Verizon has reportedly tasked AOL CEO Tim Armstrong with drawing up plans to acquire Yahoo, according to Bloomberg. With Verizon’s attempting to find alternative revenue streams to its traditional mobile subscriber model, its expansion into mobile video and advertising would be significantly augmented by bringing Yahoo’s web presence into the fold.
Verizon paid $4.4 billion for AOL back in May, an 18% market premium at the time, saying the purchase was to spur its Digital Media Services division’s expansion, likely by integrating AOL’s advertising platform into its existing offering. By targeting Yahoo, Verizon would be adding more fuel to this fire.
With Yahoo’s core web businesses, which are undergoing something of a revitalization under CEO Marissa Mayer, Verizon could potentially add a fairly healthy web content platform and emerging advertising business to its already established AOL platform – and use the combined operations as a bulwark against its diminishing pay TV and cellular ARPUs.
Verizon CFO Fran Shammo said in December that if the company saw a strategic fit for the company, it would consider making an offer, and that sentiment has been echoed by CEO Lowell McAdam. Having built up its mobile and content platforms considerably under the reign of Mayer, Yahoo looks like a very complimentary fit for Verizon. That is if you think a cellular operator can even dent its revenue and income results with a dotcom business.
At a very basic level, Verizon’s AOL buy allows it to leverage an established digital advertising platform by exposing its 112 million-plus mobile subscribers to the AOL-led adverts. By adding Yahoo to the mix, Verizon is able to include all the web-ad traffic from Yahoo’s extensive billion-user web portfolio to this mix, allowing it to transition towards a model that is less dependent on subscriber revenue and one that is video and advertising led.
With most financial analysts estimating a $4 billion to 5 billion price tag, with some as high as $8 billion, Verizon is the name that appears most in the column-inches covering the potential acquisition. Softbank is another name that crops up, with the Japanese carrier likely to be competing with venture capital firms as well as Verizon in the behind-the-scenes conversations for control of Yahoo.
In addition to the web and mobile app assets (Search, News, Answers, etc), Yahoo also brings in a mobile ad platform that currently accounts for around 3% of the US market. Yahoo went out and acquired Flurry (for a reported nine-figures) and BrightRoll for $640 million in order to build out its advertising offering – although there hasn’t been much of an apparent return on these investments to date.
Verizon’s Go90 OTT mobile video platform was launched in October, and Verizon is the current holder of the exclusive NFL mobile rights in the US. The company also picked up the remains of Intel’s OnCue platform, which attempted to break the silicon monolith into the world of online video – however this crashed and burned due to issues related to securing content rights – something that Verizon hasn’t struggled with, thanks in particular to its FiOS pay TV offerings.
But Yahoo is not a typical acquisition target, given that is in a somewhat unorthodox position. It holds a 15% stake in Alibaba the Chinese retail and internet giant, and had originally planned to spin off the 384 million shares (worth around $22 billion today, but previously as much as $34 billion) as a separate company. But tax laws have meant that such a move would pummel Yahoo with a capital gains bill of around $10 billion to 12 billion, and so it has taken the decision to spin off the core Yahoo businesses as separate entities instead.
The move would leave a shell company comprised of the Alibaba stake alongside the sizeable Yahoo Japan holding, with the core businesses leaving the company. The shell that is left is then burdened with the tax bill as an intrinsic part of its valuation, but the bill could potentially be avoided entirely if Alibaba decides to buy the shell’s 384 million shares directly – thanks to some clever accounting that would essentially treat the purchase as a share buyback scheme, according to some vocal advocates of such a move in Wall Street.
It’s an unusual way of solving the problem, but selling to Verizon would streamline the process of negotiating multiple deals for each of its different components – which include its search engine, email services, and online content portals. Outside of the Yahoo brand, the company also owns blogging site Tumblr and photo giant Flickr.
The reverse spin-off plan was announced in response to Yahoo’s previous quarterly results. This quarter, it remains flat on the year before period, with revenue of $1.2 billion, and with earnings per share down some 13 cents.
In the past year, Yahoo’s share price has fallen 34%, and is down 12% in 2016 so far. The results prompted investor calls for a shakeup. CEO Marissa Mayer has since outlined plans to reduce the Yahoo workforce by 15%, as part of a $400 million cost cutting package, as well as selling $1 billion of assets. In addition to the job cuts, Yahoo wrote off its Tumblr acquisition, along with some smaller assets, to generate a Q4 loss of $4.4 billion.
Another major incentive for Yahoo to separate its core business and the Alibaba stake is due to the continued decline in the Chinese economy. Given that around $10 billion of “value” has disappeared since Yahoo first floated the idea of spinning the stake out, the company may want a speedy conclusion to the uncertainty over how much its Alibaba holding is actually worth day-to-day.
As for official comment from Yahoo, chairman Maynard Webb said “the Board also believes that exploring additional strategic alternatives, in parallel to the execution of the management plan, is in the best interest of our shareholders. Separating our Alibaba stake from our operating business continues to be a primary focus, and our most direct path to value maximization. In addition to continuing work on the reverse spin, which we’ve discussed previously, we will engage on qualified strategic proposals.”