What kind of due diligence is this?
Thinking of how much scrutiny and effort goes into conducting pre-acquisition due diligence on medium-size deals, it is quite staggering that the hacking of some 500 million Yahoo accounts could have remained a tightly kept secret for two years and be purposefully concealed until the ink had almost dried on Verizon’s USD 4.8 billion acquisition offer.
When something of that magnitude is kept locked away in a big cupboard, one can only wonder what other skeletons of dinosaurian proportions might be tucked away elsewhere. One at least has already begun to show its ugly face : the fact that Yahoo secretly scanned user emails on behalf of U.S. Intelligence agencies.
What could possibly be going through Marissa Mayer mind when possible suitors began making offers? Could she possibly believe that the enormity of the secrets she had held for two years would never be disclosed? Was Verizon so firmly set on acquiring Yahoo that they might have fast-tracked some of the investigations which other suitors such as TPG or AT&T would have looked into with greater scrutiny?
It could have been perfect !
Verizon’s plan to acquire Yahoo, in a bid to build a huge media company and join the top league of digital advertising dominated by Facebook and Google, appeared to make perfect sense, with the company’s CEO envisaging the day when Verizon will “go from being in the millions of audience to the billions”. Combining a platform and content has always been a media dream, even if previous attempts have at times gone seriously wrong; the memory of AOL-Time-Warner is still with all of us …
However, it was never going to be easy to reverse the downward dynamics that have plagued Yahoo ever since the burst of the dot-com bubble. Few companies in recent history have experienced a cataclysmic fall in their value as Yahoo did : from a valuation exceeding the USD 100 billion threshold at the beginning of the millennium, a fast and stead decline ensued, perceived by Yahoo’s management as a temporary phenomenon, giving them the confidence to reject at USD 44.6 billion take-over offer from Microsoft in 2008. Today, 90% of that value has evaporated, forcing Yahoo to accept Verizon’s USD 4.83 billion.
Massive cut-backs in staff levels and other cost reduction measures did not suffice to stop the decline of the company. It may also well be that the USD 2.1 million invested by Marissa Mayer in acquiring over fifty start-ups since she took the helm of Yahoo in 2012 only added a layer of complexity which usually prevents management from focusing on the root-causes of decline and reversing the negative trends.
Will the net value now drop even further?
Now that the cat is out of the bag (a big fat horrible cat indeed), everyone will have eyes on Verizon to see how they will try to make sense of this sour deal. So far, the first reaction has been to request a USD 1 billion discount on the deal. One billion sounds like a nice round figure, but does this mean that in the worst case Yahoo’s gross dishonesty only warrants a 20% discount on the purchase price? Some media and investigators are predicting that the number of victims from the 500 million hacked accounts may in fact be far more numerous than 500 million individuals – where does this stop? How much legal exposure does Yahoo have regarding the secret scanning of emails which intensified since Edward Snowden’s leaks?
So things have the potential to become nastier still. According to plan, Yahoo was supposed to be managed independently until 2017, and then be integrated into Verizon together with AOL. And during that time, Marissa Mayer’s intention was to remain at the helm of Yahoo, declaring in a message to her employees : “For me personally, I’m planning to stay; I love Yahoo, and I believe in all of you. It’s important to me to see Yahoo into its next chapter.” Did she expect Verizon to collude with Yahoo in maintaining the secret about the massive hacking attack, for the sake of not admitting to having acquired a rotten apple?
We are certainly heading for interesting times, during which the personal responsibility of Marissa Mayer and other senior figures from Yahoo will be under review, with potentially devastating consequences.
The magnitude of this issue may trigger changes in the legislation regarding withheld information in M&A deals. So let us keep an eye on how this develops.