Verizon Acquires Yahoo at $4.83 bn

Verizon Communications Inc. (NYSE, Nasdaq: VZ) and Yahoo! Inc. (Nasdaq: YHOO) entered into a definitive agreement under which Verizon will acquire Yahoo's operating business for approximately $4.83 billion in cash. The deal is subject to customary closing conditions, approval by Yahoo's shareholders, and regulatory approvals, and is expected to close in Q1 of 2017.

Some of the key features in the acquisition

·       The sale does not include Yahoo's cash, its shares in Alibaba Group Holdings, its shares in Yahoo Japan, Yahoo's convertible notes, certain minority investments, and Yahoo's non-core patents 

·       Combined, AOL and Yahoo will have more than 25 brands in its portfolio for continued investment and growth. 

·       Yahoo has more than a billion monthly active users of its search, communications and digital content products. Acquiring Yahoo thus would facilitate Verizon to compete with Google and Facebook Inc. in digital advertising.

·       Yahoo's key assets include market-leading premium content brands in major categories including finance, news and sports, as well as one of the most popular email services globally with approximately 225 million monthly active users

Now let us have a look at some key financials for both the companies

Key Financials Yahoo compared with Verizon

Figure 1: Comparative Figures for Key Financials of Yahoo and Verizon

Yahoo reported a loss of $ 4,359 million in FY 2015 as compared to a net profit of $ 7,522 million in FY 2014. In early 2015, Yahoo had announced a plan wherein its holdings in Alibaba would be spun off into a separate company. However, the IRS was not prepared to commit itself that the spin off proposal would not attract any tax. To avoid a large tax liability (upwards of $10 billion), the plan was called off. Instead, Yahoo is hiving off its core operating business to Verizon. Yahoo will retain its investments in shares of Alibaba Group Holdings and in Yahoo Japan.

However, for Yahoo, it has been a series of missteps which have now culminated with its operating business itself being put on the chopping block. We ran the numbers through our data analytics platform and this is what we found.

In the last 4 years, Yahoo has made several acquisitions whose valuations could not be justified based on the targets’ book values. This resulted in the creation of “goodwill” assets totalling to nearly $2 billion. Finally, in FY 2015, there has been a huge write-off of the goodwill value essentially confirming that the acquisitions have not been value accretive.

The change in “goodwill” from FY 2011 till date is shown in the table below ($ in millions):

Figure 2: Movement in Goodwill for Yahoo across last 5 years

There has been a huge goodwill impairment of $4,460 million in FY 2015 which has in turn resulted in a net loss of $4.3 billion. Yahoo recorded goodwill impairment charges of $3,692 million, $531 million, $230 million and $8 million corresponding to their U.S. & Canada, Europe, Tumblr, and Latin America reporting units, respectively, for the year ended December 31, 2015. The impairments were a result of a combination of factors, including a sustained decrease in the market capitalization in fourth quarter of 2015 and lower estimated projected revenue and profitability in the near term. 

With the sale to Verizon of its core operating business, what will be left with Yahoo is its investments in Alibaba and Yahoo Japan, cash, marketable securities and debt liabilities. Thus it will become just an investment holding company, a far cry from being a technological titan two decades ago.

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Author: Vaishali Dedhia
Date: July 26, 2016