By Ryan Knutson
Verizon Communications Inc. outbid several suitors to buy Yahoo
Inc.'s struggling internet business last year. But the phone giant
had to scramble to keep the deal from unraveling after Yahoo
disclosed two massive data breaches.
The companies have agreed to revise the $4.83 billion deal,
cutting as much as $350 million off the price and evenly splitting
costs from the breaches, according to people familiar with the
matter.
In late January, more than a month after Yahoo had disclosed its
second breach, Verizon Chief Executive Lowell McAdam sat with two
of his top lieutenants in the company's Basking Ridge, N.J.,
offices and weighed his options, according to people familiar with
the matter.
Walk away from the deal, keep studying the impact of the
breaches -- potentially pushing the deal's closure to the second
half of the year -- or close the transaction now and move on.
There were still some things Verizon didn't know. User
engagement with Yahoo had only declined slightly after the second
breach, disclosed in December, but password resets were still under
way, meaning more defections could occur, these people said.
A recent meeting between technical staff of the two companies
revealed that some of Yahoo's systems were compromised and might be
difficult to integrate with Verizon's AOL unit, the people
added.
But Mr. McAdam still felt owning Yahoo made sense -- and further
delay would prevent Verizon from getting going on its ambitious
plans to take on Alphabet Inc.'s Google and Facebook Inc. in
digital advertising. Verizon is looking for sources of growth as
its core cellphone business matures and faces tough competition
from rivals.
Mr. McAdam decided to proceed with the deal -- but Verizon would
need a discount because of the uncertainty, the people said.
The next day, Mr. 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 Inc., another person familiar with the
matter said.
Mr. McAdam and Mr. McInerney met in New York the following week
and crafted the outlines of an agreement that the companies could
announce as soon as Tuesday. In addition to a 50-50 split of future
liabilities that may arise from the hacks, Yahoo would knock as
much as $350 million off the original $4.83 billion price tag,
according to people familiar with the matter.
It took about two weeks to hammer out the final sticking points.
Yahoo shareholders still must vote to approve the transaction,
which the companies hope will close in mid-April.
An investigation under way at the federal 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.
As part of the revised agreement, Verizon will give up its right
to sue over the idea 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.
There are already several class actions that 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.
Tuesday's agreement ends the drawn-out finale 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, a drawn-out auction of
its core internet business and disclosure of the two largest known
hacks, Yahoo's business is now worth just $4.48 billion
The first hack was revealed in September and occurred in 2014.
It affected 500 million user accounts. Then, in December, Yahoo
disclosed a hack that occurred in 2013 and impacted 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 breaches
material events 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, one of the people said. Tim Armstrong, who
runs AOL, primarily stayed focused on the pending integration, the
person added.
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. 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.
Verizon has a long way to go before it is truly relevant 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.
--Deepa Seetharaman and Dana Cimilluca contributed to this
article.
Write to Ryan Knutson at ryan.knutson@wsj.com
(END) Dow Jones Newswires
February 21, 2017 07:37 ET (12:37 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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