Should Verizon Continue To Pursue The Yahoo Deal?

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Upside
40.50
Market
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Yahoo (NASDAQ:YHOO) disclosed on Wednesday that it suffered a major data breach that likely affected around 1 billion user accounts back in 2013, close to twice the number impacted by the 2014 breach that the firm disclosed in September. The hacking, which is reported to be the largest theft of user data in history, could have significant ramifications for Yahoo’s proposed sale of its Internet business to Verizon (NYSE:VZ), allowing the telecom behemoth to push for a significant discount or walk away from the transaction altogether.

We have a price estimate of $56 for Verizon’s stock, which is slightly ahead of the current market price.

See our complete analysis for Verizon and Yahoo!

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Plenty Of Reasons For Verizon To Reconsider

The attacks are likely to reduce the confidence that users have in Yahoo’s online services, harming the company’s reputation, which has been on the decline in recent years, while resulting in further user attrition. This could also make marketers more averse to advertising on Yahoo’s properties, potentially reducing advertising revenues.  There could also be financial liabilities stemming from the hacks, with potential lawsuits being filed against the company. Moreover, the fact that it took Yahoo over two years to discover and report the two breaches does not reflect well on the company’s security management practices. This should give Verizon, which indicated that the 2014 breach represented a material impact to its takeover plans, more reasons to reconsider. The terms of the deal include ‘material adverse change’ clauses, which could give Verizon an exit option.

We Believe Deal Will Go Through At A Reduced Price

That said, Verizon is believed to be primarily interested in Yahoo’s search and native advertising technology, its programmatic buying and selling tools as well as its media properties. These assets are not necessarily tied directly to the user accounts that were compromised, giving the carrier a reason to move forward with the deal, while pushing for a significant discount. For instance, there were reports that Verizon was asking for a $1 billion discount off the initial $4.8 billion price after news of the first hack emerged in September and there is a possibility that the discount it is seeking could increase further with the news of the second hack. Yahoo’s leverage in the deal is also likely to have diminished significantly, as there are unlikely to be many other potential buyers at this juncture, leaving a strategic buyer like Verizon as its only bet to sell out.

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