VZ Verizon Communications Inc

By Thomas Gryta and Deepa Seetharaman 

Verizon Communications Inc. signaled it may demand to renegotiate its $4.8 billion deal for Yahoo Inc. following the internet company's recent disclosure of a data breach that affected more than 500 million accounts.

At a meeting in Verizon's Washington offices on Thursday, General Counsel Craig Silliman said it was "reasonable" to believe that the breach represented a material event that could allow it to change the terms of the takeover. He said it was up to Yahoo to prove the full impact of the data leak and prove it wasn't material.

"If they believe that it's not, then they'll need to show us that," said Mr. Silliman, who has been leading Verizon's review of the situation.

The breach occurred two years ago but was discovered after the merger deal was signed in July.

After a prolonged auction, Verizon outbid other suitors by agreeing to buy Yahoo's core internet business with plans to close the deal by the end of March. Shares of Yahoo fell 1.7% to $41.62 Thursday, though much of the company's market value reflects its investments in Alibaba Group Holding Ltd. and Yahoo Japan Corp.

"We are confident in Yahoo's value and we continue to work towards integration with Verizon," a Yahoo spokeswoman said in response to Mr. Silliman's comments.

Yahoo disclosed the massive breach last month, one of the largest thefts of personal user data. Yahoo said "state sponsored" hackers stole names, email addresses, dates of birth, telephone numbers and encrypted passwords. Yahoo said it discovered the breach in July. It didn't notify Verizon until September.

Earlier this week, Verizon Chief Executive Lowell McAdam said the carrier didn't plan to walk away from the acquisition but didn't rule out seeking changes to the terms. At a technology conference in Menlo Park, Calif., on Monday, Mr. McAdam said he considered Yahoo as "a real value asset," but added: "In fairness we are still understanding what was going on and defining whether it was a material impact on the business or not."

Many merger agreements contain provisions allowing buyers to withdraw from deals if the value of a transaction has been hurt by a significant development.

Legal experts said the contract language gives Verizon leverage to renegotiate or even walk away because of the security breach, but enforcing material adverse change clauses is difficult and courts have resisted their use.

In 2007 a Delaware court blocked Hexion Specialty Chemicals' attempt to walk away from a deal to buy Huntsman Corp. after its rival's earnings fell. But in 2011, private-equity firm Cerberus walked away from a deal to buy hotel company Innkeepers citing turmoil in financial markets, and later struck a new deal that was $100 million lower.

Looking to renegotiate the deal could bring risks for Verizon as well. Several suitors, including private-equity firms and a group led by Quicken Loans founder Dan Gilbert, have closely studied Yahoo's business and made bids to acquire the business. If the Verizon-Yahoo deal gets terminated, Yahoo may be required to pay Verizon relatively small termination fee of $145 million in certain circumstances.

In the days after disclosing the breach, Yahoo's investor relations team called analysts and major investors. In those calls, Yahoo officials said they couldn't comment on whether the breach was a material adverse change that would upend the deal -- but then laid out an argument for why it probably wouldn't fall into this category, a person familiar with the matter said.

Yahoo's team argued that if the user experience changed due to the breach, the "consequences" were already baked into the company's results, the person said. Yahoo officials also said they considered the hack to be low risk because all stolen user passwords were encrypted.

Yahoo also told investors there was no financial fraud because the breach came from a state-sponsored actor, who the company didn't believe would be interested in using financial data, the person said.

Yahoo declined to comment on its outreach to investors.

"One of their crown jewel assets is the audience," said Larry Ponemon, chairman of Ponemon Institute, a data-security research firm. "What this does is it basically puts the value of that asset as a lot less."

Verizon is waiting for the results of Yahoo's investigation into the breach before deciding how to proceed, said another person familiar with the matter.

Officials from both companies have continued integration planning, the two persons familiar with the matter said.

The carrier plans to combine Yahoo with AOL, which it acquired in 2015, to expand its push into online advertising.

Robert McMillan contributed to this article.

Write to Thomas Gryta at thomas.gryta@wsj.com and Deepa Seetharaman at Deepa.Seetharaman@wsj.com

(END) Dow Jones Newswires

October 14, 2016 02:47 ET (06:47 GMT)

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