AN ANALYTICAL STUDY ON VARIOUS ACQUISITIONS BY

VERIZON COMMUNICATIONS, Inc. from 2010-2018

Group Member Roll Number

Mahek Mansukhani 3113

Mukta Dhopeshwarkar 3201

Simran Khanna 3234

Aparajitha Srinivasan 3252

Shraddha Mahapatra 3300

Kashvi Pathak 3350

Submitted For :​ Mergers and Acquisitions (Group B)

Submitted To :​ Prof. Arpita Gurbaxani

Executive Summary

The following project is prepared for the course of ‘Mergers and Acquisitions’ in the
Accounting & Finance Specialization. The report aims to analyse 4 strategic
acquisitions made by Verizon Communications, Inc. between 2015 to 2020 in
different areas. Verizon is one of the largest communication technology companies
in the world. ​Founded in 2000, the company operates America’s most reliable
wireless network and the nation’s premier all-fiber network, and delivers
integrated solutions to businesses worldwide.In 2019, it generated a revenue of
$131.9 billion. In total, Verizon has made 22 acquisitions since its inception. ​The
acquisitions are categorised into 4 types of integrations - Horizontal Integration,
Vertical Integration, Conglomerate Acquisition and Concentric Acquisition. A brief
introduction to the company, details of the acquisition along with extracts of legal
contracts detailing the same are included. The acquisitions are analysed on the
basis of SWOT, pre-transaction and post-transaction performance and key changes
based on financial statements, with suitable graphs and tables. Each category is
concluded with the actions taken by Verizon with the companies acquired. Finally,
the report concludes with some of the main learnings gained while doing the
project along with the sources of information and bibliography.

2
 Table of Contents

S. No Particulars Page No.

Overview: Verizon Communications Inc 4

Chapter 1 - Horizontal Integration : Verizon Wireless 5-16

Details of the Acquisition 5

SWOT Analysis 8

Consolidated Financials & Analysis 9

Chapter 2 - Vertical Integration : Terremark Inc. 17-29

Details of the Acquisition 17

SWOT Analysis 20

Consolidated Financials & Analysis 21

Fate of the Acquisition 29

Chapter 3 - Subsidiary Merger : AOL Inc. 30-38

Details of the Acquisition 30

SWOT Analysis 32

Consolidated Financials & Analysis 33

Chapter 4 - Concentric Acquisition : Yahoo! Inc. 39- 49

Details of the Acquisition 39

SWOT Analysis 42

Consolidated Financials & Analysis 43

Fate of the Aol and Yahoo Acquisition 49

Conclusion 50

Bibliography 51

3
Verizon Communications, Inc.

Verizon Communications Inc., or Verizon, is a

multinational, conglomerate
telecommunications company that provides
wireline voice and data services, wireless
services, Internet services, and published
directory information. The Company also
provides network services for the federal
government including business phone lines,
data services, telecommunications equipment,
and payphones. It is a ​Fortune 500 company
that is headquartered in ​New York​. Verizon
was the first company in the world to launch a
commercial 5G mobile network with a
commercially-available 5G-enabled
smartphone. The company's operating
structure focuses on three customer-facing
areas: Consumer, Business and Media. Verizon
is transforming how people, businesses and
technologies interact, setting the stage for the
next Industrial Revolution by connecting
people and things through 5G networks, 4G
LTE platforms, Broadband fibers and Multi
Access Edge Computing (MEC), etc.

K
​ ey Financials (2019)

4
 Chapter 1 : Horizontal Integration
T
​ he Acquisition of Verizon Wireless from Vodafone Plc

Verizon Wireless (Merger Wave : VII)

In April 2000, the

wireless operations in
the U.S. of Verizon
Communications and
Vodafone Plc were
combined into a joint
venture agreement
called the Cellco
Partnership, doing
business as (d/b/a) Verizon Wireless. Prior to the completion of the Wireless
Transaction in which Verizon bought out Vodafone’s interest in the venture,
Verizon owned a controlling 55% interest in Verizon Wireless and Vodafone owned
the remaining 45%. On February 21, 2014, the Wireless Transaction was
completed and Verizon acquired 100% ownership of Verizon Wireless. Verizon
Wireless provides wireless communications services across one of the most
extensive wireless networks in the United States. These services and equipment
sales are provided to consumer, business and government customers in the United
States on a postpaid and prepaid basis.

Details of the Buy-out

Transaction Completion Date :​ ​February 21, 2014

Transaction Value :​ ​$130 billion

Type of Acquisition : ​Stock Purchase

5
 Execution of the Buy-out

On September 2, 2013, Verizon entered into a stock purchase agreement with

Vodafone and Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to
acquire Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon
Wireless for an aggregate consideration of approximately $130 billion. On
February 21, 2014, pursuant to the terms and subject to the conditions set forth in
the Stock Purchase Agreement, Verizon acquired from Seller all of the issued and
outstanding capital stock (theTransferred Shares) of Vodafone Americas Finance 1
Inc., a subsidiary of Seller, which indirectly through certain subsidiaries owned the
Vodafone Interest.

