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Verizon Communications: Is a Yahoo Buyout in the Cards?

According to a report by The Wall Street Journal, U.S. telecom behemoth Verizon Communications Inc. VZ is currently the frontrunner to acquire the core assets of Yahoo! Inc. YHOO. Apart from Verizon, private equity firm TPG Capital LP and Yellow Pages owner YP LLC are the other two suitors of Yahoo’s web businesses. But Verizon appears to be best suited to merge Yahoo into its online platform.

Internet-based information service provider giant Yahoo is currently struggling with its core businesses namely mail service, online sports, financial and general news sections and its vital online advertising technology, which includes the video advertising platform, BrightRoll. In Feb 2016, Yahoo stated that it would consider "strategic alternatives" for its core businesses, including an outright sale or a spin off.

In the event of the deal materializing, we believe it will largely be beneficial for Verizon. Since the beginning of 2015, the company has been focusing on mobile video offerings, online digital advertising and web-based content business as a diversification strategy.

In Oct 2015, Verizon launched its ad-supported mobile video service Go90 targeting the younger generation. To derive maximum benefits from its mobile video platform, in Jun 2015, the company took over AOL Inc. that provides advertising technology enabling automated buying and selling of ads online.

In addition to online advertising tools, AOL provides popular online content through Huffington Post which has around 200 million unique visitors worldwide. Other websites include Tech Crunch, Engadget, Moviefone and MapQuest.

In Oct 2015, Verizon also acquired Millennial Media, a leading company that sells mobile ads across numerous websites and applications. Its advertising platform is designed to monetize applications for publishers and developers through the use of data-driven ad targeting.

The core businesses of Yahoo perfectly complement Verizon’s focus areas. Notably, Yahoo boasts a significant user base that trails only Google of Alphabet Inc. GOOGL and Facebook Inc. FB. At present, Yahoo has more than 1 billion users for its e-mail, finance, sports and video sites, AOL has 2 million users and Verizon commands over 112 million wireless subscribers.

If the deal takes place, Yahoo’s online ad technology and popular content will be combined with AOL’s targeted ad technology and consumer data platform and integrated into Verizon’s massive subscriber base and Internet-based mobile video offering to provide a powerful data-driven targeted mobile ad platform.

Verizon is currently focusing on online content delivery, mobile video and online advertising for future growth. These businesses have the potential to generate significant revenues for the company, especially given that its legacy telecom business is presently facing serious pricing competition. According to market research company eMarketer, the global mobile ad market value is expected to reach $  $133.7 billion by 2017.

The acquisitions of AOL and Millennial Media have enabled Verizon to sell digital media services to large companies and social media firms by leveraging its massive wireless customer base. With an Internet giant like Yahoo in its kitty, Verizon can potentially gain a strong and extensive foothold in the global online content and advertising market.

Both Verizon and Yahoo currently carry a Zacks Rank #4 (Sell).

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YAHOO! INC (YHOO): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
FACEBOOK INC-A (FB): Free Stock Analysis Report
ALPHABET INC-A (GOOGL): Free Stock Analysis Report
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