Verizon confirms $US4.8bn Yahoo deal

The telco announced plans to buy the beleaguered internet company’s core business for $US4.83 billion in cash.

Verizon Communications on Monday announced plans to buy Yahoo for $US4.83 billion in cash, ending a drawn-out auction process for the beleaguered internet company.

The price tag, which includes Yahoo’s core internet business and some real estate, is a remarkable fall for the Silicon Valley web pioneer that once had a market capitalisation of more than $US125 billion at the height of the dotcom boom.

For New York-based Verizon, the deal simply adds another piece to the digital media and advertising business it is trying to build. The companies said the deal is subject to customary closing conditions, including approval by Yahoo’s shareholders, and is expected to close in early 2017.

The sale doesn’t include, among other things, Yahoo’s cash, its shares in Alibaba Group Holding, its shares in Yahoo Japan, and Yahoo’s noncore patents, called the Excalibur portfolio. These assets will continue to be held by Yahoo, which will change its name at closing and become a registered, publicly traded investment company.

The companies, in their news release, didn’t outline the future role for Yahoo Chief Executive Marissa Mayer; however, she is unlikely to have a prominent role — if any — under Verizon, people familiar with the matter said. She stands to make more than $US50 million in compensation if she is terminated as a result of the sale, after earning over $US100 million in cash and equity.

When the bidding began in April, Verizon was the immediate frontrunner with a market capitalisation of roughly $US228 billion and a plan for how to plug Yahoo into its upstart digital media business, which includes AOL properties it acquired last year for $US4.4 billion.

Verizon’s competition came primarily from private-equity firms such as Bain Capital, Vista Equity Partners, TPG and Advent International, as well as a group led by Quicken Loans founder Dan Gilbert. AT&T joined the bidding process later, but it wasn’t seen as a serious contender, people familiar with the matter have said.

Verizon in June submitted a bid of $US3 billion, but that didn’t include Yahoo’s real estate and came before last week’s final round of bidding.

Verizon is building a portfolio of online content and aiming to monetise it via advertising. Its current assets include Huffington Post and TechCrunch, which it acquired in last year’s AOL deal, and its own mobile video app, called go90. Acquiring Yahoo will bring in millions more viewers from Yahoo sites like Finance, Sports and News.

Verizon also hopes to plug data derived from smartphones into AOL, and now Yahoo’s, digital advertising systems, and it is aiming to build a competitor to online advertising giants Facebook Inc. and Alphabet Inc.’s Google.

But a combined Yahoo and AOL would be far outpaced by its now far-larger rivals.

Google and Facebook will account for more than half of the $US69 billion US digital ad market this year, according to estimates by data firm eMarketer. Yahoo’s share is expected to be 3.4 per cent; Verizon properties including AOL hold an even-smaller 1.8 per cent of the market, according to eMarketer.

Yahoo’s hold on the market is also slipping. In 2014, Yahoo generated $US2.54 billion in revenue from US digital ads. That is expected to be $US2.32 billion in 2016, or 8.7 per cent lower, according to eMarketer.

“The headwinds for all large players not named Google and Facebook are very real,” said Pivotal Research analyst Brian Wieser. “Noticeable growth only has a chance to come with ongoing investment, whether M&A or internal.”

Last week, Yahoo said second-quarter revenue, minus commissions paid to partners for web traffic, fell 19 per cent. This marked the sixth decline in the past seven periods and the steepest slump under Ms Mayer.

The Sunnyvale, Calif., company also said display ad prices fell 15 per cent year-over-year in the second quarter, while search ad prices fell 8 per cent. During a conference call with analysts, executives said video ad prices were under pressure because of an influx of video ad supply and “uncertainty” around the Yahoo sale process.

Ms Mayer also struck a different tone. While past calls were focused on growth, Ms Mayer spent considerable time touting the company’s lower cost structure. Yahoo’s headcount has shrunk about 15 per cent this year to 8,800 employees.

“The pace of cost cutting is significant,” wrote Bernstein Research analyst Carlos Kirjner in a July 19 note. “We suspect that there will be a price to be paid in the future for these fast, deep cuts, reflected in lower revenue growth.”

Analysts are divided on the value of Yahoo’s core business. The decline in search revenue prompted Credit Suisse to cut its valuation of Yahoo’s core business to $US7 billion, down from $US8 billion. But that is more robust than Mr Kirjner’s estimate of $US3.4 billion.

The Verizon deal is the first major step toward unwinding Yahoo. Next up is a trove of about 3,000 patents, which Yahoo is selling in a separate auction, that is expected to fetch more than $US1 billion.

The patents date back to Yahoo’s initial public offering in 1996 and cover key areas such as e-commerce, online advertising and search, including its original search technology.

Yahoo also will need to figure out what to do with its stakes in Yahoo Japan, majority-owned by SoftBank Group, and Chinese e-commerce company Alibaba Group Holding, considered to make up the majority of Yahoo’s roughly $US36 billion market value today.

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