In consideration for the Transferred Shares, upon completion of the Wireless

Transaction, Verizon :

(i) paid approximately $58.89 billion in cash,

(ii) issued approximately $60.15 billion of Verizon’s common stock, par value
$0.10 per share (the Stock Consideration),
(iii) issued senior unsecured Verizon notes in an aggregate principal amount of
$5.0 billion ,
(iv) sold Verizon’s indirectly owned 23.1% interest in Vodafone Omnitel N.V.
valued at $3.5 billion, and
(v) provided other consideration of approximately $2.5 billion

6
 Reasons for the Buy-out

Extract of the Stock Purchase Agreement

(Source : ​https://www.lawinsider.com/contracts/7T4mOxcQ8WZ​)

7
 SWOT Analysis of Verizon-Verizon Wireless Buy-out
Strengths
1. Profitable avenue for Verizon as the
resources and performances of the
company gets increased
2. Increase in profitability of both the
companies with existing resources
3. Collaboration with a top brand such
as Vodafone, which leads to
sustainability on the part of Verizon
4. Meeting evolving customer demands
effectively
5. Verizon gets access to the most
advanced fiber-optic network of
Wireless
6. Both firms can jointly beat
competition
7. Easier to offer combined wireless and
wireline services
8. Simplifies the management of Verizon
Opportunities
1. Opportunities for greater financial
flexibility and innovations
2. Tapping into international markets
3. Verizon gets full ownership of the
U.S. wireless industry leader in
network performance, profitability
and cash flow
4. Converged communications,
information and entertainment
services
5. More firepower for making
investments
6. Expansion of customer base through
new sales opportunities
7. Evolution of the firms’ business
models
8. Opens new fields of doing business
9. Increased customer reach
Weaknesses
1. Diseconomies of scale if business
becomes too large, leading to
higher unit costs
2. Increased debt of Verizon due to
taking over Wireless’s debt
3. Potential of an internal fallout
4. Confusion in the marketplace can
hamper the strength of the Verizon
brand
5. Potential of inefficient
communication and lack of
transparency
6. Increase in debt, from raising part
of transaction value through
corporate bonds.
Threats
1. Saturation in the wireless market
2. Regulations of merger control by
the SEC
3. May create confusion in the
marketplace
4. May not be able to tackle
competition
5. Lack of innovation in products can
shift the market’s attitude towards
Verizon
8
 Pre-Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2013)

Post - Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Reports 2014)

9
A. General Analysis

Motive behind the Acquisition:​ ​Since Wireless was held as a Joint Venture
between Vodafone and Verizon, the full buy-out of Verizon Wireless from Vodafone
by Verizon, was in part to help Vodafone ​avoid a massive capital gains tax bill​.
The possibility of a huge tax bill is regarded by analysts as a big hurdle to any
such deal. Verizon had hoped prior to making the deal that easing most of the tax
bill for Vodafone, so that it can buy the indirect 45% stake of the British company.
The deal was structured in two parts to avoid any tax hit -- firstly, Verizon
Communications bought the Delaware-based Vodafone Americas, which is the U.S.
based holding company of Vodafone that owns the interest in Verizon Wireless.The
second part of the transaction, however, attracted capital gains tax, because of
the sale of assets by Verizon, which is a U.S. based entity.

B. Comparative Analysis:

2013 vs 2012 : Pre-Buy-out Performance

(i)Revenue​: The increase in

consolidated revenues during
2013 compared to 2012 was
primarily due to higher revenues
at Wireless.
Wireless’ revenues increased
$5.2 billion, or 6.8%, during
2013 compared to 2012 due to
growth in service revenue​.
Service revenue increased during
2013 compared to 2012 primarily
driven by higher retail postpaid
service revenue, which increased
largely as a result of an increase
in retail postpaid connections as
well as the continued increase in
penetration of smartphones, tablets and other Internet devices.

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(ii) Cost of services and sales​:
Cost of services and sales decreased
during 2013 compared to 2012
primarily due to a decrease in cost of
equipment sales, decreased data
roaming, a decline in cost of data
services and a decrease in network
connection costs, as well as a
decrease in costs related to customer
premise equipment, a decline in
access costs and the net effect of
storm-related insurance recoveries at the Wireline segment.

(v)Dividend payout​: During the third quarter of 2013, the Board increased the
quarterly dividend payment 2.9% to $.53 per share from $.515 per share in the
same period of 2012. The cash flows were used to maintain and grow the dividend
payout to shareowners. Verizon’s Board of Directors increased the Company’s
quarterly dividend by 2.9% during 2013.

