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Yahoo and Verizon: Once more unto the breach

Yahoo! Inc.'s future once again seems to be on shaky ground.

The Internet company recently said a new investigation had found an unauthorized party stole data associated with more than 1 billion user accounts in August 2013. Yahoo believes this incident is separate from a previously disclosed 2014 hack, where data linked with at least 500 million user accounts was stolen.

The news sent Yahoo's shares spiraling on Dec. 15 and resurrected fears that the company's pending $4.83 billion deal with Verizon Communications Inc. could unravel. Verizon, which agreed to purchase Yahoo's operating business in July, warned in October after the 2014 hack was disclosed that the company might reconsider the terms of the deal. Reports indicated Verizon was seeking a $1 billion discount on the purchase, though Verizon CEO Lowell McAdam later called those reports "total speculation."

In the wake of the latest bombshell, Verizon spokesperson Bob Varettoni said in an emailed statement, "As we've said all along, we will evaluate the situation as Yahoo continues its investigation. We will review the impact of this new development before reaching any final conclusions."

Given that this is the second breach disclosed in as many months, John Colley, a professor of practice at Warwick Business School in the U.K., believes Verizon will face greater pressure to negotiate a lower price for Yahoo.

"Verizon will have to demonstrate to shareholders that major concessions have been achieved as Yahoo! is clearly worth less now than when the $4.8 [billion] deal was struck," Colley said in emailed remarks, adding, "Aborting the deal may be the best option for Verizon."

In a research note cited by Barron's, Wells Fargo analysts said there are several reasons why the 2013 breach is worse than the one from 2014. First, the 2013 hack involves more than 1 billion users, twice the number affected by the 2014 attack. Second, the data accessed was more vulnerable as it was protected by a significantly weaker encryption algorithm.

While the Wells Fargo analysts expect Verizon's planned acquisition of Yahoo's core assets to proceed, the latest disclosures "cast additional uncertainty over the timing of deal close and potential renegotiation of the purchase price," the analysts said.

However, SNL Kagan analyst Seth Shafer said it may be difficult for Verizon to prove a direct financial impact from the data breaches, given that the bulk of Yahoo's revenue comes from advertising unrelated to its email services and user accounts.

"These hacking things don't really have a material impact on revenue directly," Shafer said in an interview. "But does this drive away users from Yahoo because they don't feel like their accounts are safe? And long term, could that affect audience going forward, months or year from now? Potentially."

Moreover, Shafer noted that long before the attacks were reported, Yahoo's ad business was already in decline, which will make it hard for Verizon to prove any causal relationship between future revenue losses and the hacks.

"If you look at their core ad business, which generates the bulk of their revenue, it has been declining pretty significantly in 2016 whereas the digital advertising market as a whole has been going gangbusters," Shafer said.

Essentially, while the hacks have not been good news for Yahoo, Shafer said the internet company was already widely seen as "a fixer upper," and had been priced accordingly.

Along those same lines, branding expert Rob Frankel said it would be hard to say these data breaches have had a negative impact on Yahoo's brand -- but only because he believes Yahoo has not had a solid brand for many years.

"There is no such thing as the Yahoo brand. There is an identity. We know the name of the company. But there has never been a brand strategy associated with Yahoo, so nobody ever knows what to think of Yahoo," Frankel said in an interview.

This lack of brand, Frankel believes, will make it much harder for Yahoo to recover from these hacking scandals.

With a well-defined and understood brand, when something goes wrong, the company can say, "That should never have happened," and rely on the trust its brand engenders, he explained.

"And the public goes, 'You're right. You do have a track record of stating who and what you are, and you've always delivered. So we can see this is an anomaly,'" Frankel said.

By contrast, Yahoo has come to be defined in the eye of the public only by its latest scandal or gaffe, Frankel said. "They are just constantly the market's punching bag," he added.

In part, this is why Colley believes it is so important for Yahoo to successfully close its deal with Verizon, even if it means accepting a lower price.

"If this deal fails, then they are 'damaged goods' and others may no longer be queuing up to buy," Colley said.

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