Verizon Will Spin Shareholder Gold from Yahoo's Ashes

Wall Street finally catches up to what we've said for three years now...

I've been "hooked" on the long, tumultuous "up 'n down" saga of Marissa Mayer and Yahoo! Inc. (Nasdaq: YHOO) because it reminds me so much of one of the biggest stories I covered early on in my career - Kodak.

You see, I was there to watch that company essentially write its own obituary as a Fortune 500 company, just like Yahoo did.

Since 2014, I've made the case that Marissa Mayer, bolstered with a $40 billion pre-IPO stake in Alibaba, could avoid a "Kodak moment" of sorts by using a time-tested strategy to make sure shareholders got the better, more profitable end of Yahoo's demise.

I have to say, watching Team Mayer fumble that easy play was profoundly disappointing, knowing how much better it could have been for folks who owned a piece of the company.

But, after all the drama, the slow death march for what was once Silicon Valley's brightest star is finally over.

And I'm pleased to tell you I couldn't be more excited for what's coming next - and not just because it looked like we'd never get here...

It Looked Like This Deal Might Not Happen - Several Times

On June 8, Yahoo's shareholders officially approved the company's sale to Verizon Communication Inc. (NYSE: VZ) for $4.5 billion.

YahooLike I said, since 2014, we've been calling for Yahoo CEO Marissa Mayer to ditch her "resuscitation plan" - and to instead employ the "Harvest Strategy" and just liquidate the company.

Now, this strategy was famously advocated by Prudential sell-side "axe" B. Alex Henderson. In the '90s, Henderson maintained Kodak should ditch the digital strategy it was developing as a "lifeline" and just manage the company for cash flow purposes.

A company using the "Harvest Strategy" uses cash flow for buybacks and serial dividend increases. It can take a long time, but the company eventually shrinks away into nothingness, while shareholders reap the steady benefit. When the "time comes," leadership turns out the lights, locks the doors, and dumps a big pile of cash into shareholder accounts.

I reiterated that "Harvest Strategy" call several times - including when activist investor Starboard Value Fund LP made the same case we did.

As we saw last week, I was right.

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Mayer originally approved the sale of Yahoo's web assets and patents (and some real estate) to Verizon for a $4.83 billion deal last year.

But that deal was rife with problems from the beginning.

The most notable being when Verizon slashed Yahoo's purchase price by $350 million in the wake of the revelation that Yahoo passwords and personal information had been compromised in a massive hacking attack. In September, Yahoo disclosed a 2014 breach that affected at least 500 million customer accounts. Then the company said in December that hackers in 2013 siphoned information including users' email addresses, scrambled account passwords, and dates of birth.

Now, following the deal's close on June 13, Yahoo and AOL Inc. - another faded Internet pioneer that Verizon acquired for $4.4 billion in 2015 - will merge into a combined entity called Oath.

"Oath is a brand that will start out as a values-based brand, about connecting our values," said AOL CEO Tim Armstrong, who will head up Oath. "Over time, if there's brands we can create around Oath, we would think about that. But the most important brands we have are things like Yahoo Finance, Yahoo Sports, Tumblr, Huffington Post."

I love this savvy move.

Merging Yahoo and AOL makes perfect sense from a business standpoint.

Their combined traffic will make Oath the largest digital media company in the United States, even ahead of Google from Alphabet Inc. (Nasdaq: GOOGL). That scale alone gives Verizon a chance to establish itself as a viable rival to Google - and Facebook Inc. (Nasdaq: FB) - at least when it comes to advertising revenue.

Rivalries on that scale are almost always a good thing for shareholders.

The bottom line is when you combine Verizon's tracking abilities with Yahoo and AOL's audience and ad technology, you have the makings of a digital media powerhouse - a very profitable one at that.

Now, this deal does come with some casualties. According to Verizon, it plans on cutting as many as 2,100 employees from the combined venture.

Note: Every day, Bill publishes our Editors' best investment recommendations as well as his own high-profit research. Bill's going to keep his Private Briefing readers updated on the latest developments at Verizon and its new Oath venture, and all the opportunities that are likely to come from these moves. Click here to learn how to get Private Briefing yourself - plus one of his favorite stocks.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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