Verizon: Risks Surrounding Yahoo Data Breach?

| About: Verizon Communications (VZ)

Summary

Yahoo disclosed a massive security breach impacting 500 million customer credentials.

Verizon apparently knew nothing about the security breach from 2014 prior to agreeing to purchase Yahoo for $4.8 billion.

The Yahoo hack could allow Verizon to walk away or renegotiate the deal making the stock a buy on any irrational dip.

The original headlines around a massive data breach at Yahoo (NASDAQ:YHOO) didn't appear to grab a lot of attention. Even the cybersecurity stocks hardly got a bump out of the news of a large scale attack that in the past would warrant increased corporate spending on security products.

As the details come to the surface, Verizon Communications (NYSE:VZ) might actually alter the merger deal due to this issue not disclosed in the merger due diligence. With the stock previously approaching my $50 target, will this Yahoo issue impact Verizon?

Data Breach

On September 22, Yahoo disclosed that the company's network was hacked in late 2014 by a state-sponsored actor. The company suggests that information associated with 500 million user accounts were stolen. Supposedly, bank and payment card data was not stolen.

Consumers now appear somewhat immune to online information being hacked. The potential size and scope of this hack is alarming. The Yahoo hack nearly equals all of these other prominent data breaches combined.

Verizon Impact

As the information is starting to leak out (via the NY Times), lots of questions surround whether Yahoo kept Verizon informed on the hack. Signs exist that Yahoo management knew about a Russian hack back in 2014 and at least 280 million credentials hacked back in July, but apparently, Verizon was unaware of any risk.

The key for Verizon investors is that the deal is for only $4.8 billion. The wireless giant has a market cap of nearly $215 billion making the purchase rather immaterial.

Sure the deal promised to provide Verizon the scale and scope of users to become a digital advertising threat to Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Facebook (NASDAQ:FB). The question now is whether the deal actually adds more risk with the likelihood of a class-action lawsuit and a tarnished reputation for the already declining Yahoo brand.

The reality is that my previous research suggested that Verizon should dump any attempt to purchase Yahoo. The company is better off focusing on the deals for the likes of Complex Media and AwesomenessTV.

Since the initial research back in April, the quarterly numbers for Yahoo only got worse in Q2.

Click to enlarge

Source: Yahoo Q216 earnings presentation

Takeaway

The key investor takeaway is that the Yahoo hack might provide an out for Verizon. The deal remains mostly immaterial to Verizon and the hack only serves to likely further diminish the business the company is obtaining in the purchase.

Either way, the dip to $51.02 likely provided a solid entry point offering a 4.5% dividend yield. To any extent that the stock gets hit by concerns over the Yahoo hack would only serve to provide another entry point for the dominant wireless player.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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