Verizon Puts Yahoo on Notice After Data Breach -- WSJ
14 October 2016 - 6:02PM
Dow Jones News
By Thomas Gryta and Deepa Seetharaman
Verizon Communications Inc. signaled it may demand to
renegotiate its $4.8 billion deal for Yahoo Inc. following the
internet company's recent disclosure of a data breach that affected
more than 500 million accounts.
At a meeting in Verizon's Washington offices on Thursday,
General Counsel Craig Silliman said it was "reasonable" to believe
that the breach represented a material event that could allow it to
change the terms of the takeover. He said it was up to Yahoo to
prove the full impact of the data leak and prove it wasn't
material.
"If they believe that it's not, then they'll need to show us
that," said Mr. Silliman, who has been leading Verizon's review of
the situation.
The breach occurred two years ago but was discovered after the
merger deal was signed in July.
After a prolonged auction, Verizon outbid other suitors by
agreeing to buy Yahoo's core internet business with plans to close
the deal by the end of March. Shares of Yahoo fell 1.7% to $41.62
Thursday, though much of the company's market value reflects its
investments in Alibaba Group Holding Ltd. and Yahoo Japan Corp.
"We are confident in Yahoo's value and we continue to work
towards integration with Verizon," a Yahoo spokeswoman said in
response to Mr. Silliman's comments.
Yahoo disclosed the massive breach last month, one of the
largest thefts of personal user data. Yahoo said "state sponsored"
hackers stole names, email addresses, dates of birth, telephone
numbers and encrypted passwords. Yahoo said it discovered the
breach in July. It didn't notify Verizon until September.
Earlier this week, Verizon Chief Executive Lowell McAdam said
the carrier didn't plan to walk away from the acquisition but
didn't rule out seeking changes to the terms. At a technology
conference in Menlo Park, Calif., on Monday, Mr. McAdam said he
considered Yahoo as "a real value asset," but added: "In fairness
we are still understanding what was going on and defining whether
it was a material impact on the business or not."
Many merger agreements contain provisions allowing buyers to
withdraw from deals if the value of a transaction has been hurt by
a significant development.
Legal experts said the contract language gives Verizon leverage
to renegotiate or even walk away because of the security breach,
but enforcing material adverse change clauses is difficult and
courts have resisted their use.
In 2007 a Delaware court blocked Hexion Specialty Chemicals'
attempt to walk away from a deal to buy Huntsman Corp. after its
rival's earnings fell. But in 2011, private-equity firm Cerberus
walked away from a deal to buy hotel company Innkeepers citing
turmoil in financial markets, and later struck a new deal that was
$100 million lower.
Looking to renegotiate the deal could bring risks for Verizon as
well. Several suitors, including private-equity firms and a group
led by Quicken Loans founder Dan Gilbert, have closely studied
Yahoo's business and made bids to acquire the business. If the
Verizon-Yahoo deal gets terminated, Yahoo may be required to pay
Verizon relatively small termination fee of $145 million in certain
circumstances.
In the days after disclosing the breach, Yahoo's investor
relations team called analysts and major investors. In those calls,
Yahoo officials said they couldn't comment on whether the breach
was a material adverse change that would upend the deal -- but then
laid out an argument for why it probably wouldn't fall into this
category, a person familiar with the matter said.
Yahoo's team argued that if the user experience changed due to
the breach, the "consequences" were already baked into the
company's results, the person said. Yahoo officials also said they
considered the hack to be low risk because all stolen user
passwords were encrypted.
Yahoo also told investors there was no financial fraud because
the breach came from a state-sponsored actor, who the company
didn't believe would be interested in using financial data, the
person said.
Yahoo declined to comment on its outreach to investors.
"One of their crown jewel assets is the audience," said Larry
Ponemon, chairman of Ponemon Institute, a data-security research
firm. "What this does is it basically puts the value of that asset
as a lot less."
Verizon is waiting for the results of Yahoo's investigation into
the breach before deciding how to proceed, said another person
familiar with the matter.
Officials from both companies have continued integration
planning, the two persons familiar with the matter said.
The carrier plans to combine Yahoo with AOL, which it acquired
in 2015, to expand its push into online advertising.
Robert McMillan contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com and Deepa
Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
October 14, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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