Will Yahoo's Data Breach Derail Verizon Deal? -- Update
September 23 2016 - 5:02PM
Dow Jones News
By Vipal Monga and Ryan Knutson
Investors started worrying Friday that a massive security breach
disclosed by Yahoo Inc. could impact the internet company's $4.8
billion deal to sell its core business to Verizon Communications
Inc.
The breach, which Yahoo blamed on a state-sponsored actor,
occurred two years ago but was discovered after the merger deal was
signed. Verizon said it learned of the problem this week and was
reviewing the situation.
The telecom company is waiting to see how the breach affect's
Yahoo's business in coming weeks before deciding its next steps, a
person familiar with the matter said.
Verizon was displeased by how long it took Yahoo to notify the
company about the breach, this person said. Verizon isn't
conducting its own independent investigation since the deal hasn't
yet closed, the person said.
Verizon's principal interest in the deal was the audience, not
user accounts, that visits Yahoo web properties, as the telecom
company looks to boost its online advertising business.
Shares of Yahoo fell 3% to $42.80 in Friday trading, a sign of
mounting fears around the all-cash deal. The decline erased $1.5
billion of Yahoo's market value, which is mostly tied to its stake
in Alibaba Group Holding Ltd. and Yahoo Japan Corp.
Some of the decline in Yahoo's shares Friday was because of a
drop in Alibaba's stock, which was down 1.8%, and some to worries
the data breach could encourage Verizon to recut its deal for
Yahoo's core business, said Youssef Squali, an analyst with Cantor
Fitzgerald.
"The question is, can you put a number around the data breach,"
said Mr. Squali.
Many merger agreements contain provisions allowing buyers to
withdraw from deals if the value of a transaction has been hurt by
a significant development. In the case of the Verizon/Yahoo deal,
such a change is defined as one that would "reasonably be expected
to have a material adverse effect on the business, assets,
properties, results of operation or financial condition of the
business, taken as a whole."
Stephen S. Wu, a lawyer at the Silicon Valley Law Group,
reviewed the purchase agreement and says it is clear that Yahoo
effectively promised that no security breaches had taken place --
and that no breaches will have occurred by the deal's closing,
which is expected in the first quarter of 2017.
That gives Verizon leverage to potentially renegotiate the deal,
or even walk away, he said. The difficulty for Verizon is
determining what exactly is a materially adverse effect, and
whether it is enough to extinguish Verizon's interest in Yahoo.
There isn't a clear definition.
"It's vague," Mr. Wu said. "This is an agreement written in a
way that there's a judgment call that needs to be made."
It is rare for companies to trigger material adverse change
clauses because courts have resisted their use, said Lisa Stark, a
partner at K&L Gates LLP.
"It's a very high standard," she said. "It has to be a very
substantial event. It can't just be a hiccup."
In 2007, for example, Hexion Specialty Chemicals agreed to
acquire Huntsman Corp. in a $6.5 billion deal. But Huntsman's
earnings fell after the deal was signed and Hexion and its
private-equity owner sued to get out of the deal. The Delaware
court sided with Huntsman, however, ruling Huntsman's weak earnings
were short term.
The two sides ultimately agreed to settle, with Hexion walking
away after it paid to settle with Huntsman.
In 2001, a Delaware judge ruled that Tyson Foods Inc. improperly
broke off a $3.2 billion deal with meatpacker IBP Inc. after Tyson
argued IBP had misled it about its earnings potential.
Although there is little history of successful use of the
clauses, one lawyer said companies continue to put them into deal
contracts, because it gives buyers a way to begin difficult
conversations if they get cold feet after signing an agreement.
"It gives somebody leverage to renegotiate a deal without
necessarily going to court," said Andrew Herman, a partner at
Kirkland & Ellis LLP. "It sets up that conversation."
Write to Vipal Monga at vipal.monga@wsj.com and Ryan Knutson at
ryan.knutson@wsj.com
(END) Dow Jones Newswires
September 23, 2016 16:47 ET (20:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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