By Parke Shall
Debate has continued this week as to whether or not Verizon (NYSE:VZ) will be considering abandoning its planned purchase of Yahoo's (NASDAQ:YHOO) core assets. We think the possibility is still there that Verizon may abandon this deal, but after we stepped back and looked at the whole situation this morning we were really only able to draw one conclusion: the real loser in the Verizon Yahoo deal is Yahoo shareholders.
Yahoo has done an enormous disservice to its shareholders over the last couple of years and is simply not a stock we would want to own going forward, no matter what the outcome of the merger.
From our viewpoint, management and the board have consistently put shareholders last and have displayed actions to us that consistently make us glad that we are not Yahoo shareholders. In today's article, we wanted to discuss two potential outcomes of the Yahoo/Verizon merger and also talk about how both of these outcomes are detrimental to Yahoo shareholders. From there, we want to briefly discuss why we don't think Yahoo's management team should be trusted going forward and why Yahoo should not be a stock to own regardless of how and when the Verizon deal finally hits a terminus.
As for those unfamiliar with the story, Yahoo and Verizon have supposedly been jockeying back-and-forth on terms since it was revealed that there has now been a second data breach that Yahoo recently incurred that it did not share with Verizon prior to Verizon making its bid for the company. We have been questioning the Yahoo and Verizon merger since the revelation of these data breaches for several months now. We also wrote a series of articles skeptical about Yahoo being able to sell its core business at all, claiming that there may have been a couple of wild cards underneath the surface that Yahoo may have not disclosed. We commented in these articles that we found it to be troubling how long it was taking Yahoo to sell its core assets. We were put off by how long the process was taking and how many times the company had repeated itself when it made announcements that it was putting itself up for sale. It seems like a lot of show and not a lot of action.
Lo and behold, several years go by and Yahoo finally finds a bidder. It then comes out of the woodwork that Yahoo has not disclosed two massive data breaches to the bidder, once again highlighting how poorly run Yahoo's business is. This brings us to where we are today, with analysts trying to figure out whether or not the entire process might derail based on these new revelations.
Though it may not be a shocker to our readers, we are going to continue to be skeptical and take the position that this very well may wind up costing Yahoo the merger. To no surprise of ours, analysts have come out and taken the "rose colored glasses" view, recently stating that they do not expect this data breach to terminate the merger, while they do believe that it may be cause for some concessions on the part of Yahoo. Seeking Alpha recently reported,
- Despite some widely debated comments from Verizon's Marni Walden, who said at a Citi conference this week that the company was "unsure" about closing a $4.8B deal for Yahoo, analysts are still largely expecting the deal to go through.
- "For all of Yahoo's flaws, you're not going to find a property that has a billion users that you are going to pick up for [less than] $5B," says A.T. Kearney's Greg Portell, pointing to ad tech's key to the play. "The deal's economics were good at the start of this. So, if Verizon is able to knock off a billion dollars and get protection against user data exposure, it's better for them."
- "There are not a lot of media properties on the planet that have a billion user accounts and leading categories," says CFRA's Scott Kessler, who notes the massive data breach actually proved Yahoo's massive scale.
- Verizon could be hard pressed to prove that Yahoo's worth declined due to breaches that occurred a few years ago.
We would take a couple of exceptions with this line of thinking that analysts have put forth. First, it seems as though they are making excuses for Yahoo's poor performance. Where are the analysts holding Yahoo management's feet to the fire? While management might enjoy analysts making excuses for them, we are not sure that shareholders find this amusing. Putting out the fact that Yahoo may wind up losing money on the deal in a cavalier fashion should only irritate and annoy Yahoo shareholders further.
Analysts back up these statements by telling people to look at what an opportunity it is to capture 1 billion users for the price. While we certainly understand the importance of owning user data, and we understand the role that it played in buyouts of companies like LinkedIn (LNKD), we can't help but wonder this: if it is such a great price and Yahoo's user information is such a fantastic commodity, why wasn't there a legitimate and significant bidding war for this information? We know there were deliberations between several companies who considered buying Yahoo, but we think anybody would be hard-pressed to say that it was an all out war for Yahoo's assets. It actually seemed like quite the opposite, that perhaps Yahoo was having trouble selling itself.
The problem is that either way, Yahoo shareholders are getting the worst end of this deal. If the deal doesn't go through, it will have been an enormous waste of resources and time once again exemplifying Yahoo management's inability to get any type of tangible work done. It would not only be a huge disappointment in terms of morale for Yahoo shareholders, it would be a tremendous waste of resources.
If the deal goes through for a lower price, like some of these analysts are suggesting, it is also a negative for Yahoo shareholders. Management will likely retain their bonuses from pushing the merger through, the legal teams that helped out will get their fees and the discount will really come at the expense of Yahoo shareholders.
So forgive us for once again taking the skeptical angle to these continued talks as both parties try to establish what the end game is going to be for this merger. We believe that there is still significant chance that the merger winds up getting called off and to be honest, we still don't know if there are any more skeletons hiding in Yahoo's closet. One thing is for sure and that is this entire debacle has spoken volumes about the incompetency of Yahoo's management and Board of Directors. There is absolutely no way we would be confident in holding Yahoo stock going forward, regardless of the outcome of this deal, with the current management and current board of directors in place.
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.