By Ryan Knutson
In January, a month after Yahoo Inc. disclosed a second massive
data breach, Verizon Communications Inc.'s top executives huddled
at the company's headquarters and weighed their options.
They could walk away from their $4.83 billion deal to buy
Yahoo's internet business; wait to learn more about the damage to
Yahoo's brand; or plunge ahead with the purchase and their plans to
build a digital media business.
Verizon Chief Executive Lowell McAdam wanted to proceed and took
the lead in the negotiations that ended with a new deal announced
Tuesday: Verizon would pay $350 million less than it first offered,
and the two companies would still split any future costs from the
data breaches.
Mr. McAdam was worried that delaying or calling off the deal
would put on ice Verizon's ambitious plans to take on Facebook Inc.
and Alphabet Inc.'s Google in digital advertising.
Verizon plans to fold Yahoo's digital advertising technology and
portfolio of websites like Yahoo News, Sports and Finance into AOL,
which Verizon acquired in 2015. Verizon plans to keep the Yahoo
brand.
But the company has a long way to go to become a force in
digital advertising. In 2016, Yahoo and AOL combined controlled
about 2% of global digital advertising revenue, compared with
Google's 32% and Facebook's 13%, according to eMarketer.
During the January discussions in Verizon's Basking Ridge, N.J.,
headquarters, executives wrestled with thorny issues. There were
some things Verizon didn't know. User engagement with Yahoo had
declined only slightly after the second breach, disclosed in
December, but password resets were still under way, meaning more
user defections could occur, people familiar with the matter said.
Yahoo has not provided any update on defections. Also, after a
recent meeting of technical staffers, Verizon realized that the
breaches might have made some of Yahoo's systems more difficult to
integrate with Verizon's AOL unit, according to the people.
The following day, McAdam spoke with Yahoo director Thomas
McInerney, who was amenable to the idea, the people said. Yahoo
also wanted to move on. Selling Yahoo's internet business was a
"gating item" for the remaining businesses' ability to do other,
more lucrative things, such as selling stakes in Alibaba Group
Holding Ltd. and Yahoo Japan Corp., another person familiar with
the matter said.
Mr. McAdam and Mr. McInerney met in New York the next week and
reached an agreement. It took about two weeks to resolve the final
sticking points, clearing the way for Tuesday's announcement. Yahoo
shareholders still must vote to approve the transaction, which the
companies hope will close in April.
An investigation under way at the Securities and Exchange
Commission -- about what Yahoo knew about the data breaches and
when, and whether it properly informed investors -- could slow that
timeline. Before Yahoo can schedule a shareholder vote on the deal,
it needs the SEC to approve its proxy statement. The SEC declined
to comment.
As part of the revised agreement, Verizon will give up its right
to sue over any allegations that Yahoo had covered up the hacks,
one of the people said. The entity selling Yahoo will retain
liability for the SEC investigation and any shareholder lawsuits
related to the deal itself. Verizon will split costs and
liabilities related to any lawsuits from consumers or partners
about the breaches. Yahoo has said it is cooperating with federal,
state and foreign agencies that are seeking information about the
2014 breach. Several lawsuits have arisen as a result of the
disclosures.
Earlier this month, two influential U.S. senators criticized
Yahoo for dragging its feet when responding to questions about the
hacks.
The agreement marks the final act for the once-mighty internet
pioneer. At the height of the dot-com boom in early 2000, Yahoo's
market capitalization was more than $125 billion. After years of
strategic U-turns, the drawn-out auction of its internet business
and disclosure of the hacks, Yahoo's core business is now worth
just $4.48 billion after the original deal's $350 million
reduction.
The first hack occurred in 2014 and was revealed in September.
It affected 500 million user accounts. Then, in December, Yahoo
disclosed a hack from 2013 that exposed more than one billion user
accounts. The stolen data included names, email addresses, dates of
birth, telephone numbers and encrypted passwords, Yahoo has
said.
In October, Verizon signaled it could consider the breach
disclosed the prior month as a material event that could allow it
to change the deal terms.
Since then, Yahoo CEO Marissa Mayer and Verizon executives Marni
Walden and Craig Silliman have held regular calls to discuss
Yahoo's investigation of the hacks, one of the people said. Tim
Armstrong, who runs AOL, stayed focused on the pending integration
for the most part, the person added.
The entity selling Yahoo will be renamed Altaba Inc. Ms. Mayer
will step down from the board but it is unclear what role she will
play after the transaction closes. "Today's announcement allows us
to move forward with confidence and certainty, as we continue to
plan for a successful integration," Ms. Mayer wrote in an email to
staff on Tuesday.
--Deepa Seetharaman and Dana Cimilluca contributed to this
article.
Write to Ryan Knutson at ryan.knutson@wsj.com
(END) Dow Jones Newswires
February 22, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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