What Verizon Communications Inc. (VZ) Really Gets With Yahoo! Inc. (YHOO)

It's not about getting deeper into the web business, it's about cross-selling

   

The deal isn’t yet official. But between common sense and the sources of all the whispers thus far, it’s not a stretch to believe that telecom player Verizon Communications Inc. (NYSE:VZ) has emerged as the front-running bidder for most of the internet operation of web company Yahoo! Inc. (NASDAQ:YHOO).

Not only has Verizon already tiptoed into the world of the world wide web with last year’s $4.4 billion acquisition of AOL, it’s also got more reason — and more fiscal wherewithal — to do with Yahoo what CEO Marissa Mayer couldn’t.

Though only time can answer those questions with any certainty, enough is known and enough can be surmised to make a good guess as to what this pairing could bring about a couple years from now.

Verizon + Yahoo

Bloomberg said it first … Verizon was indeed nearing a deal to acquire Yahoo’s struggling internet presence. The source for the news was the typical “people familiar with the matter,” though when the impending deal is a high-profile one such as this, it’s unlikely someone wouldn’t know about such an impending union.

The final price for Yahoo’s name and web operation has not been given. Indeed, it’s not even likely set in stone yet, nor has the exact list of what’s being sold; Yahoo’s intellectual property may not be part of the sale. Everything else involved with the web business, though, is said to be fetching a price somewhere around $5 billion.

The current market cap for YHOO is $37.2 billion, though the bulk of that value is made up by Yahoo’s stakes in Alibaba Group Holding Ltd (NYSE:BABA) and Yahoo Japan.

It’s mathematically arguable that Yahoo’s internet operation is worth nothing, though as has been explained before, that’s a short-sighted way of thinking. This is a case where the sum of the parts can be greater than the whole, as the combined parts create logistical (and tax) hurdles for one another. On its own and under new management, Yahoo could return to its glory days.

To that end, in the first quarter of 2016, the AOL unit of Verizon drove a five-year high revenue total of $669 million. The company’s second-quarter numbers aren’t out yet, but clearly the new owner is doing something right with AOL. There’s no reason it couldn’t leverage the same sales tools and techniques it’s used to ramp-up AOL’s business.

It’s also not as if Yahoo is the walking dead. Despite its woes, Yahoo has still managed to drive $4.9 billion worth of revenue over the course of the past four quarters, and it could be made operationally profitable again with relative ease.

Verizon may be better suited than any other to put YHOO back on the right track.

Bottom Line for VZ and YHOO

As for how this will impact the value of VZ shares and what will come of YHOO shares, the former will likely see a measurable increase in value — perhaps more than most observers appreciate — while the latter is going away at a price not apt to be much better than its current value.

Yes, while Yahoo is the target acquisition, this isn’t a gotta-have-it kind of deal one might expect within the world of biotech. YHOO shareholders need Verizon more than VZ shareholders need Yahoo. This is a relatively graceful exit out of a situation with little to no hope for anything but an ugly end. Most Yahoo investors are apt to be content getting what they know they can get, and Verizon doesn’t have to pay a sweet premium.

And yet, the deal could prove to be significant for Verizon’s top and bottom line.

For perspective, Verizon has generated $132 billion worth of revenue during the past twelve reported months; adding Yahoo’s $4.9 billion worth of revenue to the tally isn’t a game-changer. This was never about Yahoo’s internet operation, though … it was about garnering access to Yahoo’s 200 million monthly users to sell them a variety of goods and services.

This is about co-marketing and cross-selling Yahoo’s ad inventory with AOL’s, leveraging AOL’s ad technology. This is about selling wireless services to a relatively captive audience, not unlike the way the AT&T Inc. (NYSE:T) has been cross-marketing its cell phone services to DirecTV customers, and vice versa, since AT&T acquired the satellite TV outfit last year. It may even be about developing a big enough customer base for Verizon to work toward its still-unclear digital television ambitions.

From that perspective, $5 billion for 200 million regular users and a globally recognizable brand is not only reasonable, but exciting for patient VZ stock holders.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, http://investorplace.com/2016/07/verizon-vz-really-gets-yahoo-yhoo-acquisition/.

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