July 25--SUNNYVALE -- Verizon's nearly $5 billion gambit to buy Yahoo carries one major unknown.
Will Yahoo's billion monthly users and content such as sports and finance be enough to make Verizon a contender in a digital advertising cage fight with Google and Facebook?
"If Verizon starts to build an alternative, will advertisers flock? Will the advertisers want and support an alternative to Facebook and Google?" asked Steve Beck, managing partner of competitive strategy firm cg42. "It's a tough road but it would not surprise me that advertisers would love for an alternative if nothing else but to ... keep pricing in check."
The $4.83 billion deal, announced Monday and to be finalized in the first quarter of 2017 pending shareholder and regulatory approval, puts Verizon solidly in the No. 3 position behind Google and Facebook among sellers of digital ads, Pivotal Research analyst Brian Wieser said in a note.
"Returning Yahoo's core business to growth and driving costs out of that business will be among the primary challenges Verizon will have to face in order to retain that position," Wieser said.
But the deal will allow Verizon to build on its $4.4 billion purchase last year of digital media firm AOL. AOL tallies more than 180 million monthly visitors to its websites, including 81 million to Huffington Post, plus 156 million monthly visitors to its AOL On television network, the company said.
"The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising," Verizon chairman and CEO Lowell McAdam said in a statement.
AOL chief executive Tim Armstrong highlighted the "extensive distribution capabilities" Verizon will gain through the acquisition.
"Combining Verizon, AOL and Yahoo will create a new powerful competitive rival in mobile media," Armstrong said in a statement.
Still, others questioned whether combining AOL and Yahoo -- two tech companies past their prime -- will create a powerhouse that can now challenge the dominant companies in digital advertising. Google and Facebook together reap 64 percent of that U.S. market, according to Pivotal Research.
"Can Yahoo plus AOL compete effectively with Google or Facebook? I think the answer is no," said Mizuho Securities analyst Neil Doshi. "Both those companies are significantly further ahead in terms of scale, market share and dominance."
However, Yahoo's sports, news and finance websites, combined with AOL's technology, politics and entertainment content, could prove attractive to advertisers, who would be able to reach large numbers of viewers and provide Verizon with significant revenue, Doshi said.
"If you take one dinosaur and add another dinosaur and you now put them under a big cave they might have a better chance of surviving," Doshi said. "It gives them a little more scale."
That increased reach should allow Verizon to capture new ad dollars, said SunTrust analyst Robert Peck.
"Instead of two having two properties (AOL and Yahoo) that were sub-scale they now are of scale in order to give the reach to advertisers that they are looking for and the ROI (return on investment) on their advertising dollars that they require," Peck said.
In the longer term, Verizon could start to take ad spending away from Google and Facebook by increasing its user base and creating engaging new products, such as long-form video, Peck said.
For Verizon, which sells TV packages including ESPN and Fox News, the purchase provides a huge video distribution platform it lacked in the past, a valuable asset at a time when people are moving away from watching TV to consuming video online and on mobile devices, Doshi said.
"Now they can capture some of the dollars they were going to lose on the TV side as viewership switches," Doshi said.
But there will be blood on the Yahoo floor, analysts expect. Because of redundancies between the Yahoo and Verizon workforces, layoffs at Yahoo are likely, perhaps hitting up to 1 in 5 workers, Gold said. "Typically in these things 10, 15, 20 percent is not uncommon," Gold said. Peck said Verizon could lay off 2,000 employees from Yahoo's workforce of 8,800.
Although analysts Peck and Doshi said the $4.83 billion sale price was reasonable, that figure is lower than what shareholders hoped for, said activist investor Eric Jackson of SpringOwl Asset Management.
"It's disappointing," Jackson said. "When they started this process $4 billion was sort of the low end of expectations. We were expecting $6 billion or more. The final price just speaks to how much the business has deteriorated."
Yahoo CEO Marissa Mayer said in a conference call Monday that she would stay on through the transition. "I love Yahoo and I'm excited to see it into its next chapter," Mayer said.
Contact Ethan Baron at 408-920-5011 or follow him at Twitter.com/ethanbaron.
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