Can Yahoo Help Verizon Communications, Inc. Gain A Foothold In A $187 Billion Market?

  • Verizon will acquire Yahoo’s operating business for $4.83 billion in cash. The acquisition follows the 2015 acquisition of AOL.
  • Yahoo web properties, including email, News, Sports and Finance, have 200 million unique monthly visitors, many of them on mobile devices.
  • Verizon wants to be a top global mobile media company, and accelerate its revenue stream in the $187 billion digital advertising market.

Verizon Communications Inc. (NYSE:VZ) and Yahoo Inc. (NSDQ:YHOO) announced that they have entered into a definitive agreement under which Verizon will acquire Yahoo’s operating business for $4.83 billion in cash, subject to customary closing adjustments.

"Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers," said Verizon Chairman and CEO Lowell McAdam. "The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising."

The sale is limited to Yahoo's operating business and does not include other assets such as cash, shares in other companies such as Alibaba Group Holdings, minority investments and non-core patents. These assets will continue to be held by Yahoo, which will change its name at closing and become a publicly traded investment company.

Verizon plans to combine Yahoo search, email and messenger assets as well as advertising technology tools with its AOL unit, which it bought last year for $4.4 billion. Reuters notes that the move could enable Verizon - the leading wireless operator in the US -  to add the 200 million unique monthly visitors to Yahoo sites, many of them on mobile devices, and the 150 million unique monthly AOL users, to its own user base of over 100 million wireless subscribers to offer a more targeted service for advertisers. Furthermore, according to a Barclays analysis, Verizon could save $500 million a year in costs of acquiring internet traffic and other expenses by buying Yahoo's internet business.

"Yahoo is a company that has changed the world, and will continue to do so through this combination with Verizon and AOL," said Yahoo CEO Marissa Mayer. "Yahoo and AOL popularized the Internet, email, search and real-time media."

Like AOL, Yahoo was one of the big names of the young Internet industry in the nineties, when for some time (before Google) the company's name was synonymous with search, like AOL was synonymous with consumer email. But the company has been fighting to survive as a stand-alone company in the last few years, and therefore, according to many analysts, Verizon has been able to get it at a bargain price. Verizon is expected to use Yahoo to compete with Alphabet Inc (NSDQ:GOOGL) and Facebook (NSDQ:FB) in digital advertising, by leveraging high-traffic sites like Yahoo Finance, notes Bloomberg Business.

According to the current Alexa ranking, Yahoo is the fifth most visited domain in the world behind Alphabet's Google and YouTube, Facebook, and Baidu.  Now, with the acquisition of Yahoo, Verizon could monetize wireless in an entirely new way. Instead of charging customers for traffic, the company would charge advertisers for views and clicks.

Verizon management provided further details on the rationale for acquiring Yahoo and the company's overall strategy in a call with investors, The Wall Street Journal reports. The Yahoo assets most interesting for Verizon are its email, News, Sports and Finance properties, all of which can be used to attract advertisers. The market for digital advertising - a $187 billion market - is expanding for both home and mobile devices, and Verizon wants to develop an alternative to Alphabet and Facebook, which own 31 percent and 12 percent of the market respectively, according to recent data, while Yahoo and AOL combined have about 2.2 percent.

"There’s been a lot made of are we going to challenge Google and Facebook in this process," said McAdam. "We’re a small player today relative to them. All we need to do is take more than our fair share of the growth of the market and this will be a success for us." Verizon noted that more media consumption is moving to mobile devices, especially among millennials.

The growing importance of mobile plays is good news for Verizon because, contrary to Alphabet and Facebook, the company is a wireless carrier. At the same time, the acquisition of Yahoo will enable Verizon to offer advertisers an audience that goes much beyond the company's own subscribers, and conquer a bigger slice of the global digital advertising market. Investors should take notice, and consider Verizon as an interesting stock with good prospects for mid-term growth.

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