Verizon Communications Inc (VZ) Throwing Good Money After Bad in Yahoo Deal

Verizon shareholders are getting a raw deal with Yahoo merger

After months of speculation, the deal is sealed; Verizon Communications Inc. (VZ) will buy Yahoo! Inc. (YHOO)’s core business for $4.8 billion. And while Yahoo shareholders can certainly rejoice over the way things turned out, this is not the case for VZ stock owners.

Verizon Communications Inc (VZ) Throwing Good Money After Bad in Yahoo DealBecause, unlike Verizon’s merger with AOL last year, this time around, VZ got it wrong. Because buying Yahoo to create growth is like adding weight to your car and hoping it will go faster — it just doesn’t make sense.

Yahoo Is Not AOL

When Verizon took over AOL a year ago it was not a stumbling company — it was a well-oiled growth machine. For the $4.4 billion VZ paid for AOL, VZ stockholders got a company that was growing, a company that, as Business Insider recently reported, had a $669 million in revenue for Q1 of 2016 ,its highest quarterly revenue in the past five years. A company that held numerous media assets, including the Huffington Post. And finally, Verizon was getting AOL’s CEO, Tim Armstrong, a highly capable executive, who still manages AOL under Verizon.

But what are VZ stockholders getting for $4.8 billion? Under the inked agreement, Verizon will take over Yahoo’s core business. What it won’t get is the YHOO stock holdings in Alibaba Group Holding Ltd (BABA) or Yahoo Japan and its patents.

What it will get is a platform that has millions of users but is in decline.

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These two charts from Yahoo’s earnings report for the second quarter paint a rather gloomy picture for Yahoo’s core ad business. Price per ad fell by 15% in the past quarter after falling by 6% in the first. The number of paid clicks, another important indicator, fell by 24% after falling by 21% in the first quarter.

The overall picture is rather gloomy; Yahoo’s net revenue fell by 19% year-on-year for the second quarter and EPS attributed to Yahoo Inc was -46 cents per share compared with -2 cents in Q2 of last year.

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True, some may claim that when Yahoo’s core business is absorbed into VZ it will be different.

It might, but this assumption seems farfetched. Because when VZ took over AOL, AOL has some weak segments but was growing in aggregate a validation that the engine under the hood was working well. In Yahoo it seems that something in the platform is not working, at least not well enough to grow.

The Bottom Line

Verizon’s strategy to diversify away from its telecom business is well in place, as the telecom business is rather saturated.

Buying AOL was a great move for VZ stockholders. But it’s difficult to see how adding a declining business, like the Verizon-Yahoo deal does, can bring growth. The idea is for Verizon to diversify away from telecom by adding a growing business, not a business that is in decline and in an even worse state.

Verizon should not collect clunkers in the hopes that they will turn to gold.

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

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