What would make it so that five years from now Verizon would be glad it paid $5B for Yahoo? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
Answer by Jonathan Brodsky, SVP, Chicken Soup for the Soul; fmr Dir of Corp Dev, 1800flowers; 2x start-up-er, on Quora:
This is really hard, because if I were looking at Yahoo, I'd tend to agree with the analysis in this article: Yahoo's $8 Billion Black Hole.
That article shows an analysis that says that the value of Yahoo's operating assets -- what Verizon is purportedly going to announce they're buying tomorrow -- is worth negative $8 billion. That would imply that a $5 billion offer for those assets needs to make up $13 billion in value in order to break even.
- First, its people. I know, if you're in Silicon Valley, you've probably heard over and over how there's been a brain drain out of Yahoo over the years. And, of course, many high-profile people have left. But there are still about 9,400 employees (as of March 2016), and as someone who has been a Verizon customer for about a decade, suffering through terrible apps such as VZ Navigator force-installed on my phone, I've got to believe that Yahoo's employee base is a significant level-up for Verizon's tech team in terms of size, breadth, and talent. If I were Verizon, I think I'd see a lot of employee cost savings in engineering ... in my own company.
- Second, there are all those email users - 250 million of them. I know what you're thinking. All those people are old and / or dead. Yeah, they likely skew older, just like the Yahoo Bing search audience did. But you know something? Older people have money. They've been working longer than millennials. They have disposable income. They're a great audience to remind that you have the exclusive rights to the back catalog of Saturday Night Live (which, incidentally, Yahoo also owns).
- Third, there are a few companies within the Yahoo family with true break-out valuation potential. I'm not going to get into Tumblr, because, as much as it breaks my heart to say this, the ship has probably sailed on the moment for that company. However, Yahoo does own Flurry, which is arguably best-of-breed mobile app analytics; BrightRoll, which is easily one of the most exciting companies in terms of serving video ads to customers (and, even if you disagree with that, it's the largest in terms of customers); and Polyvore, a really interesting marketplace / affiliate model platform.
- First, FIOS. Verizon has the largest fiber optic cable footprint in the US, covering almost 10% of the country and has massive coverage in major population centers, such as New York and New Jersey (and, if you live in Rhode Island, all of that, too). If you think about how Google Fiber only operates in six cities today and that Verizon already reaches into millions of homes through physical cables, that's an asset that no other large internet company has.
- Verizon has about 35% of all wireless customers in the US, and many of those (like me) are on multi-year contracts. It's the best carrier in every region of the US on the metric that matters the most to all of us - it works when we need it to work. Yeah, we've all had our phones go out from time to time, but I'll never forget my wife's reaction when she finally switched from AT&T to Verizon: "Wait, you get a signal by the high school? And you have for a year and you didn't tell me about it?"
- First, get rid of the crappy apps that come with Verizon's Android phones (except, maybe, Verizon Cloud, which is kind of useful when your toddler throws your phone in the toilet and you need to get a new one up and running fast), and replace them with things that people might use, like Polyvore and Tumblr. Bonus points if they can also put in a decent native mail client and a decent native messaging client, because those both stink, too. This will enable Verizon to capture a little bit more information about its customers.
- Second, deeper integration with Flurry and the other Yahoo Analytics platforms. There has got to be a ton of stuff that a carrier can provide in terms of analytical data that you can't get simply from an app (such as demographic information, credit rating, and all that other nice stuff that Verizon finds out about you when you sign up for a phone in the first place). That could help make Flurry into the only sensible analytics option in the mobile phone space.
- Third, combine that email data with personal data that Verizon has on those 250 million Yahoo email users. Verizon knows a ton about at least some of these people in the offline world, and they have the potential to combine it. As an advertiser, can you imagine if you knew for certain that X @yahoo.com lived at a certain address AND you knew what he watched on TV AND you knew that he had paid his bills on time for the last three years AND you knew that they had just bought aviator sunglasses via Polyvore? You can't get that data already. Trust me. I've been trying for years. The best you can do is anonymized credit card spending habits that tell you the store someone shops in, but not what they bought. This has the potential to be leaps and bounds ahead of everyone else's advertising data, and would allow a combined Verizon / Yahoo to sell across the entire spectrum with some pretty incredible targeting abilities.
- Fourth, what I described above in #3 creeps me out. Like, it creeps me out enough that I'd stop using Verizon (I long ago stopped using Yahoo for anything except Yahoo Finance, and even there, I prefer Morningstar). So throw people like me a bone, and expand Yahoo's partnership with DuckDuckGo. If you're not familiar with that service, it's a search engine that doesn't track its users, which means that pretty much everyone gets the same results for everything and that the ads you get served are based on your search queries, not on your personal profile data. Make this the pre-installed search on all Yahoo sites and Verizon devices, because it will have a two-fold impact: first, it's decent PR about user privacy and a very large company taking it 'seriously;' and second, it deprives Google and Microsoft of data, and that's what those companies feed on ... which would help level the playing field a bit for Yahoo.
Will all this together create an ROI that makes spending $5 billion look like a smart idea?
Probably not. Unless this combined entity somehow grows Yahoo's revenue from $5 billion (yes, Verizon is offering 1x trailing price / sales, not that that's a measure that you care about in a company this size) to $15 billion, they're unlikely to generate enough cash on this deal to make it into something where they even get their $5 billion back (remember, Yahoo lost almost $5 billion last year, although much of that was non-current-cash expense -- e.g., write-downs).
However, you have to remember that Verizon is a huge company -- as of right now, they've got $228 billion in market cap and and roughly $17 billion in annual profit. This deal is a rounding error for them. Or, if I was going to say it like a corporate development guy would, there's nothing but upside in this deal.
Yahoo has physical and intellectual assets worth more than what Verizon is paying, so they're protected on the downside. As for the upside, well, if they can make that $5 billion in revenue into something much more, they'll look really, really smart. And if they can't, they're just going to bury Yahoo's operating results in their overall financials and tell everyone that it's doing great ... right up until they shut it all down.
So, to answer your question - in five years, Verizon will be happy that they bought Yahoo as long as they don't have to write down the assets to $0 in that time frame. Otherwise, they're taking very little financial risk.