Should Verizon Buy Yahoo?

After multiple failed efforts to resurrect Yahoo (Nasdaq: YHOO), it appears that the company has finally hit absolute bottom. Markets reports continue to be dismal. An eMarketer report estimates that Yahoo will account for 1.5% of the global market for online ads compared with 2.4% share in 2015. As the company continues to flounder through each quarter, the only news that appears to be uplifting the stock is news of its potential acquisition.

Yahoo’s Financials

Yahoo’s Q1 GAAP revenues fell 11% to $1.08 billion. Non GAAP revenues fell to $859 million, ahead of the Street’s forecast of $846 million. EPS of $0.08 was also ahead of the market’s forecast of $0.07. But the market is not just looking at the numbers.

Among operating metrics, mobile revenues accounted for 25% of the quarter’s revenues. Gross mobile revenues grew 5% to $412 million. By segment, gross search revenues fell 15% to $820 million. Cost of revenues grew 44% to $144 million while the number of paid clicks fell 21% over the year and the price-per-click grew 7% over the year. Display revenue was no better as it reported a 1% decline to $463 million with cost of revenues growing 1% to $83 million. The number of Ads sold grew 8% and price-per-ad fell 6% over the year.

For the current quarter, Yahoo projected GAAP revenues of $1.05-$1.09 billion and non GAAP revenues of $810-$850 million. The market was looking for revenues of $862 million. Yahoo expects to end the year with non-GAAP revenues of $3.4-$3.6 billion, in line with the Street’s forecast of $3.54 billion.

Yahoo’s Initiatives

During the quarter, Yahoo continued to improve its mobile offerings. It released an enhanced mobile search experience to simplify the search process especially for users looking for specialized information about sports teams, players, presidential candidates, and movies. It released new features for Yahoo Mail such as customizable swipe options, actionable notifications, recent attachment features to help Android- and iOS-based customers of Yahoo Mail stay more organized. It also released a new Yahoo App and Homepage to allow users access to news that they were interested in, share comments, and stay connected with real-time notifications when stories are updated.

Within Sports, Yahoo introduced Yahoo Esports, a new premium destination targeted at the avid sports fan. The site includes additional features such as news reporting, blogging, video commentary, match pages, team rosters, stats, related schedules, scores, and a chat section that allows users to connect with other sports fans.

Yahoo’s Potential Sale

But the biggest buzz surrounding Yahoo has been the announcement of its plans to auction its core business. Driven by activist shareholder Starboard Value LP and shelved plans to spin-off its Alibaba stake, Yahoo earlier this year announced plans to auction off its media, email, and other web businesses. The first round of acquisition bids was closed on Monday this week. Some of the bidders for the company include Verizon Communications and several private equity firms including Apax Partners LLP, TPG Capital LP, Bain Capital LLC, Apollo Global Management LLC, and Warburg Pincus LLC. There were several others that decided to opt out of the bidding process. Some of these were big names like Alphabet, Comcast, Time, and AT&T.

Verizon is expected to be the front runner among Yahoo’s potential buyers. Last year, it had acquired AOL for an estimated $4.4 billion and wants to make bigger inroads into the digital advertising market to leverage its user base of over 140 million customers. Analysts expect a Verizon Yahoo combination to provide Verizon with the ability to combine customer data from smartphones with advertising inventory on AOL and Yahoo to create an online advertising technology platform.

I think it would be a bold move for Verizon to acquire Yahoo. First off, for all its failings, Yahoo is still a strong search engine, just not strong enough to compete independently with the likes of Alphabet and Facebook. When it comes to mobile phone services, there isn’t much to differentiate between service providers besides tariff structures. With Yahoo, Verizon could offer a differentiated fee plan that offers consumers the advantage of access to Yahoo content for free. Adding Yahoo to its portfolio would also help Verizon improve its presence within the digital and mobile advertising space. Verizon has been looking to expand its LTE wireless video and streaming video strategy. Yahoo’s acquisition could help it achieve that goal too.

Analysts peg Yahoo’s core business to be worth between $4 billion-$5 billion and its patents to be worth an additional $1 billion-$2 billion. The bids for Yahoo are estimated to have come in at $4 billion-$8 billion. After the sale of the core business, Yahoo would be left with its stake in Alibaba and Japan, which are estimated to be worth $23 billion and $10 billion, respectively. As of now, it doesn’t appear that Yahoo would like to sell these assets due to the tax cost involved. The Alibaba stake sale alone would have a tax bill of $10 billion-$12 billion.

It will be an interesting next few months to watch who finally buys Yahoo. Meanwhile, its stock is trading at $37.67 with a market capitalization of $35.67 billion. It reached a high of $45.10 in April last year.