Verizon Ends Yahoo Independence With $4.83 Billion Deal
Verizon Ends Yahoo Independence With $4.83 Billion Deal
By Brian Womack
July 25, 2016 — 4:36 AM PDT Updated on July 25, 2016 —
12:00 PM PDT
Verizon Communications Inc. agreed to buy Yahoo! Inc.’s
web assets for $4.83 billion, ending the company’s two-decade run as an
independent business that took it from Stanford University startup at the dawn
of the internet age to also-ran behind nimbler online rivals such as Google and
Facebook Inc.
Verizon will pay cash in a deal that includes Yahoo real
estate, but excludes some intellectual property, which will be sold separately.
Yahoo will be left with its stakes in Alibaba Group Holding Ltd. and Yahoo
Japan Corp., with a combined market value of about $40 billion.
The telecommunications company will add Yahoo web
services that still draw 1 billion monthly users, including mail, news and
sports content and financial tools, gaining share in the $187 billion
digital-advertising market -- though it will nevertheless be a distant third
behind Google and Facebook. Verizon, the largest U.S. wireless carrier, also
gets smaller but faster-growing assets including mobile applications and
advertising technology for video and handheld devices.
“We have enormous respect for what Yahoo has
accomplished: this transaction is about unleashing Yahoo’s full potential,
building upon our collective synergies, and strengthening and accelerating that
growth,” AOL Inc. Chief Executive Officer Tim Armstrong said Monday in a
statement. “Combining Verizon, AOL and Yahoo will create a new powerful
competitive rival in mobile media, and an open, scaled alternative offering for
advertisers and publishers.”
The deal amounts to an admission that Yahoo has lost much
of its relevance as modern internet use shifts toward mobile, social networking
and messaging. The "portal," officially formed in 1995 by Stanford
students Jerry Yang and David Filo, was once indispensable, serving as the
on-ramp to the online world for millions of consumers just discovering the
internet. Yahoo’s decline, which began with the rise of Google as the preferred
search engine for web surfers and advertisers, was hastened in the past decade
by management missteps and a failure to keep up with users’ changing habits.
With annual sales forecast to drop to their lowest in
more than a decade, an abandoned plan to spin off Yahoo’s valuable Asian
assets, and rising pressure from investors, Yahoo CEO Marissa Mayer had no
choice but to put the company’s core up for sale earlier this year. Now,
Verizon must find a way to turn around a business that, even after strategy
shifts and job cuts, remains bloated with costs and held back by a fragmented
product lineup.
"We see this deal as signifying something of an
ignominious end for Yahoo," Mark Mahaney, an analyst with RBC Capital
Markets, said in a research note. It "says something about how much of a
Have More and Have Less sector the Consumer Internet sector has become."
Mayer’s Plans
The deal also ends the turnaround efforts of Mayer, whose
appointment in 2012 was lauded by Wall Street and Silicon Valley. Mayer,
Google’s No. 20 employee and its first female engineer, was hailed as a
potential savior for a foundering company in management disarray. This
wunderkind, who gained renown for tending Google’s spartan home page, applied
her engineering chops to building new products and restoring Yahoo’s long-lost
technological prowess. Yet her four-year effort -- including spending billions
of dollars on acquisitions and developing and updating mobile apps -- did
little to win a new generation of users, attract more advertising dollars or
fend off competition from Google in search and Facebook in social media. Mayer
said Monday she would remain at the company.
“I’m planning to stay,” Mayer, 41, said in a post on the
company’s website. “It’s important to me to see Yahoo into its next chapter.”
She stands to get $54.9 million if she’s terminated without cause and there’s a
change in control of the company, Yahoo estimated in an April 29 regulatory
filing.
Yahoo will be integrated with Verizon’s AOL under Marni
Walden, executive vice president of the product innovation and new businesses
organization at Verizon. Walden said she and Armstrong planned to meet with
Mayer this week.
“Marissa will be very key to successful integration,”
Walden said in an interview on Bloomberg Television. “It’s premature to talk
about who will be in what roles” longer term, she said.
The shares of Sunnyvale, California-based Yahoo fell 2.7
percent to $38.33 in midday trading in New York. Verizon shares slipped less
than 1 percent to $55.75.
Asian Holdings
Yahoo will change its name when the deal closes, hanging
onto its cash, patents and stakes in Alibaba and Yahoo Japan, with a combined
market value of about $40 billion. The company said it will return cash to
shareholders and update investors on plans for the other assets later.
