prevent Icahn from acquiring any more stock.

The Los Gatos, Calif., company lined up investment banks Goldman Sachs (GS) and Morgan Stanley (MS), law firm Wilson Sonsini Goodrich & Rosati and public relations firm Sard Verbinnen for advice on what promises to be a fight for its independence.

In the meantime, Icahn cranked up his criticism, calling Netflix's poison pill "an example of poor corporate governance" in a Nov. 5 securities filing.

"I guess they decided to go to battle," said the 76-year-old investor, who is famous for taking large stakes in companies including Clorox (CLX), Motorola Solutions (MSI) and Lions Gate Entertainment (LGF) and pushing for changes in strategy or a sale.

At the heart of the looming clash is whether Netflix, which has a market capitalization of about $4.42 billion, is more valuable alone or as part of a bigger company. Icahn said Netflix has achieved all it can on its own and should be sold to a cash-rich company, like Google (GOOG), Amazon or Microsoft (MSFT). (Microsoft is the publisher of MSN Money.)

"There is a very good argument that, at the right premium, somebody should buy Netflix," Icahn said. He is pursuing shareholders to support a sale to a company that could exploit Netflix's distribution. "They've got a great platform. That is also why it is such a great acquisition candidate for someone. Most of the shareholders would like to see the company sold at a big premium."

Top Netflix investors Capital Group, Davis Selected Advisers and Vanguard Group declined to comment. T. Rowe Price Group (TROW) was unavailable to comment. Whitney Tilson, who holds Netflix shares through his T2 Partners' hedge and mutual funds, said in an email to clients this month he would be "very disappointed" if the company, whose shares closed today at $79.78, were sold for $100 a share.

"It would have to be a much higher price for me to be happy about giving up this stock," Tilson wrote, noting it would be a "bite-size" acquisition for many larger tech companies to buy Netflix.

Hastings has argued that Netflix, which he co-founded in 1997 as a DVD-by-mail company, is in the early stages of a multiyear growth strategy that it hopes will lure millions of new customers, particularly overseas. It operates in Norway, Brazil and Ireland, and is developing original content to draw new subscribers. The strategy is expensive and has hurt profits and Netflix's share price over the past year.

In the first nine months of the year, Netflix's international push brought in $186.1 million in revenue, but led to a $284.5 million loss in the period. The domestic streaming business turned a $240.6 million profit on $1.6 billion in revenue.

Hastings has asked investors to be patient. In an email response to questions, he said Netflix is focused on daily operations, not on Icahn. "Next steps: grow membership, increase content, repeat," he wrote.

As Hastings and Icahn circle one another, bankers have contacted big media, technology, telecommunications and cable companies to gauge their interest in a Netflix bid. Netflix spokesman Jonathan Friedland said the company's board would consider any bid. He added that Netflix board members and Hastings weren't available for additional comment.

The fight between Icahn and Hastings spotlights just how far Netflix has fallen. The company's stock hit an all-time high of around $300 just 16 months ago, then tumbled after Netflix raised its consumer-subscription prices last year and disclosed an ill-fated plan to split the business into separate DVD and streaming-content companies.

In the aftermath, Netflix lost nearly a million consumer accounts. Today, its more profitable DVD-by-mail business is losing hundreds of thousands of customers a quarter, while the company continues to cut expensive region-by-region content deals to expand overseas.

Competition also is intensifying from rivals including Amazon and Hulu. Amazon is aggressively adding streaming content as part of its annual $79 Prime membership program.

Netflix has conceded it will likely miss a projection from early this year by Hastings to add 7 million streaming customers in its U.S. market. It had 21.7 million U.S. streaming subscribers at the end of 2011.

Still, Netflix's Friedland pointed to a recent survey by Sandvine showing the company was responsible for 29% of Internet streaming traffic in North America, more than double Google's YouTube. He said a plan to release original content next year, such as cult hit "Arrested Development," would drive new $8-a-month memberships.

Icahn, who is a Netflix customer and favors History Channel documentaries, said the company has a leg up on competitors in streaming content and is poised to take advantage of "a secular change" in how consumers view media.

"They have a big advantage if they are run correctly," he said. Icahn didn't say whether Hastings should stay or go, saying he doesn't "micromanage" the companies he invests in.

Icahn faces challenges in taking on Netflix. Only a portion of the company's board stands for election in a given year -- the next annual meeting isn't expect to be called until mid-2013 -- meaning it would take several years for an outsider to unseat a meaningful number of directors.

And Icahn's record in taking on tech companies is mixed, said Ryan Jacob, the chairman of mutual-fund firm Jacob Funds in Manhattan Beach, Calif., which previously owned Netflix stock. Icahn successfully broke up Motorola, for instance, but wasn't able to get Yahoo (YHOO) to sell itself to Microsoft after acquiring a stake and forcing himself and two others onto the board in 2008.

And as a director for five years at Netflix rival Blockbuster, Icahn couldn't prevent that video-rental company from slipping into bankruptcy in 2010. "Netflix pretty much cleaned their clock," Jacob said.

Icahn said he is prepared for a lengthy fight with Netflix if necessary. "If they want to go to war," he said," then we'll go to war."

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