Jittery Analysts Weigh in on Delayed Yahoo! Inc. (YHOO) / Verizon Communications (VZ) Deal

Verizon Communications’ (NYSE:VZ) much-anticipated $4.83B acquisition of Yahoo! Inc. (NASDAQ:YHOO) has been pushed back from the first quarter of 2017 to the second, Yahoo announced in its Q4 earnings release on Jan 23.

In December 2016 Yahoo announced that back in 2013 there had been a vast security breach compromising data from over a billion user accounts. Yahoo had already come clean about a similar security breach in 2014. An investigation is currently underway by the SEC over why Yahoo took such a long time to report the two attacks, a Wall Street Journal report says.

The cancellation of the traditional post-earnings conference call means the precise reason for the delay is unknown but it is believed that Verizon is extending its due diligence process while Yahoo grapples with its security processes. Yahoo CEO Marissa Mayer says the company’s commitment to user security is “unwavering”.

Verizon deal delay

While the announcement that the sale is still on came as a relief, analysts are nervous that the delay is a sign that the companies will now try to renegotiate deal terms. Needham’s Laura Martin commented: “News of data breaches… has raised speculation that Verizon may seek a discount to the announced purchase price, further giving risk that Verizon could walk away from this deal.”

Martin, who TipRanks shows has a 75% success rate on the stock, warns that a failed sale could be very harmful to Yahoo as it will result “in an accelerated loss of talent, time lost while satisfying Verizon’s due diligence process, and distraction which could hurt near term fundamentals.”

However, Mizuho Securities’ analyst Neil Doshi believes that the deal delay is simply due to additional due diligence required in light of the security breaches. Doshi says that Verizon will simply up the cash requirement from Yahoo to cover any potential liabilities that occur following the acquisition completion. An adjustment of the potential liabilities reduces the risk that the deal will not complete in comparison to the mammoth task of renegotiating the sales price.

The announcement did not include any further information on the details of the sale including how the cash will be returned to shareholders once the sale has completed.

Yahoo beats expectations

The Verizon news somewhat overshadowed Yahoo’s positive financial results announcement.

Yahoo reported adjusted Q4 EPS of 25 cents, excluding items, on $960.1 billion revenue- beating consensus estimates of adjusted EPS of 21 cents on $908 billion revenue. Display revenue ($573 million) and search revenue ($767 million) also beat estimates, although display ad prices dropped 10% year-on-year. Analysts also pointed out that traffic had returned to relatively typical levels following the latest security announcement in December.

“The background music sounds much better” commented RBC Capital’s five-star analyst Mark Mahaney. Despite this, Mahaney reiterated his YHOO hold rating while lowering his price target to $43 from $45. His last buy rating for Yahoo was all the way back in April 2014.

Market consensus

TipRanks’ clear analyst consensus on Yahoo is Buy. Out of 13 analysts that have published recommendations on the stock in the last 3 months, 4 rate YHOO a buy, while 9 rate the stock a Hold. The average analyst price target on TipRanks of $46.90 paints a better picture with a potential upside of close to 7% from the current share price of $42.40.

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