Will Verizon's $4.8 Billion Bet on Yahoo! Pay Off?
Verizon Communications (VZ) - Get Report made its latest bet on digital content and advertising Monday by agreeing to buy the core business of Yahoo! (YHOO) just about a year after acquiring AOL. But it's still too early to tell if the giant telco's big move toward digital will pay off.
Verizon and Yahoo! announced Monday that the New York-based telco has agreed to acquire Yahoo!'s core operating business for about $4.83 billion in cash. The core business includes Yahoo!'s search, digital content and advertising technology assets.
Verizon, which reports second-quarter earnings before the market opens on Tuesday, said it will integrate Yahoo! and AOL, which it bought for $4.4 billion last year. The sale does not include Yahoo's stakes in Alibaba Group (BABA) - Get Report and Yahoo! Japan, nor its patents, cash, convertible notes and certain investments. These assets will be held by a holding company.
Sunnyvale, Calif.-based Yahoo launched an auction in February following pressure from Starboard Value. Yahoo! was once a Silicon Valley darling, but has faded badly amid increasing competition from younger, more innovative peers such as Alphabet (GOOGL) - Get Report and Facebook (FB) - Get Report .
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Former Google executive Marissa Mayer joined Yahoo in 2012 in hopes of expediting the former powerhouse's turnaround efforts. Under Mayer, Yahoo turned to M&A by scooping up faster-growing assets like Tumblr and BrightRoll. But such efforts never really came to fruition.
Even before Yahoo! formally kicked off its auction, Verizon was seen as a favorite to win due to the strategic fit between Yahoo! and AOL. Verizon had also publicly expressed interest in Yahoo!'s assets.
Verizon is paying a relatively reasonable multiple of just over 1 times net revenue, and six times Ebitda for Yahoo!
The telco, which has seen its wireless penetration slow and its wireline business mature over the years, believes that mobile advertising could be an area of future growth, said Edward Jones analyst Dave Heger via phone.
Heger further said that people are increasingly turning to mobile devices for video and Internet searches, and Verizon already has a huge user base that it can leverage.
"It allows them to put their toe in the water," he said, adding that turning to M&A for expanding its digital advertising footprint is "relatively low risk" for Verizon.
Still, Verizon has a limited track record when it comes to digital media acquisitions. When it purchased AOL last year, the Internet company had already started to turn itself around under CEO Tim Armstrong.
"The hope is that he can take the Yahoo! assets, combine that and grow it as a whole. Tim Armstrong has proven himself in getting AOL back on track," Heger added. While Verizon has more to prove, it has demonstrated its potential with the AOL acquisition and subsequent investments.
Meanwhile, AT&T (T) - Get Report was also reportedly looking at Yahoo! Verizon has clearly been calling the shots first in digital advertising, but this doesn't mean that AT&T won't also look to increase its presence, Heger explained.
"Verizon gets the chance to keep more people by having a tie-in we haven't thought of," said Jim Cramer, founder of TheStreet and manager of the Action Alerts PLUS portfolio, explaining that Verizon could now rely on Yahoo! content to attract wireless customers. "Verizon is a 4-percent yield with a kicker now that they are maybe able to fight to maintain their leadership."
"These guys are bolder than you think. Just because their DNA is not from Silicon Valley does not mean they're not bold," Cramer further said.