Will the Yahoo Takeover Boost VZ Stock?

Yahoo StockVerizon Yahoo Deal

The Yahoo! Inc. (NASDAQ:YHOO) saga is over. After years of attempting to restore the company to its former glory, the tech giant is on its way to a buyout by Verizon Communications Inc. (NYSE:VZ). Despite bumps in the road, the question pestering investors for years—”‘Is Yahoo sold?”— finally has a definitive answer.

The Verizon Yahoo deal marks the end of Yahoo management’s multiple attempts at re-configuring the company to reach its past riches of the $125.0-billion market capitalization. Investors are looking to see the impacts that the deal will have on both Yahoo stock and the Verizon stock (VZ stock) price.

But the deal has hardly been without drama. If you asked the question, “How much was Yahoo bought for?” a few months ago, you would have gotten an answer that is $350.0 million higher than it is today.

Initially, the Verizon Yahoo deal was valued at $4.83 billion, but that was before information regarding two massive hacks that affected up to 1.5 billion Yahoo users came to light at the end of 2016. Following the data breaches becoming public knowledge, and with the knowledge it might affect the Verizon stock price, Verizon went back to the drawing board. Many believed the Verizon Yahoo deal to be in serious peril.

The most recent news is that the deal is back on; investors in both companies who favored the acquisition can breathe a sigh of relief. The renegotiated terms involved a $350.0-million drop in price for Yahoo, down to $4.48 billion.

“We have always believed this acquisition makes strategic sense,” said Marni Walden, Verizon’s President of Product Innovation and New Businesses, in a company statement. “We look forward to moving ahead expeditiously so that we can quickly welcome Yahoo’s tremendous talent and assets into our expanding portfolio in the digital advertising space.” (Source: “Verizon and Yahoo agree to revised deal, cutting $350 million from acquisition price,” MarketWatch, February 21, 2017.)

As a result of the good news, Yahoo stock has climbed about two percent since the new terms of the deal were announced. VZ stock gained about one percent.

Some of the particulars of the deal have also been altered as a result of the two data breaches, which I’ll touch upon later in this article. But, more importantly, you have to be wondering why Verizon is so interested in acquiring Yahoo.

A company that was largely featured in the news for the past few years as being mismanaged, making poor acquisitions, failed pivots, and now two massive consumer information leaks hardly seems like a stellar buy. But, for Verizon, this was all worth the price of admission to what they see as a gateway to digital advertising dominance. Or at least, relevance.

Verizon Chief Executive Lowell McAdam has longed to rival Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG) in terms of digital advertising. This is one of the primary reasons that Yahoo, with its huge user base, appealed as an acquisition target in the first place. (Source: “Why Verizon Decided to Stick With Yahoo Deal After Big Data Breaches,” The Wall Street Journal, February 21, 2017.)

The current plan following the Verizon Yahoo deal’s completion will be twofold. Yahoo’s digital advertising technology and portfolio of web sites like “Yahoo! News,” “Yahoo! Sports,” and “Yahoo! Finance” will move into AOL, a 2015 acquisition of Verizon’s. The current plan is to leverage the Yahoo brand into a higher stake in digital advertising.

But, for the moment, Verizon is a kid running among giants; in 2016, Yahoo and AOL combined accounted for about two percent of global digital advertising revenue. Google (owned by Alphabet Inc) raked in 32% while Facebook controlled a more modest—but still strong compared to Verizon/AOL’s share— 13%.

The two data breaches at Yahoo might make that already-steep climb even more troublesome. While Yahoo’s user engagement declined only slightly following the second data breach, password resets are still taking place, so it is not impossible that more consumers may desert following the information leaks.

To make matters worse, Verizon found that the breaches may have made some of Yahoo’s systems more difficult to integrate with Verizon’s AOL unit. (Source: Ibid)

These types of setbacks may not doom the acquisition as a failure before it’s even consummated but, at the same time, the road to buying Yahoo has been anything but smooth for Verizon stock.

It’s important to note that the two hacks happened years ago—in 2013 and 2014—but that hasn’t exactly assuaged fears. The stolen data included names, e-mail addresses, dates of birth, telephone numbers, and encrypted passwords. Some are questioning how much Yahoo chose to disclose about the breaches prior to its deal with Verizon.

