The Rationale Behind Verizon's Interest in Yahoo's Web Business

  • Both have staked their futures on mobile Web and video growth
  • Verizon racing to amass traffic to attract and keep users

Verizon Communications Inc. wants to attract teens and millennials who are more used to watching videos on their mobile phones than on a TV in a living room. Yahoo! Inc., which is spinning out its main Web business, has been investing heavily in online-video content.

So it’s probably not a coincidence that executives at the largest U.S. wireless carrier were chattier than usual this week when asked the question: Would Verizon be interested in buying Yahoo’s Internet assets?

Chief Executive Officer Lowell McAdam and Chief Financial Officer Fran Shammo, using similar language, both said within the past two days that Verizon would look at a Yahoo deal "if it made sense," instead of declining to comment. 

Both Yahoo and Verizon have staked their future on mobile Internet and video growth. On paper, a deal would make sense. New York-based Verizon has already shown a willingness to buy Internet properties with its $4.4 billion acquisition of AOL in June. Yahoo’s Web business, which could fetch a price of $3 billion to $3.5 billion, based on analysts’ estimates, will be spun out as part of Yahoo’s tax-saving move to return the value of its $31 billion stake in Alibaba Group Holding Ltd. to shareholders. Yahoo’s board has said that it’s not putting the company up for sale, and that the move is the best way to deal with the Alibaba holdings.

"Yahoo would help check several boxes in what Verizon is looking to build at the moment with a cross-platform ad strategy and new video offerings," said Jan Dawson, an analyst at Jackdaw Research LLC.

Marissa Mayer, president and CEO of Yahoo.

Photographer: David Paul Morris/Bloomberg

Yahoo’s mail, finance, sports and video sites attract more than 1 billion users, a prized asset that would add to AOL’s 2 million users. That kind of Web traffic, along with exclusive content, is just what Verizon, with more than 105 million wireless subscribers, needs to lure and retain a new smartphone-addicted generation.

A Yahoo deal would also give Verizon a new source of revenue, through online advertising, especially from Yahoo’s video-ad unit Brightroll. Verizon has introduced an ad-supported mobile-video service called go90 (named for tilting small screens 90 degrees to watch videos). By seeking users and marketers, Verizon is essentially bulking up to compete with the likes of Facebook Inc. and Google, which are starting to move into the Internet space as a way to drive more users to their online properties.

"Verizon is vying to get a larger share of advertisers’ wallets and adding Yahoo would help strengthen AOL as the No. 3 player," said Brian Wieser, an analyst at Pivotal Research Group. "Yahoo has a lot of users in a well defined environment. That is very valuable to advertisers."

Great Brand

For now, Yahoo Chairman Maynard Webb is saying that the Sunnyvale, California-based company isn’t actively shopping its Web business, only that the board would look at reasonable offers if they made sense.

"This business remains very undervalued and that means that if somebody came today, they would probably come with an offer that would reflect the current value and a mark-up," Webb said on CNBC. "That would be not be in the best interest of shareholders. We believe we have a good brand -- a great brand -- we have hundreds of millions of consumers that use our products daily."

At a discount, Yahoo’s main Web business could be an attractive asset for other potential buyers, including wireless and Internet providers. A bidding war would help put a number on the spinoff, realize value for Yahoo’s investors and give Yahoo CEO Marissa Mayer a graceful exit.

Representatives from Verizon and Yahoo didn’t respond to requests for comment.

Deal Appetite

What makes a Verizon-Yahoo deal more likely is that other carriers might have less appetite for a big Yahoo acquisition. Sprint Corp., without backing from majority owner SoftBank Group Corp. is too cash-strapped to pursue a deal. T-Mobile US Inc. has been critical of other carriers’ moves into media and is focused more on the business of delivering music and video. AT&T Inc. just purchased DirecTV for $48.5 billion and is working on integrating the two companies.

Yahoo, plus AOL and an established Web-advertising business, would go a long way toward helping the wireless carrier compete with other tech giants, according to Hunter Newby, CEO of Allied Fiber, a closely-held data network company.

"Verizon wants to compete with Google and Facebook, which are probably the biggest personal-data collection machines in the world," Newby said.