Yahoo! Inc. Is a Great Fit for Verizon Communications Inc (YHOO, VZ)

Yahoo! Inc. (YHOO) is on the auction block, and Verizon Communications Inc (VZ) is the company to beat to acquire the beleaguered internet company.

Yahoo! Inc. Is a Great Fit for Verizon Stock (YHOO, VZ)While other companies have expressed interest in purchasing it, including Alphabet Inc’s (GOOG, GOOGL) Google, IAC/InterActiveCorp (IAC), and The Daily Mail, Verizon is still the frontrunner as Yahoo! looks to close its first round of bidding next Monday.

Verizon stock investors may question why the company is interested in Yahoo!, but it will be able to get more use out of the company’s assets than just about any other interested bidder.

Last year, Verizon made a big effort to grow its digital media services, acquiring AOL, which later acquired Millennial Media. Those assets helped it launch its Go90 video service. Yahoo! and its media assets and ad platform provide the perfect complement to its existing media services portfolio.

A New Avenue for Growth for Verizon Stock

The days where Verizon can simply increase prices for wireless data buckets are numbered. Pressure from T-Mobile US Inc (TMUS) has put a lid on its ability to increase revenue from wireless services as the value carrier takes share of the market.

As a means of diversifying its revenue streams, Verizon is investing heavily in digital media. Go90 is its biggest consumer-facing effort, which is bolstered by content from its AOL acquisition. Verizon monetizes the video platform with digital video ads.

Yahoo!, likewise, has a bevy of consumer-facing media properties including Yahoo! News, Yahoo! Finance, Yahoo! Sports, Tumblr and more. It also has lots of media partnerships in place to license video content, which could likely be rolled into Verizon’s Go90.

What’s more, Yahoo! also brings its digital advertising assets like the BrightRoll video ad platform, which operates similarly to AOL’s Businesses are able to buy ads programmatically — i.e. a computer assesses the value of an ad impression and bids for it automatically in real-time — through both platforms. Combining the two would give Verizon a lot more bidders for its existing platform.

Verizon Stock Should Outbid the Competition

The overlap between Verizon/AOL’s existing assets and Yahoo!’s points to two important factors that will allow Verizon to spend more on Yahoo! than any other bidder. Verizon can squeeze more synergies out of combining the two platforms than other companies, and Verizon will gain benefits of scale that its competing bidders won’t achieve or already have (in the case of Google).

Verizon has a lot of useful targeting data on its 100 million-plus wireless customers. When you combine that with the data Yahoo! is able to collect on its 1 billion monthly active visitors across its sites, Verizon could likely monetize Yahoo! visitors on mobile better than Yahoo! could alone. That’s something Yahoo! has struggled with for some time despite huge amounts of capital invested by Marissa Mayer.

Additionally, Yahoo! provides the scale necessary to draw in more advertisers. With AOL and Yahoo! combined, Verizon would be able to save money on ad sales teams and offer better value to advertisers by extending products across media properties.

Without the scale of Yahoo!, Verizon will have a tougher time attracting advertisers that prefer to make a few big deals than several small ones. That’s one reason why Google and Facebook Inc (FB) have been dominating the mobile advertising market — they offer scale where no one else can.

Verizon, at least in the U.S., could be able to compete if it includes assets across AOL, Yahoo!, and its own home-grown digital media.

Verizon stock investors ought to expect the company to come out as the leader when Yahoo! closes its doors to new bidders next week.

While Verizon probably won’t overpay for the company, it can afford to spend more than anyone else due to the synergistic impact and scale the company provides.

As of this writing, Adam Levy holds no positions in any of the companies mentioned.

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