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Questionable Timing For Billion-Dollar Buy

Verizon announces that it plans to buy Yahoo for $4.8 billion

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Verizon and Yahoo Logos

It appears Verizon isn’t just looking to sell phones and wireless service anymore. The telecommunications giant is now trying to become a formidable media company. On Monday, Verizon announced plans to purchase Yahoo for $4.8 billion. The deal is expected to be finalized in early 2017.

Donald Bergh, professor of management at DU’s Daniels College of Business, finds the timing of the deal surprising. “Uncertainties owing to the U.S. election and Brexit, among others, have made executives less willing to place large investments in acquisitions,” he says. “After a record year in worldwide value, there have been fewer deals, especially large ones like this.”

While often the acquiring firm wants a change in leadership following the acquisition close, doing so is a common driving force that causes acquisitions to fail. Prof. Donald Bergh, Daniels College of Business

What’s not surprising is Verizon’s interest to further diversify. The decision to purchase Yahoo allows Verizon to focus more on mobile content, which will help attract more millennial customers. “The deal helps further diversify Verizon and expand its revenue base,” Bergh says.

The acquisition of Yahoo comes one year after Verizon purchased AOL for $4.4 billion. Both moves will not only help Verizon’s business model, but also the company’s revenue base. “These acquisitions give them access to more revenues in digital advertising. One can look at this as Verizon will seek to cut costs in the acquired businesses, expand their advertising base and realize the gains in margins,” Bergh says.

What also can’t be ignored in this deal is the property that Verizon gains. Yahoo operates on a roughly 1-million-square-foot campus in Sunnyvale, California. According to a report in the Los Angeles Times, the property is valued at $500 million, or one-10th of what Verizon has agreed to pay.

Bergh believes the next 12 months will be crucial to the success of this deal. Especially relevant, he says, is whether the leadership team from Yahoo is retained after the deal closes. “While often the acquiring firm wants a change in leadership following the acquisition close, doing so is a common driving force that causes acquisitions to fail.”