Verizon Buying Yahoo: Analyzing The Benefits And Challenges

Verizon (NYSE:VZ), the largest U.S. wireless operator, has entered an agreement to buy Yahoo’s core internet business in a cash deal worth about $4.8 billion, as it looks to bolster its presence in the digital advertising and content space. ^[1] The transaction, which is subject to shareholder and regulatory approval, is expected to close in Q1 2017. The price that Verizon is paying appears to be relatively fair, as our current valuation model for Yahoo values the core operating business at roughly $4.2 billion. (See our complete valuation model for Yahoo) Below we take a look at what the deal could mean for Verizon.

We have a $55 price estimate for Verizon, which is roughly in line with the current market price.

See our complete analysis for Verizon

Verizon Looks To Cash In On The Surging Digital Ad Market

The U.S. wireless market is slowing down, and driving top line growth from Verizon’s core wireless business is becoming increasingly difficult amid high customer acquisition costs and high levels of wireless penetration. Digital advertising, on the other hand, offers high margins and a fast-growing market, as people spend more time consuming content on mobile devices. Marketers are quickly shifting ad dollars from traditional media towards digital ads, particularly on mobile devices. Research firm eMarketer estimates that U.S. mobile ad spending will grow by 38% this year to about $43.6 billion, with overall U.S. digital ad spending poised to overtake TV ad spending next year. ^[2] Mobile advertising may be a good fit for Verizon, considering its subscriber base of over 112 million retail subscribers (who could provide a captive audience) and its sizable customer data sets.

How Can Yahoo Bolster Verizon’s Advertising Strategy? 

Verizon has been making a concerted push into the mobile advertising and content markets over the last two years, investing in Internet TV providers (OnCue), content delivery networks (Edgecast) and ad technology. In 2015, the company bought AOL in a $4.4 billion deal, gaining access to a robust programmatic and video advertising platform as well as a vast library of original content. By acquiring Yahoo, the firm could make inroads into the search engine and native ad market. Yahoo’s key advertising assets include Gemini – which combines search and native ads for superior results – and BrightRoll, which offers programmatic buying and selling tools for video, display and native advertising. This would give Verizon a wide spectrum of ad tech assets, ranging from programmatic video and display to native advertising and search, potentially allowing it to compete with digital ad titans such as Google.

Moreover, Yahoo has a base of over a billion monthly active users on its key online properties such as Search, Mail, Finance and Tumblr, with roughly 600 million monthly active mobile users who could provide a valuable audience for mobile advertisers. It’s possible that these properties, combined with Verizon’s and AOL’s customer data sets, could facilitate superior ad targeting and potentially fetch better ad rates. Yahoo is also significantly invested in content, with a focus on four verticals — news, finance, sports and lifestyle and this could help to bolster Verizon’s mobile-video initiatives.  Additionally, the Yahoo deal is likely to bring in some cost synergies for Verizon, as there is likely to be an overlap with AOL’s operations, particularly in areas such as sales, administration and product development.

Key Near Term Challenges: Integrating Assets, Building Business Model

While mobile and video advertising appear to be promising long-term bets for Verizon, the carrier has a lot to prove in the interim. Integrating and stabilizing Yahoo’s core business is likely to be the first challenge. Yahoo holds a lot of disparate online properties and technological assets and Verizon may have to dedicate considerable time and resources to combine these assets with its core business. Additionally, Yahoo’s core business has been on the decline, with 2016 revenues (excluding traffic-acquisition costs) projected to fall by as much as 17% to between $3.4 billion and $3.6 billion amid falling ad prices (display ad prices fell by about 15% year-over-year in Q2). The firm’s core internet properties such as Mail, Search and Yahoo.com are also reported to be witnessing declines in daily active users. ^[3] 

Moreover, Verizon must prove that it can build a sustainable advertising and content-based business model leveraging its recent acquisitions, which come at a total cost of close to $10 billion. Verizon will have to compete against companies such as Facebook and Google, which together hold more than half the U.S. digital ad market (per eMarketer), while Verizon’s share following the deal could stand at a little over 5%. It will be interesting to see the long-term strategy that Verizon takes to turn around these erstwhile online behemoths.

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1. Verizon Press Release [↩]
2. Digital Ad Spending to Surpass TV Next Year,eMarketer, March 2016 [↩]
3. Leaked numbers show Yahoo’s core products are in trouble, Business Insider, June 2016 [↩]