Why Verizon Communications Inc. (VZ) Should Buy Yahoo! Inc. (YHOO)

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April 15, 2016 11:27am ETF BASIC NEWS

investMarshall Hargrave:  Verizon Communications (NYSE:VZ), one of the nation’s largest wireless carriers, has been quietly gearing up for its next big move in its aim to become a media giant.


Verizon should buy Yahoo

But it needs some help. It bought up AOL last year, which has helped get the proverbial ball rolling. However, AOL CEO Tim Armstrong can only do so much, as AOL only brought in around $3 billion in revenues last year. That amount barely moves the needle for Verizon, which brings in more than $130 billion annually in revenues.

Nonetheless, Yahoo (NASDAQ:YHOO) might hold the answers, as Verizon is reportedly working on a bid for Yahoo’s Web business.

Verizon Is Well Positioned

The fact that Alphabet (NASDAQ: GOOGL), the parent company of Google, is also looking at buying up Yahoo’s core business adds some validation to the fact that there’s still value within Yahoo’s ad business. Even AT&T (NYSE: T) considered a bid for Yahoo, but backed out.

Verizon is in the leadership position when it comes to winning the Yahoo bidding war, which also reportedly includes private equity firms and other tech giants. Verizon, with a more than $200 billion market cap, has the ability to not only buy Yahoo’s core business but also its 35% stake in Yahoo Japan, which is valued at roughly $8.5 billion.

Yahoo shares

This is a deal that would be appealing to Yahoo, which would like to unload everything but its Alibaba Group (NASDAQ: BABA) stake.

Yahoo has been desperately trying to monetize its assets, including its Alibaba stake, for over a year. But it has endured one misstep after another, from the abandoning of plans to spin off the Alibaba stake to the months-long attempt to either spin off or sell its core Web business.

The buyout of Yahoo would make Verizon an even bigger threat to Facebook (NASDAQ: FB) and Google, which are the leaders in online advertising. And this is what Verizon shareholders should want.

Verizon’s Big Vision

The best-case scenario right now is that Verizon buys Yahoo.

Yahoo still has some value in its websites and search engine, which still generate plenty of traffic. However, Yahoo has failed to both fully monetize and properly fend off competitors like Facebook.

Verizon has AOL’s Tim Armstrong, who’s proven to be a hustler when it comes to advertising. He’s already in charge of Verizon’s digital media advertising business, and he could be on the short list to eventually take over as CEO of Verizon.

Armstrong has big plans for the ad business at Verizon. He’s hoping he can transition Verizon from a predominantly wireless telecom company to a mobile media powerhouse by creating a media business within Verizon that generates upward of $20 billion in revenues by 2020. This would be a grand feat that might require Yahoo’s help.

AOL only brought in around $3 billion last year. Facebook, in contrast, generates $18 billion in annual revenues. A Yahoo deal would give Verizon the ability to leverage its 100 million wireless customers through targeted advertising, such as tapping into the location of wireless users to send ads and then seeing if the user visited a store after seeing the ad.

Verizon is a $200 billion market cap company, so it’s not easy to “move the needle” in terms of finding a new way to significantly grow revenues. The cross-selling opportunities between Verizon’s customers and brands looking to expand their ad presence could be a fast-growing market.

A move by Verizon to buy Yahoo would be much more prudent than AT&T’s purchase of Dish Network. Verizon trades at 12 times earnings, compared to AT&T’s P/E multiple of 17. The potential Yahoo deal is yet another reason why Verizon is still the better bet when it comes to the battle of the telecom giants.

This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.


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