29 July 2016

Verizon to merge Yahoo! with AOL

Telecommunication network provider Verizon this week announced an agreement to acquire Yahoo!’s operating business. The takeover excludes Yahoo!’s other assets, such as its interests in Chinese e-commerce company Alibaba and Yahoo! Japan. Following the transaction, the Nasdaq-listed search engine operator plans to change its name and transform into an investment firm, which will continue to hold the unsold assets.

Under the terms of the deal, New York Stock Exchange-listed Verison agreed to pay a cash consideration of around USD 4,826 million, making the acquisition its largest since 2006, according to Zephyr, the M&A database published by Bureau van Dijk. However, from Yahoo!’s perspective, the price represents a steep discount from its peak valuation of around USD 125 billion in the early 2000s.

Upon completion, Verizon plans to merge Yahoo!’s business with AOL, an online media company it acquired last year, for USD 4,400 million. The combined entity will together own more than 25 brands, including AOL’s the Huffington Post and TechCrunch, alongside Yahoo!’s various news content and its email service, which has about 225 million monthly active users.

Describing the integration as “poetic”, Yahoo!’s chief executive Marissa Mayer stated that the next chapter for her business is to focus on achieving scale on mobile devices. AOL’s chief executive Tim Armstrong also reckons the merger will unleash Yahoo!’s full potential and will make both companies a powerful competitive rival in mobile media, offering an alternative to advertisers and publishers.

However, even after the integration, Yahoo! and AOL will still remain a very small player against strong competitors like Google and Facebook. According to eMarketer, the digital advertising sphere is currently dominated by the two internet giants, whose combined revenues make up about 43 per cent of the total global market. Yahoo! and AOL’s collective revenues, on the other hand, only represent around 5 per cent. Furthermore, Google and Facebook are also spending generously on research and development to enhance their services, which, if successful, will further increase user engagement.

It is unsure if the takeover will result in Mayer leaving her job. Previously a top executive at Google, she was hired in 2012 by Yahoo! in an attempt to turn its business around. The Economist pointed out several reasons for Mayer’s failure to revive the company. These include her indecision about the area of business Yahoo! should focus on, as well as her move to purchase companies that failed to deliver growth, most notably the USD 1,100 million acquisition of social media firm Tumblr, whose value has almost entirely been wiped out. Overall, Yahoo! posted net loss of USD 4,351 million last year, down significantly from the net profit of USD 3,951 million recorded in 2012.

Following the announcement, Verizon’s share price fell from USD 56 to USD 55 on 25th July, while Yahoo!’s stock was down from USD 39 to USD 38.

Verizon has appointed advisors including Bank of America, Allen & Company and Guggenheim Securities to assist on the deal, while Goldman Sachs, JP Morgan and PJT Partners are representing Yahoo!. The transaction, which is subject to approvals from regulators and shareholders, is expected to close next year.

© Zephyr