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Financials Mergers & Acquisitions Reports

Verizon throws Yahoo a life jacket – will it sink or swim?

The Yahoo sale saga has come to a close this week as US telecoms giant Verizon has bought the core assets of the firm for $4.8bn, comprising search, email and messenger, and its new business areas often referred to as Mavens – including Flurry and Tumblr – in a deal which aims to add further advertising clout to its recent $4.4bn purchase of AOL. The deal does not include cash, IPR assets and stakes in Alibaba and Yahoo Japan.

Verizon has been the frontrunner in this race for a while now, so this news isn’t a huge surprise. However, the question is whether the combined entities of these two internet tech companies struggling prior to Verizon’s takeover, will actually benefit the company? Yahoo’s most recent Q2 figures don’t exactly paint a promising picture – showing a $440m loss.

Those positive about the deal remind us that Yahoo continues to see a billion regular monthly users, and is still the fifth most viewed website in the US, ahead of the likes of Wikipedia, eBay, Twitter, and Netflix – a position that has the potential to provide Verizon with a quick route to new revenue streams and partnerships.

Yahoo has been surpassed in every way imaginable by Google, as well as a wave of fresh and innovative tech companies such as Facebook and Snapchat, but Yahoo’s core web businesses could still be a valuable addition to the already established AOL advertising platform – providing advertising and web content platforms working in synergy to expand Verizon’s businesses beyond simple cellular ARPUs.

Verizon’s purchase does not include Yahoo’s 15% stake in the colossal Chinese e-commerce group Alibaba – which accounts for the majority of Yahoo’s total valuation of $35.8bn. Alibaba is valued at around $207 billion, meaning that Yahoo’s stake is worth around $31bn, but this puts Yahoo in a difficult position due to business rules. Selling the shares would hit Yahoo with a capital gains bill of around $10bn if it decided to spin off the shares as a separate company.

Yahoo also announced the second write-down of Tumblr, following the Q1 February write-down of $230m with this quarter’s $482m. That’s a very bad return on the $1bn that Yahoo paid for the blogging site. Last quarter’s 15% reduction in Yahoo’s workforce might take a little longer than a quarter to have any positive impact on the financials.

The company’s revenue minus the commissions it paid for web traffic acquisition fell 19% in Q2, which is the sixth quarterly decline in the previous seven quarters.

Initial bids, made back in February, were said to be as high as $8bn for the core assets, but in the end Verizon has beaten its bitter rival AT&T in the bidding, as well as other reported offers from Google, Apple, and an ambitious bid from UK newspaper the Daily Mail.

Yahoo chief executive Marissa Mayer said, “Yahoo is a company that has changed the world, and will continue to do so through this combination with Verizon and AOL.” Mayer has expressed plans to stay at the company, but would be in for a hefty $137m pay off in the event she is driven out of the company. AOL CEO Tim Armstrong is strongly pipped to head up the combined units of Yahoo and AOL.

According to recent research from eMarketer, Yahoo is forecast to bring in $2.3bn in US digital ad sales this year, and AOL is expected to generate $1.3bn. In comparison, Google is projected to generate sales of $24.6bn, and Facebook $10.3bn.

The deal is expected to close late this year or early in 2017.

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