Why is Verizon so eager to buy Yahoo?
The clock is ticking, and the number of suitors who have kicked the tired old tires on Yahoo is dwindling down.
Comcast and AT&T are both out, according to Bloomberg. Microsoft isn't preparing an outright bid, although it's not clear whether it will help out in financing other bids. Verizon, notably, is actively working a bid. Google is considering one, as are Time Inc. and private-equity firms Bain and TPG. Others may follow before the April 11 deadline.
Among these, Verizon seems like the clear frontrunner. The mention of Google's name is an interesting twist, since it has not been seriously considered as a suitor before. Dropping several billion dollars on a company with an aging business model and slowing if not declining revenue isn't a part of Google's playbook. At least not since Motorola Mobility five years ago.
Since then, Google has paid $3.2 billion for Nest and just shy of $1 billion for Waze. Most of its other deals have been smaller in size and located in markets where the company is expecting future growth, like AI (DeepMind), cloud software (bebop), along with dozens of small acquihires. And given the recent news out of Nest, Google might be growing even shier about entering a bidding war with Verizon, which is reportedly readying an $8 billion bid for Yahoo.
It's possible that Google is willing to part with a fraction of its $70 billion cash stockpile to pick up Yahoo's core business, if only for its patent portfolio, or to keep it away from Microsoft, say, or to add scale to its owned-and-operated sites. It's more likely that the company is willing to make a low-ball bid simply to buy a front-row ticket to look at Yahoo's financials, a move that's not unheard of in the world of tech M&A.
Verizon's approach feels different. As Bloomberg noted, the company has already hired three different financial advisors for its Yahoo bid. For months, it has been signaling its interest in Yahoo as a follow up to its $4.4 billion AOL purchase last summer. “I think marrying up some of their [Yahoo's] assets with AOL under Tim Armstrong's leadership would be a good thing for investors," CEO Lowell McAdam told CNBC in February.
Why is Verizon so eager to buy Yahoo, when other potential suitors are sounding unsure if not flat-out uninterested? Because the telecom giant's core market of wireless subscribers is slowing, and it's hungry for new growth. Wireless and wireline markets are becoming saturated, with less growth potential. Wireless providers in particular are facing pressure from lower-cost subscription plans from T-Mobile and Sprint.
Verizon's plan for growth beyond telecom is “a digital media platform.” Which, yes, “platform” is the default business model for companies that need to announce a strategy before they can actually fill in the details. Here is how Verizon CFO Fran Shammo described the company's platform strategy at an investment conference last month.
“The concept was a platform that could ingest content digitally formatted without any human touch and deliver it to an end-user... There were two reasons that AOL was very, very appealing to us. One was we needed the ad-tech platform. We needed that programmatic advertising platform to insert those ads on a programmatic basis. And Tim [Armstrong] and his team brought that platform and that expertise. And although there's a lot of platforms out there in the industry, this platform was actually operating and it could scale.”
Armstrong achieved at AOL what Mayer has tried to do at Yahoo. He took a business model designed for the 1990s (in AOL's case, dial-up modems) and built a new digital-ad business (in AOL's case, programmatic ads) that kept revenue and profits growing modestly. Anyone who bought AOL's stock at $12 a share in the summer of 2011 and then held on could have sold it to Verizon for $50 a share.
Today, Armstrong is running Verizon's untouched-by-human-hands digital platform. Which of course means there would be no room for Mayer after an AOL-Yahoo combination. Mayer's intention was to bring engineering innovation to Yahoo's mobile properties and make it relevant again. At AOL, all that innovation would be fed, along with with its staler Web properties, into the efficient, programmatic woodchipper Armstrong has built. The idea is to scale what's working, not dazzle with creativity and innvation.
This can't go over well with Yahoo's existing board. But there is a shadow board lurking just off stage in case they balk at the notion. And, as a sweetener, Verizon is reportedly offering to take Yahoo Japan as well, leaving Alibaba as the only key asset inside the company.
And yet it's close to what Starboard urged Mayer to do in September 2014, when he wrote a letter to Yahoo's board that, among other suggestions, included this one: a “strategic combination with AOL, Inc. – a company we know well – which could improve Yahoo's competitive position.”
It's the same solution today, only Verizon owns AOL. One risk for Verizon is that adding Yahoo to the digital platform it's building is likely to add to a drain on profits before it adds to them. That's been the case with AOL and other Verizon content initiatives, like its Go90 video app. As Shammo said,
“As we start to invest in some of these startups like a Go90, AOL, I mean these are really true startups for us. So, they create a lot of negative to the bottom-line, as truly a startup would. And that will continue this year.”
Yes, it's strange that a company, even Verizon, is regarding AOL and perhaps Yahoo as startups. But in an odd way, it makes sense, as both companies seem to be reaching a full-circle kind of closure. Yahoo, more than any portal, ushered AOL users out of its walled gardens and onto the open Web. 20 years later, what's left of AOL is ushering Yahoo back into oblivion.