Yahoo Deal Could Put Verizon in Google and Facebook’s League

Verizon Communications on Monday announced that it had entered into a definitive agreement to acquire Yahoo’s operating business for approximately US$4.83 billion in cash. The deal, which comes on the heels of Verizon’s $4.4 billion AOL purchase last year, will allow it to expand its digital advertising business.

The purchase will provide Verizon with Yahoo’s ad tech tools, including BrightRoll and Flurry, as well as Yahoo’s search, email and messenger assets. It brings to a close Yahoo’s attempts to find an interested suitor for the company, which — despite being the third most-popular online destination — has struggled in the marketplace in recent years, and as a result saw its market value steadily decline.

“Yahoo is a company that has changed the world, and will continue to do so through this combination with Verizon and AOL,” said Marissa Mayer, CEO of Yahoo.

“The sale of our operating business, which effectively separates our Asian asset equity stakes, is an important step in our plan to unlock shareholder value for Yahoo,” she said. “This transaction also sets up a great opportunity for Yahoo to build further distribution and accelerate our work in mobile, video, native advertising and social.”

The deal is subject to customary closing adjustments. Shares of Verizon were down 0.4 percent to $55.88, while Yahoo fell 2.6. percent to $38.37 in Monday morning trading.

Existing Relationships

What effect is the integration of Yahoo with AOL likely to have on Verizon?

“The short answer is that this will be a bigger competitor to Google,” said Greg Sterling, vice president of strategy and insight at the Local Search Association.

“The longer answer is that Yahoo is already the third-biggest Internet site, with more than 600 million mobile users,” he told the E-Commerce Times. “Verizon now has AOL and Yahoo, with the search and display business, so it does make it a rival for Facebook and even Google. However, Yahoo was already a partner with Google in search, just as Microsoft was a partner with AOL.”

Those relationships likely will remain in the near term, but it isn’t clear how these deals might shake out over time.

“The Internet is complete with coopetitors and frenemies,” explained Sterling. “Potentially things will change, but for now the deals will stay in place.”

Yahoo’s Savior or Breaker?

Verizon is Yahoo’s white knight, in a sense.

“Verizon will provide Yahoo with better management,” said Roger Entner, principal analyst at Recon Analytics.

“This is a company that had a decade of poor management, but what is amazing is that somehow through it all they remained the third-largest Web property,” he told the E-Commerce Times.

However, “going forward, it’s not a new beginning for Yahoo,” added Steve Blum, principal analyst at Tellus Venture Associates.

“It’s more likely to be broken apart and recombined with AOL and other Verizon assets,” he told the E-Commerce Times. “The brand, the content and the core technology will likely live on separately within a larger Verizon enterprise, but the company behind it all won’t.”

Verizon’s Cloud Play

Not every piece of Yahoo will fit into Verizon’s strategy, so the breakup of the once-mighty company is more than likely.

“Verizon is buying Yahoo’s core Web platforms and advertising delivery assets, leaving Yahoo with over $40 billion in other assets,” noted Paul Teich, principal analyst at Tirias Research.

“Verizon wants to become a cloud giant,” he told the E-Commerce Times.

“Yahoo’s core Web properties are not hugely competitive — but similar to AOL, Yahoo still has a dedicated user base, so they are a better starting point for Verizon than building everything from scratch,” Teich pointed out. “It looks like some key intellectual property will also be transferred, and if Verizon can enforce and build upon that IP, then this could be a good deal.”

Extending Verizon’s Reach

Perhaps more importantly, this deal could extend Verizon’s reach in the mobile space. Despite being the nation’s No. 1 mobile carrier, its mobile reach has been far more limited than that of Facebook or Google.

“There have been issues that restricted how a carrier could use customer data to promote its own services,” noted Entner.

“This will extend the ability that Verizon will have in a roundabout method, and if you pull together AOL’s and Yahoo’s reach with that of Verizon, you get close to reaching every mobile user in the country,” he remarked.

“Yahoo’s core business still has great assets — it pulls in a lot of traffic — but it can’t grow those assets or use them to grow other business lines,” said Tellus Venture’s Blum.

“So another company, with complementary assets, might be able to wring more value out of the core business — but whether that company is Verizon or not, is another question,” he added.

“One of the big reasons Yahoo generates so much traffic is that it’s AT&T’s consumer email platform — if you have an AT&T email account, you see Yahoo content,” Blum noted. “It raises an interesting question for AT&T: Do they want their No. 1 competitor to control a critical service?”

What Could Have Been

At nearly $5 billion, Yahoo might still be seen as a bargain, given how much was offered for the company only eight years ago.

“Remember that Microsoft offered $45 billion for essentially the same deal in 2008,” said Tirias’ Teich.

“That should put the current $4.8 billion price in context,” he added.

“Yahoo’s biggest problem is sinking value,” observed Blum.

“In 2008, Microsoft’s offer at the time was considered a bargain basement price — Yahoo hit $125 billion during the dot-com boom,” he recalled. “From a shareholder’s perspective, $4.8 billion now is a better play than likely taking less in a year or two.”