Verizon’s deal said to include real estate, exclude intellectual property assets
Telecom giant Verizon Communications Inc. (NYSE: VZ), which was the forerunner in the bidding race to acquire beleaguered web portal Yahoo Inc.’s (NASDAQ: YHOO) core internet assets, has agreed to a $4.83 billion deal to acquire the troubled online player, as reported by Reuters on July 25th, 2016. The deal, which is expected to close in early 2017, excludes Yahoo’s approximately 3,000 patents worth $1 billion and cash. Yahoo will continue to operate as an independent company until the deal receives shareholders and regulatory approvals. Headquartered in Sunnyvale, California, Yahoo’s remaining assets are its 15% stake in Alibaba Group Holding Ltd. (NYSE: BABA) and 35.5% interest in Yahoo Japan Corp., which have a combined market value of about $40 billion.
Yahoo, one of the largest global online players in its heydays, lost its competitive edge and was struggling to find a winning business strategy in recent years after steadily ceding market share in digital advertising to rivals such as Facebook Inc. (NASDAQ: FB), Google Inc. (NASDAQ: GOOG) and Twitter Inc. (NYSE: TWTR). To add to its woes, Yahoo is expected to capture just 1.5% share of the digital ad market in 2016, down from 2.1% in 2015, according to eMarketer Inc. and as reported by The Wall Street Journal on June 6th, 2016.
In 2015, Yahoo reported losses of $4.4 billion as it went through a failed restructuring by CEO Marissa Mayer, including writing down the valuations of some of its brands like Tumblr, which it acquired for $1 billion in 2013. Under pressure from shareholders after the Company’s stock value was eroded, Yahoo began looking for a suitable buyer for its core internet assets.
Verizon – Forerunner in the bidding race
Verizon, which acquired AOL Inc. (NYSE: AOL) for $4.4 billion in 2015, wasseen as the best bet to turn around the ailing web portal. Verizon bid slightly higher at $3 billion in June 2016 for Yahoo’s core internet assets to edge out other potential buyers. Giving it a leg-up over other competitors, Verizon had added Bank of America to its roster of investment banks.The telecom giant is looking for synergies from Yahoo’s web properties, which together attract more than a billion users a month, with its growing online ads business.Verizon is also looking to save $500 million a year in costs of acquiring internet traffic through the Yahoo deal.
Yahoo, which was worth over $100 billion at its peak, had said in early February 2016 that it is considering the sale of its non-core assets, including real estate and patents, which could fetch more than $1 billion. Verizon had also indicated that its bid may vary if Yahoo would offer to help with severance payments to workers who would be laid off if the deal goes through.
Verizon’s strategy shift
With its core wireless business reaching saturation, Verizon is expected to leverage the Yahoo acquisition to effectively compete with Google and Facebook in digital ads by tapping into users on sites like Yahoo! Finance. The takeover would double the size of Verizon’s current digital advertising business, placing it third behind Google and Facebook. Google and Facebook are expected to account for more than half of the $69 billion U.S. digital ad market in 2016, according data firm eMarketer, and as reported by The Wall Street Journal on July 24th, 2016. The Yahoo takeover also marks a clear shift in Verizon’s strategy, wherein Verizon would charge advertisers, rather than charge customers for traffic.
Verizon is building a portfolio of online content that include Huffington Post and TechCrunch, which it aims to monetize via advertising. Verizon is looking to combine Yahoo’s content with AOL’s ad technology platform to make its advertising inventory more valuable. Yahoo has millions of users through its websites including Flickr, Tumblr and Yahoo! Finance and Sports, and useful digital-ad tech like Flurry and BrightRoll. Hence, the Yahoo takeover would expand Verizon’s advertising base by at least 200 million visitors.
Q2 FY16 financial highlights – Yahoo misses already weak estimates
Yahoo, which recently announced its Q2 FY16 financial results on July18th, 2016, announced that Q2 FY16 GAAP revenue and Cost of revenue – TAC were impacted by a change in revenue presentation related to the Eleventh Amendment to the Microsoft Search Agreement. As a result, $252 million of GAAP revenue and Cost of revenue – TAC for Q2 FY16 was due to the change in revenue presentation. Excluding the impact of this change, GAAP revenue would have declined 15% to $1,055 million, while cost of revenue – TAC would have increased 7% to $214 million as compared to the year-ago quarter. With the nose-diving of non-GAAP income from operations to $39 million in Q2 FY16 from $108 million in the year-ago period, Yahoo’s EPS tumbled to$0.09 compared to EPS of $0.16 a year earlier. Yahoo’s GAAP revenue by geography and source is shown in the diagram below.
During Q2 FY16, the number of ads sold grew 9% as compared to the year-ago period, while Yahoo’s price-per-ad on display dived 15%. Adding to its woes, Yahoo’s number of paid clicks sank 24% in Q2 FY16 compared to a year ago, while the price-per-click dropped 8%.Yahoo reported an 88% Y-o-Y jump in total video stream, especially live-streams, with events like Brexit bringing traffic to the site.
During Q2 FY16, mobile, video, native and social operations (Mavens) revenue jumped to $504 million from $401 million a year earlier. Mobile revenue also grew to $378 million, up from $252 million in the year-ago period. Excluding a change in revenue presentation, Mavens would have been $385 million and mobile revenue would have been $259 million during Q2 FY16.
Yahoo’s GAAP search revenue was higher at $711 million in Q2 FY16 compared to $528 million in Q2 FY15. Excluding the impact of the change in revenue presentation, which contributed $252 million to search revenue in Q2 FY16, search revenue fell 13% compared to Q2 FY15. Yahoo’s GAAP display revenue fell 7% to $470 million in Q2 FY16 versus the year-ago period.
During Q2 FY16, Yahoo’s Platforms business kept Yahoo Mail one of the highest rated mail apps in both the App Store and Google Play, with major updates foriOS and Android versions. In its Verticals business, Yahoo launched updates to Yahoo News, Sports, and Finance on desktop along with new updated Sports and Finance apps for a more personalized experience during Q2 FY16.
During Q2 FY16, Yahoo announced new video programming for advertisers, and expanded open view ability measurement to include Yahoo Gemini native video in partnership with Moat. Yahoo also launched a new content marketing tool called Yahoo Storytellers, and a new mobile offering, Yahoo Tiles, for advertisers.
For its Tumblr acquisition, Yahoo recorded a non-cash goodwill impairment charge of $395 million and a non-cash intangibles impairment charge of $87 million in Q2 FY16. Yahoo took a similar write-down of $230 million in Q1 FY16relating to Tumblr. In total, Yahoo has now written down more than half of Tumblr’s value since acquiring it for $1.1 billion in 2013.
With regard to its non-core assets, Yahoo generated $246 million in net cash proceeds through real estate divestments during Q2 FY16. The internet giant also established Excalibur LLC to explore the divestiture of more than 4,000 non-strategic patents and pending applications.
More importantly, Yahoo’s staff count declined to 2,100 Y-o-Y as of Q2 FY16.
Yahoo’s stock stood at $38.32, slipping 2.69%, at the close on Monday, July 25th, 2016, having vacillated between an intraday high of $39.21 and a low of $38.22 during the session. The stock’s trading volume was at 41,800,500 for the day. The Company’s market cap was at $35.91 billion as of Monday’s close.