Verizon, a challenger to Google, Facebook

Looking at Yahoo’s stock price, the company’s shareholders concluded long ago that its internet business was effectively worthless. Yahoo’s stock traded based on its huge investments in two Asian internet companies.

On Monday, Verizon put a much more precise price tag on Yahoo’s collection of web properties: $4.83 billion. By buying the operations, Verizon is betting it can do what Yahoo’s leaders failed at for a decade: find a way for the business, which ruled the desktop web a generation ago, to thrive in a smartphone world dominated by Google and Facebook.

The deal, which was reached over the weekend, unites two titans of the early internet, AOL and Yahoo, under the umbrella of one of the nation’s largest telecommunications companies.

Verizon bought AOL for $4.4 billion last year. Now it will add Yahoo’s consumer services — search, news, finance, sports, video, email and the Tumblr social network — to a portfolio that also includes popular sites like The Huffington Post.

The fate of Yahoo’s chief executive, Marissa Mayer, is unclear. She came under sharp criticism for failing to arrest the company’s downward spiral during her four-year tenure. Some shareholders called for her to be fired.

In an interview, Mayer said: “I plan to stay. I love Yahoo and I want to see it into its next chapter.” But she and Tim Armstrong, the chief executive of AOL, said it had not yet been decided if she would have a role after the deal closes in early 2017.

Mayer was the 11th-highest-paid chief executive of a large American company last
year, according to the compensation research firm Equilar. If she is terminated, she will be due severance of about $57 million. Including that severance, her total compensation from Yahoo for her service so far would be about $218 million.

Verizon, which has a vast amount of information about its customers’ internet use, hopes that combining Yahoo with AOL and other Verizon services will help it create a strong No. 3 challenger to Google and Facebook for consumer attention and digital advertising revenue.

Armstrong said the acquisition would give Verizon’s internet efforts much more scale, since Yahoo claims one billion users who visit at least once a month. “This deal is a leap forward from serving millions of customers to billions,” he said in an interview. “Yahoo is one of the most powerful brands on the planet.”

Verizon plans to keep most of Yahoo’s current products, including its popular email
service, and invest in them to make them stronger. “Our strategy is to structure ourselves as a house of brands,” Armstrong said. However, he said Verizon had not yet decided what it wanted to do in search, an area where Yahoo has waged a losing fight against Google for a decade.

The Yahoo purchase carries risks for Verizon, which is well known for its wireless phone and internet services but has little experience in the cutthroat business of digital content. “All Verizon may have done is purchase a weak player that was on its way to extinction,” Larry Chiagouris, a marketing professor at Pace University’s Lubin School of Business, said in an email. Analysts say that Verizon’s purchase of AOL has yet to prove its value, although Armstrong is a well-regarded operator.

Yahoo’s leadership team, led by Mayer, spent the past four years trying to create a viable stand-alone strategy for the company without much success. Its market share among web users and advertisers had fallen, and Yahoo recently acknowledged that its $1.1 billion acquisition of Tumblr, a blogging network that was supposed to help Yahoo attract younger users, was worth about one-third what it paid.

Mayer said Verizon would help Yahoo get better distribution for its mobile apps in areas like search, mail, news, weather and sports. Verizon, she said, could promote Yahoo services on its smartphones and in its retail stores. Although many on Wall Street have strongly criticised her, Mayer defended her tenure in an email to employees. “We set out to transform this company — and we’ve made incredible progress. We counteracted many of the tectonic shifts of declining legacy businesses, and built a Yahoo that is unequivocally stronger, nimbler and more modern,” she wrote.

Verizon agreed to pay an extra $1.1 billion on top of the purchase price to cash out Yahoo employees’ restricted stock upon the close of the deal, Yahoo said. Many employees, particularly senior executives, are also entitled to large severance packages if they are fired by Verizon.

Great opportunities
Dan Marcec, director of content at Equilar, said Mayer’s pay was high but was not out of line with other Silicon Valley companies. Notably, most of her compensation was in stock — and Yahoo’s stock price more than doubled during her tenure. “Over time, the shares she received gained a tonne of value,” he said. But most of those stock gains had little to do with Mayer’s leadership, springing instead from the large stake in Alibaba, a leading Chinese internet company that Yahoo bought in 2005.

The sale of Yahoo’s business ends the company’s 22-year run as an independent entity. Founded in 1994 by two Stanford graduate students, it was the front door to the web for a generation of internet users but failed to keep up with Google in search technology and then missed the social media and mobile revolutions. “It does mark the end of a particular time period for the company,” Mayer said. “That said, there are great opportunities for Yahoo, for the brand, for the services, with Verizon.”

The sale, which still requires approval by Yahoo shareholders and regulators, does not include Yahoo’s cash and its non-core patents, which it is trying to sell separately. Yahoo shareholders will still own shares in what is left of the company: an investment fund with a 15% stake in Alibaba, worth about $32 billion based on its recent share price; and a 35.5% stake, worth about $8.7 billion, in Yahoo Japan.

Yahoo was under pressure from stockholders to unlock the value of its Asian investments without incurring a huge capital gains tax bill, and the sale of its core operations to Verizon was the first step. “For investors, this came to the expected conclusion: Verizon was the front-runner very early on,” said Robert Peck, an analyst with SunTrust Robinson Humphrey.
“The real question for investors now is, What’s next? Will Yahoo have an efficient liquidation of the Asian securities?”