The most likely buyer is Verizon (NYSE:VZ). They are the only bidder talking up the price, thinking it could fetch $10 billion. (Not bad, considering the market was pricing Yahoo based entirely on the Alibaba (NYSE:BABA) stake and organic Yahoo was thus worth nothing.) The plan is for Yahoo to be combined with America Online, which Verizon bought last year.
The driver of the deal is Tim Armstrong, ex-Google (NASDAQ:GOOG) (NASDAQ:GOOGL) ad man, the genius who gave us Patch. Verizon bought AOL for its video ad network, and would be buying Yahoo for similar assets. Armstrong would act as the general manager, and provide a buffer between Verizon management and the staff for as long as he can stand it.
What this means is that Marissa Mayer would go away, with the minimal possible severance. For those who don't like Mayer, and they're legion, this is a consummation devoutly to be wished.
The strategy would be to control Internet advertising market share, directing some of that wealth to Verizon's own properties to create vertical integration. AOL owned the Huffington Post, TechCrunch, and many other blog-based properties. Yahoo owns some excellent news, finance and radio assets. My guess is Armstrong is also telling tales about how this deal gets Verizon into video, and how it can dominate the coming world of mobile, over-the-top information.
So how should investors play it? If you must be in telecom stocks, you play it by buying anything else. Buy AT&T (NYSE:T). Buy T-Mobile (NASDAQ:TMUS). Even buy Comcast (NASDAQ:CMCSA), which has dropped out of the bidding. Better yet, buy Alphabet or buy Facebook (NASDAQ:FB), which know this business and how to profit from it.
The only way a carrier can own any content company is by keeping its hands off it, as Comcast does. The economics are different. The management structures are different. The profit margins are different. The risk profile is different.
A phone company doesn't know how to do this. It deploys capital once and then acts to extract that capital at regular intervals. The idea of continuing investment is anathema. Verizon has a 56 cent/share dividend that presently yields 4.35%. That's what it cares about. Capital gains are not the game. So long as it can cover that dividend with earnings, preferably at least twice over, management is happy.
But content does not work that way. Sometimes you're up, sometimes you're down. Sometimes you have to pay stars. Sometimes you have to even take risks, and take losses. Verizon is going to find this out. Verizon is not going to be happy.
Armstrong has probably spun a tale in which people work for little or no money. That's the case at many AOL properties, like HuffPo. That won't be the case under phone company management. Is anyone going to work for free, for the phone company, for the exposure? Can you imagine a phone company doing something exciting, something new, something that would draw you to work for it only for exposure?
In short, over time, Armstrong is going to have to pay for talent. And the cost of talent is going to rise. Internet ad costs will continue to deteriorate, and the problems Yahoo has caused its owners over the last 20 years will manifest again. Verizon won't like this, and within five years, these assets are going to be written off.
I don't expect the dividend to be threatened. Verizon had revenue of $131 billion last year. In its last year as an independent company, AOL had less than $1 billion, Yahoo $5 billion. Verizon will try to squeeze the costs down, and wind up slowly bleeding the revenue down. Within five years, Armstrong will have his golden parachute and be doing something else. The people working at the units will be picking up the pieces of their lives somewhere else.
You, as an investor, don't need that bleed. You're much better off with cloud and business services, which is AT&T's strategy. You're much better off with cable and separately-managed TV assets, which is Comcast's strategy. You're much better off investing Internet money in companies that understand the Internet.
All you need to do here is avoid Verizon stock.
Disclosure: I am/we are long CMCSA, GOOGL.
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.