In the late 1990s, Yahoo was the site where many people
learned how to navigate the World Wide Web by serving up links from a handy
search box and aggregating news and other content from disparate sources. The
company went public in 1996 at $13 a share, part of a wave of Internet IPOs
that included Netscape Communications Corp., Excite Inc. and Lycos Inc. Its
stock more than doubled in its first day of trading, buoyed by optimism that
the internet would someday become a meaningful advertising medium.
As the web expanded to become a central way people
communicate and do business in the new century, traversing its breadth became
more difficult, and Yahoo sought to fold in more products and features. That
gave an opening to another Stanford company, algorithm-based web-query startup
Google, which brought fresh thinking to search and a focus on technology that
could scale with the internet’s expansion -- and make money by more precisely
targeting advertising based on users’ searches. Consumers soon began to shift
to Google, and by 2005 it surpassed Yahoo in overall sales.
“It lasted a whole hell of a lot longer than I thought it
would," said Paul Saffo, who teaches forecasting at Stanford, noting that
Yahoo was also held back by poor leadership over the years. "It made some
right moves, but it could never get ahead of the curve."
An acquisition of Yahoo could have happened sooner. The
most high-profile bid came in 2008 when it failed to consummate a potential
purchase by Microsoft Corp. The software giant offered more than $45 billion
for Yahoo, but then-CEO Yang eventually rebuffed the deal as too cheap. Today,
the company is worth less than $38 billion, including its valuable Asian
assets.
The latest takeover talks began earlier this year when
Mayer -- after keeping investors at bay for years -- said the company would
explore strategic alternatives, including selling its main internet operations.
Mayer was finally bowing to rising shareholder ire that gained steam after the
collapse of a plan to spin off Yahoo’s stake in Alibaba in a way that would
minimize tax for investors. Alibaba, the largest e-commerce provider in China,
had emerged as the most valuable piece of Yahoo, and investors wanted a way to
realize some of those gains. After U.S. regulators failed to give prior
approval for the transaction’s tax status, Yahoo jettisoned the plan late last
year.
In an interview, Mayer said she began to look at how a
sale could work for Yahoo’s core operations in December, following a decision
to scrap a spinoff of the Alibaba stake. The goal was a separation while still
getting a "strategic advantage" for the operating business, she said.
"We needed to separate the Alibaba stake," she
said. "I really came to the conclusion we could kill two birds with one
stone."
Activist investor Starboard Value LP, a longtime Yahoo
critic, stepped up its campaign to pressure Mayer to act, including threatening
to oust the board through a proxy battle. In April, Yahoo struck an agreement
with Starboard by naming several new directors, including Jeffrey Smith,
Starboard’s CEO. As part of the deal, Smith joined the strategic review
committee.
Multiple Offers
The latest sale process attracted strategic players and
private equity firms. After the bids in early June, remaining participants
included private equity firms TPG, Advent International Corp. and a partnership
of Sycamore Partners and Vector Capital Management, people familiar with the
matter said at the time.
AT&T Inc. and Quicken Loans Inc. founder Dan Gilbert
were also active in the bidding process, each vying to win Yahoo’s core
Internet business, as well as some of its intellectual property and real estate
assets.
At the time, the multiple offers valued Yahoo’s web
businesses from about $4 billion to $6 billion, except for Verizon, a person
familiar with the matter said. Verizon’s bid was lower -- from $3.75 billion to
$4 billion -- because it didn’t include Yahoo’s patents and real estate.
Early in her tenure at Yahoo, Mayer focused on hiring and
product development to add user traffic and generate more revenue. She expanded
online news with big-name hires such as Katie Couric, made several large acquisitions
to round out the company’s advertising and video services, and pushed for a
shift to mobile.
Her efforts never translated to a financial revival. In
the first quarter of 2016, Yahoo sales fell 18 percent to $859.4 million, even
as rivals such as Google parent Alphabet Inc. and Facebook posted respective
revenue gains of 18 percent and 52 percent. Yahoo is projected to grab just 1.5
percent of the global digital ad market this year, down from 2.1 percent in
2015, according to EMarketer. Google is forecast to command 30.9 percent.
Facebook’s slice will grow to 12 percent, the researcher said.
"We all mistakes, and I actually made my fair share
here," Mayer said. "That said, I tend to be much more focused on the
future, how do we learn from them and how do we get better over time."
Though Mayer expressed confidence in the turnaround plan
as recently as this year, she said such efforts sometimes take five to seven
years. Investors weren’t that patient.
“It’s just so unfortunate that it’s kind of ending in a
fire sale," said Shar VanBoskirk, an analyst at Forrester Research. “It
was such a foundational piece of the current economy.”
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