Yahoo! Finally Sells to Verizon for $4.8 Billion
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Verizon Communications (VZ) - Get Reportconfirmed Monday it was buying Yahoo!'s (YHOO) core assets for $4.8 billion in cash to build an online media and advertising technology giant.
Yahoo! shares fell 2.1% in trading early Verizon was off 0.6%.
The deal comes after a long auction process that began on Feb. 3, when the struggling Internet company announced that it would explore strategic alternatives for its core assets.
Yahoo! will join Verizon's AOL division. The New York-based company acquired AOL in May 2015 for $4.4 billion, and CEO Tim Armstrong continues to lead the unit. The Yahoo! deal is intended as a springboard to build the digital media juggernaut Armstrong has long sought to combat the dominance of Alphabet's (GOOGL) - Get ReportGoogle and Facebook (FB) - Get Report .
Since joining Verizon, AOL has made several acquisitions, including paying $248 million for advertising technology provider Millennial Media.
According to media reports, the final bidders were private-equity firm TPG Capital and Quicken Loans founder Dan Gilbert. The latter had financial backing from Berkshire HathawayBRK.B CEO Warren Buffett.
Bidders that weighed offers or dropped out in earlier rounds reportedly included Google, Daily Mail & General Trust, Time (TIME) , Yellow Pages publisher YP Holdings (backed by Cerberus Capital Management), Bain Capital and Vista Equity Partners.
CEO Marissa Mayer joined Yahoo! four years ago to great fanfare. Her strategy to turn around the tech company, now 22 years old, relied on the so-called MaVeNS, or mobile, video, native advertising and social. In addition, she spent over $2 billion on acquisitions, most notably shelling out $1.1 billion for Tumblr Inc. in 2012.
The strategy has failed to raise revenue, however. The company expects to generate 2016 revenue (excluding traffic acquisition costs) of $3.4 billion to $3.6 billion, down 18%-23% from 2014. Operating income is expected at $175 million to $275 million, a fraction from the $755 reported in 2014.
In second-quarter results announced last Monday, MaVeNS reported revenue of $385 million, a 4% drop year-over-year.
"Yahoo's best businesses are now declining year over year" for the first time, Pacific Crest Securities analyst Evan Wilson wrote in a note. "The deceleration comes as it laps the acquisitions it made a year ago, which propped up growth."
Despite these disappointing results, Yahoo! still boasts millions of users across several properties, including Yahoo! Sports and Yahoo! Messenger. The latter is famously popular with oil traders.
While Yahoo!'s market capitalization as of the deal's announcement was over $37 billion, the Sunnyvale, Calif.-based company's most valuable holdings are its stakes in two Asian technology groups, Yahoo! Japan and Alibaba Group Holdings (BABA) - Get Report .
SunTrust Robinson Humphrey analyst Robert Peck cautioned in a Tuesday note that while a sale could yield up to $6 billion, "the process of rationalizing the Asian investments could be convoluted, complex, and costly, which raises the discount rate."
Wells Fargo Securities analyst Peter Stabler valued the Alibaba stake at $21.6 billion after taxes and the Yahoo! Japan stake at $6.7 billion after taxes. Oppenheimer analyst Jason Helfstein estimates the Alibaba stake at $28 billion.
Yahoo! originally planned to spin off the two stakes, but opted against the move after it became clear that the move would incur a significant tax liability.
Valuations of the core business vary considerably. In February, Stabler pegged the assets at $2.2 billion, or 3 times projected 2017 Ebitda, while Ben Schachter of Macquarie Capital valued the assets at 5 times 2017 Ebitda, or $3.7 billion. UBS analyst Eric Sheridan's valuation of $4.85 billion comes from 1.5 times 2017 sales, 6 times Ebitda and 12 times free cash flow.
More recently, Cantor Fitzgerald analyst Youssef Squali values the core assets at $4.13 billion net of taxes, while Stephen Ju of Credit Suisse decreased his valuation to $7 billion from $8 billion due to recently decreasing search revenues.
The sale came about in part due to pressure from activist shareholders, notably Starboard Value. Yahoo! settled with Starboard on April 27, adding four dissident directors to its board, a month after the activist attempted to install a change-of-control slate of nine dissident director candidates. The company has 11 directors in total.
According to data from TheStreet affiliate BoardEx, Yahoo! has had 47 directors since 1995, a high level of turnover.
Another activist, Tom Sandell of Sandell Asset Management, told TheStreet affiliate The Deal in March that Mayer epitomized "misalignment between compensation and share-price performance at many S&P 500 companies." She is entitled to change-of-control payment of up to $158 million if she is fired after a change-of-control of the business.
And a third activist, SpringOwl Asset Management, released a 99-page plan last December to turn Yahoo! around, including firing Mayer and cutting the workforce by 75%.
The deal is expected to close in the first quarter of 2017.