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Verizon Bags Yahoo, But We Question the Strategic Rationale

The $4.8 billion deal won’t move the needle on valuation, but we’re skeptical that Verizon will be able to reinvigorate Yahoo.

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 Verizon (VZ) has finally captured its target, agreeing to acquire  Yahoo’s (YHOO) core business for $4.8 billion. Verizon management will address the deal when it releases earnings on July 26. While the deal is too small to have a material impact on our fair value estimate or moat rating for Verizon overall, we aren’t enamored with the purchase. Despite its large audience surrounding sports, finance, and email, Yahoo has famously struggled to turn around its core business over the past several years. We are skeptical that Verizon will add much to reinvigorate innovation within Yahoo’s search and display advertising businesses via the combination with its AOL segment. It seems more likely to us that Yahoo’s turnaround faces even longer odds within a telecom giant than as a stand-alone, at least somewhat focused entity.

Further, Yahoo has also struggled to create a meaningful video content business, failing with original productions, such as the television series Community and its foray into NFL broadcasts last year. As such, we doubt Yahoo will contribute much to any improvement in Verizon’s Go90 offering. We remain skeptical of Verizon’s video efforts, as other competitors in the video market enjoy far greater insight into viewing habits or enjoy the benefits of an open platform, such as Facebook and YouTube.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.