By Valuentum Analysts
Yahoo (YHOO) has been in the news a lot lately, and not in a good light. The revelations recently uncovered at the Internet portal have put the terms of its pending deal to be bought by Verizon (VZ) at risk, perhaps jeopardizing the transaction altogether. Recent reports indicate that Yahoo shareholders may now get far less for their business from Verizon, to the tune of ~$1 billion, and top Verizon executives are even “wondering if (it) should pull out of the deal.” The telecom giant could just be taking advantage of the “bad” situation at Yahoo in asking for a better price, but the company walking away would not be out of the question. Yahoo, after all, didn’t disclose any of the issues during transaction negotiations with Verizon, and top executives at the suitor aren’t happy about it.
But what’s got Yahoo in hot water this time? Well, it started on September 22 when Yahoo confirmed a giant data breach to its system. The size of what has been identified as a Russian-sponsored attack is without precedent, as it has been estimated that 500 million names, email addresses, telephone numbers, and dates of birth were exposed. Though disappointed and frustrated, customers may still have been forgiving to some degree, as data breaches have unfortunately become part of corporate life, with some of the largest public players from JP Morgan Chase (JPM), Target (TGT), Home Depot (HD), and Sony (SNE) encountering issues within the past few years, just to name a few. But that the Yahoo breach occurred in 2014, two years ago, and that the Internet portal is only disclosing it now may be too much for any reasonable onlooker to offer sympathy. US senators are demanding answers.
The 2014 hacking of Yahoo’s database was only the beginning of customer security issues at the company coming to light recently. On October 4, Yahoo was found to have been scanning emails for specific information last year under the directive of US intelligence officials. Yahoo exercising such power over the confidentiality of customer information is especially concerning when considering that it was so blatantly unable to protect its database from outside hackers. Since the accusations surfaced, Yahoo has denied involvement in email scanning as described by the media, but it did not expressly deny its participation in all forms of email scanning. Instead, the company declared that it was a law-abiding company that complies with all US laws.
It may not matter in the court of public opinion, however. The protection of customer information continues to be a critical business issue of the day, perhaps punctuated by Apple’s (AAPL) recent run-in with the Federal Bureau of Investigation where the government under the All Writs Act of 1789 demanded that the tech giant unlock a phone that had been used by a shooter in the San Bernadino terrorist attacks December 2015. Apple vigorously defended the privacy of its customers, thereby avoiding customer backlash, but Yahoo may now face the wrath of a disappointed consumer. The days of Yahoo email may now be numbered, if they haven’t been already. Consumer email rivals Alphabet (GOOG, GOOGL) and Microsoft (MSFT) were quick to issue public statements that their systems do not include any such email scanning programs.
The past few weeks have been a nightmare for the Internet portal, to say the least, and former interim Yahoo CEO Ross Levinsohn has done more to fan the anti-Yahoo flames. Levinsohn believes Yahoo knew of the attack on its database and the controversial situation regarding the dealings with the US government but chose not to disclose such information to Verizon during merger negotiations. He is in favor of Verizon hedging its bets regarding the acquisition of Yahoo and demanding a discount to the agreed-upon $4.8 billion price tag (which Verizon has done). It is also worth noting that the Chief Information Security Officer of Yahoo was not on board with the email searching program, which was eventually approved without his knowing. He later resigned in June 2015 under protest.
The chain of events surrounding Yahoo recently has been simply incredible. Why CEO Marissa Mayer and the rest of management have not been able to provide a clear timeline with respect to the Russian-sponsored attack or provide clear details on the firm’s involvement in email scanning becomes evident when considering the impact such details would have had on its recent journey in the M&A market. Tensions are now running high. Verizon is asking for a $1 billion discount on the original $4.8 billion agreement, and Yahoo won’t accept it without a challenge; Yahoo believes Verizon has no legal recourse to change the terms of the deal.
With the status of the Verizon-Yahoo deal up in the air, Yahoo shareholders are left out in the cold again. The purchase of the company was supposed to be the end of what has become a long saga of back-and-forths between Yahoo, the US government, potential suitors, and Yahoo shareholders. We still think the deal will get done, as Verizon has gone too far, and the company’s ambitious to combine in-house AOL with Yahoo may be too great. Still, we continue to point to our open letter to the board of Yahoo if all should fail, “VALUENTUM ISSUES OPEN LETTER TO MARISSA MAYER, CHIEF EXECUTIVE OFFICER OF YAHOO!” We have no interest in getting involved with Yahoo’s equity.