By Ryan Knutson, Dana Mattioli and Deepa Seetharaman
Verizon Communications Inc.'s planned $4.83 billion acquisition
of Yahoo Inc. deepens the nation's largest wireless carrier's
investment in digital media but hands it a troubled company in need
of restructuring.
By combining Yahoo's content and its one billion monthly active
users with Verizon's 110 million customers, executives from both
companies said the transaction would help Verizon achieve its goal
of increasing its global audience to two billion users and $20
billion revenue by 2020.
Acquiring Yahoo will bring in more viewers from Yahoo sites like
Finance, Sports and News. The carrier also will gain the rights to
royalty payments from Yahoo Japan worth tens of millions of dollars
annually. But it will also assume about $1 billion worth of
employee stock-based awards.
The deal "takes us from being millions in terms of audience to
billions, " said Marni Walden, Verizon's head of product innovation
and new business, who will oversee the integration of Yahoo into
Verizon. That will help the carrier better leverage the advertising
platform it acquired from AOL last year, and accelerate revenue
growth in its nascent media business.
Verizon last year's $4.4 billion AOL dealoutbid several other
suitors to get Yahoo. Private-equity firm TPG, telecom rival
AT&T Inc., Vector Capital and a consortium led by Quicken Loans
founder Dan Gilbert also submitted final bids for Yahoo, according
to a person familiar with the matter.
In the end, the last two bidders were Verizon and Mr. Gilbert's
group, some people familiar said. Verizon raised its bid by around
$1 billion in the last round, one of the people said.
While the consortium led by Mr. Gilbert had a final bid that
valued Yahoo around $4.8 billion, Verizon had an edge because it
will be able to roll Yahoo's options plans into its own plan,
giving Yahoo a valuation closer to $6 billion, some of the people
said. The Quicken consortium wasn't able to match that valuation,
the people said.
Verizon has been building a portfolio of online content. Its
current assets include Huffington Post and TechCrunch, which it
acquired through last year's $4.4 billion AOL deal, and its own
mobile video app, called go90. After the Yahoo deal, which is
slated to close in the first quarter, it will have spent roughly
$10 billion
It is part of a strategy to cope with slowing growth in its
wireless business. Rival AT&T Inc. is in the process of
developing a streaming video service and spent $49 billion last
year to buy satellite television service DirecTV.
While the smartphone revolution was a boon for Verizon and other
wireless companies, the bulk of the profits went to Silicon Valley,
where tech giants like Alphabet Inc.'s Google and Facebook Inc.
built empires from money made reaching smartphone users who logged
in over Verizon's network.
With Yahoo, Verizon is trying to get in on that game, but it is
going to have to digest a company that multiple leaders were unable
to fix. That task will land on Tim Armstrong, a former Google
executive who joined Verizon after selling AOL.
Shares of Verizon fell slightly in Monday afternoon trading,
down 0.5% to $55.80. Yahoo dropped 2.8% to $38.28.
The deal will cost Verizon about four months of free cash flow,
according to analysts at Nomura, who said the challenge will be for
the phone company to "execute crisply" on its new media
strategy.
Revenue at Yahoo -- minus commissions paid to partners for web
traffic -- fell 19% in the second quarter, the sixth decline in the
past seven periods, and its loss grew to $439 million because of a
large write-down of Tumblr. It has been laying off its employees
ending the second quarter with 8,800 employees, its smallest head
count in years.
Yahoo CEO Marissa Mayer said she would stay on with Yahoo to
oversee the transition. "I love Yahoo and it's very important to me
to see it well into this next chapter," she said in an interview.
"I'm open-minded about what that role could be."
Verizon wants to own digital content that it can sell
advertising against. It is planning to combine consumer data
collected from smartphone users to deliver targeted ads to users
tuning into its online properties.
Combining AOL's investment in programmatic advertising and
Yahoo's work on programmatic, mobile and native could be appealing
to advertisers, Ms. Mayer said.
"All of that could be put together to really be a big scale play
in terms of our supply. But also much richer data and much richer
targeting, " she said.
But Verizon will still have more to do. Combined, AOL and Yahoo
collect only about 2% of the global digital advertising revenue,
compared with Google's 31% and Facebook's 12%.
"We think we've got work ahead of us," Verizon Chief Executive
Lowell McAdam said in an interview, but putting AOL and Yahoo
together "brings you the scale you need."
Write to Ryan Knutson at ryan.knutson@wsj.com, Dana Mattioli at
dana.mattioli@wsj.com and Deepa Seetharaman at
Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
July 25, 2016 14:49 ET (18:49 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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