Chart showing the stock price of Verizon between October 2015 and September 2016

Verizon Splashes $9 Billion Acquiring AOL and Yahoo. Why?

Verizon (Verizon Communications Inc.) is on a buying spree purchasing online media assets for no less than $9 billion within several months. The company paid in excess of $4 billion for the online media business of AOL and initially offered some $5 billion for the online media business of Yahoo. Following a number of cybersecurity and privacy issues, Verizon and Yahoo reduced the cost of the deal by $350 million to $4.48 billion in cash, subject to closing adjustments, according to a Verizon statement. The deal is expected to close in the second half of 2017*.

Why would a leading telecommunications company like Verizon splash such amounts of cash to purchase online businesses that are in trouble for years and whose fundamentals do not suggest huge growth possibilities.

“Transaction will create a new rival in mobile media technology reaching over 1 billion user* with an unrivaled roster of the world’s most beloved brands,” a Verizon statement on the Yahoo acquisition reads.

Nonetheless, experts believe that the combined Verizon-AOL-Yahoo will control meager 5 percent of the markets for digital advertising, which caused many analysts to raise an eyebrow. Following the release of the news that Verizon plans to acquire Yahoo, the stocks of the two companies gained markedly with Yahoo stocks nearly doubling their price from $26.76 in February to $44.71 in Septembers when the deal was confirmed. The Verizon stocks gained some 10 percent since February and are now trading at price close to $28 per share.

Chart showing the price of Yahoo stocks between October 2015 and September 2016.
Yahoo stock price nearly doubled since the news that the company will be acquired by Verizon in 2017. Source: StockCharts.com

The truth is that Verizon purchases Yahoo assets that are worth more than the agreed $4.8 billion. Thus, their Board might have decided that this is the time to make a bargain deal and add some online ad power in the process.

The challenge for Verizon will be to restructure two old-fashioned online search and media companies to enter new markets and provide advertising and media services similar to those offered by Facebook, Google and other companies that appeal to millennials.
This looks like Verizon’s ultimate goal in the light of purchases that add little value in terms of search engine market share and disruptive media technology.

“The addition of Yahoo to Verizon and AOL will create one of the largest portfolios of owned and partnered global brands with extensive distribution capabilities. Combined, AOL and Yahoo will have more than 25 brands in its portfolio for continued investment and growth,” a statement by Verizon reads.

However, the very fact of owning many brands does not result in profitability or efficiency. Verizon is facing hard times teaching AOL and Yahoo to operate in an extremely competitive market that is very different from the market in which both AOL and Yahoo prospered a decade ago.

The far-reaching goal of Verizon is to create a streamlined advertising channel that combines online and mobile but it is yet to be seen whether a Verizon-AOL-Yahoo mix will cope with the challenges of extremely flexible and fast-paced startups that quickly set foot in the market for mobile and online ads.

* The article is updated to include the final cost of the Verizon – Yahoo deal and projected deal closing.

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