And that doesn’t include the multiple lawsuits currently levied against Yahoo following the breach.

In other words, for those looking for the Yahoo acquisition to be a shot in the arm for the Verizon stock price, it may not be the instant boost that VZ stock bulls were hoping for.

VZ Stock chart

Chart courtesy of StockCharts.com

Yahoo Takeover

Let’s get more into the nitty-gritty of the deal, shall we?

Yahoo will sell off the aforementioned online entities like Yahoo! Sports and Yahoo! News to Verizon, but the rest of the company’s approximately $39.0 billion in assets will be spun off into Altaba, a holding company that will do little other than become a stock ticker to represent these high-value assets.

Among Altaba’s strongest possessions is a 36% stake in Yahoo! Japan and a 16% equity stake in Alibaba Group Holding Ltd (NYSE:BABA), as well as $7.1 billion in cash, a large collection of patents, certain minority investments, and convertible notes. (Source: “Yahoo leaves behind $30 billion ‘company’ that does nothing,MarketWatch, July 26, 2016.)

So Altaba, essentially a zombie company that will rise from the corpse of a formerly independent Yahoo, does nothing but hold valuable assets. But these are highly sought-after prizes, and their value far outweighs the section of the company that is being purchased by Verizon.

But, like all things in this deal, Altaba is not without its own complications.

As mentioned earlier in this piece, there is a large number of pending lawsuits facing Yahoo following the data breach debacle: 23 consumer class-action lawsuits, to be more precise. And that doesn’t include the U.S. Securities and Exchange Commission (SEC) investigation into whether the two hacks should have been reported to investors sooner. (Source: “The revised Verizon-Yahoo deal puts liability on Altaba,MarketWatch, February 22, 2017.)

Under the terms of the renegotiated deal, Verizon and Yahoo (soon to be Altaba) agreed to equally share liabilities resulting from non-SEC related investigations and other third-party litigation resulting from the data breach. Verizon, it seems, is willing to assume some extra risk for the sake of seeing this deal, through.

In other words, any settlements or rulings derived from those 23 lawsuits will be split between Verizon and Altaba.

But the SEC investigation is Altaba’s burden to bear alone. Any shareholder lawsuits are also going to be the sole responsibility of the holding company left in Yahoo’s wake.

So far, at least one shareholder lawsuit has been filed against Yahoo, soon after the SEC investigation was announced. The lawsuit is seeking class-action status in federal court and alleges that Yahoo and its top executives, CEO Marissa Mayer and CFO Ken Goldman, made public misrepresentations and failed to fully disclose material facts to investors concerning the data breaches.

With the deal set to close in April, that will leave Altaba holding an estimated $39.0 billion in assets (based on Yahoo’s current market cap of $43.0 billion, less the $4.0 billion-plus bought out in the deal). But so too will Altaba be on the hook for the consumer lawsuits as well as the SEC investigation and shareholder lawsuits. It may have to reach deep into that $7.0-billion horde before we can finally close the book on the hacking scandal.

VZ Stock Chart and the Bottom Line 

YHOO Stock chart

Chart courtesy of StockCharts.com

Taking a look at the above VZ stock chart compared to Yahoo stock over the past 10 months, we see that YHOO stock has definitely come out on top following the initial stages of the deal.

We can see the downturn in October 2016 following revelations about the hacks, but otherwise, Yahoo stock has been on a solid burst upward. In fact, compared to a year earlier, Yahoo is up over 53%.

But what’s the takeaway from this deal?

Ultimately, Altaba has some solid assets but faces pressure from lawsuits that might be enough to scare off investors.

Alternatively, Verizon is swinging big with its attempt at muscling in on the online digital advertising market, where it is currently a small player. The question is whether the Yahoo acquisition will provide the boost that Verizon stock needs to challenge the other top competitors in that space.

For investors who believe that the Yahoo brand still carries power and that it will translate into increased ad revenue for Verizon, there is reason to be excited about this deal. But, for others more concerned about the pending lawsuits—or who just don’t think Yahoo will be able to push the needle for Verizon online—then this might be an investment worth passing on.