Date Open High Low Close Adj. close Volume

01-Dec-2013 49.66 49.79 47.45 49.14 36.7 23,66,01,200

01-Nov-2013 50.79 51.46 49.36 49.62 37.06 18,27,88,700
08-Oct-2013 0.53 Dividend
01-Oct-2013 46.62 51.49 46.03 50.51 37.31 38,61,39,000
08-Jul-2013 0.515 Dividend
01-Jul-2013 50.29 51.94 49.19 49.48 36.18 20,39,77,200
08-Apr-2013 0.515 Dividend
(Source : Yahoo Finance - Verizon
Communications Historical Stock Prices)

(viii) Earnings per share: ​Earnings

per share were $2.84, up 26.8 percent
from 2012. Reported earnings per share
were $4.00 for 2013, compared with 31
cents per share in 2012. For
shareowners, this translated to a total
annual return of 18.6 percent. The

11
significant increase in the eps might be due to the future acquisition which was
clearly an accretive acquisition for Verizon.

(ix) Stock performance

pre-acquisition: ​The stock price of the
company has traditionally been near
the $50 mark with occasional highs and
lows. The company has done very well
to be able to maintain that. A constant
dividend of $0.53 has also been
successfully maintained over the years
by Verizon. Before the acquisition, the
number of stocks in the company have
been below 400 million on average. It
can be inferred from the following
information that Verizon has been seeing a constant growth in its stock
performance.
(Note : In the graph, daily recorded closing prices are taken from August 1, 2013
to February 28, 2014. The source of information is Yahoo Finance)

2014 vs 2013 : Post - Buy-out performance

(i) Revenue : ​Demand for Verizon’s

fourth generation (4G) Long Term
Evolution (LTE) smartphones and
tablets continues to drive growth in
the Wireless business. During 2014,
Wireless revenue increased $6.6
billion, or 8.2%, compared to 2013
driven by ​service revenue growth of
$3.6 billion, or 5.2%. Also
contributing to the increase in
Wireless revenue was ​equipment
revenue growth of $2.8 billion, or
35.1%.

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 (ii) Retail Postpaid Connections :
During 2014, ​retail postpaid
connections increased 5.5%
compared to 2013, with smartphones
representing 79% of retail postpaid
phone base in 2014 compared to 70%
in 2013. Retail postpaid connections
per account, which is calculated by
dividing the total number of retail
postpaid connections by the number of
retail postpaid accounts as of the end of
the period, increased 4.0% as of December 31, 2014 compared to 2013 primarily
due to the increased penetration of tablets.

(iii) Cost of services and sales : ​The

cost of services and sales increased
during 2014 compared to 2013, primarily
due to an increase in cost of equipment
sales of $5.3 billion in the Wireless
segment as a result of an increase in the
number of devices sold as well as an
increase in the cost per unit.

(vi) Dividend Payout : During the third quarter of 2014, the Board increased
quarterly dividend payment ​3.8% to $.55 per share from $.53 per share in the
same period of 2013. During 2014, $7.8 billion in dividends were paid, compared
to $5.9 billion in 2013. The increase is primarily due to the issuance of
approximately 1.27 billion additional shares of common stock as a result of the
Wireless Transaction. There were no repurchases of common stock in 2014.
Date Open High Low Close Adj Close Volume
Dec 01, 2014 50.68 50.84 45.09 46.78 36.5 419,728,200
Oct 08, 2014 0.55 Dividend
Oct 01, 2014 49.73 50.5 46.89 50.25 38.78 369,933,200
Jul 08, 2014 0.53 Dividend
Jul 01, 2014 48.88 53.66 48.54 50.42 38.49 316,714,100
Apr 08, 2014 0.53 Dividend
(Source : Yahoo Finance - Verizon Communications Historical Stock Prices)

13
(ix) Earnings per Share (EPS): This
acquisition was clearly an accretive
acquisition also for Verizon because it
increased the EPS significantly from $0.31
to $4.01 in 2013 after the transaction. In
2014, it decreased to $2.42, due to the
introduction of 1.27 billion additional
shares of common stock as a result of the
Wireless Transaction.

(x) Stock performance post acquisition : ​Verizon’s stock price increased to

$50 around the dates when the higher
dividend of $0.55/share was declared
by the Board of Directors. Shareholders
were excited about the transaction and
higher dividends along with the
introduction of 1.27 billion additional
common stock, brought more
shareholders to buy the Verizon stock.
The acquisition was anticipated to be
successful by investors as is evident by
the higher volume of trades just days before completion of the transaction. The
stock price reduced slightly after the acquisition in the month of April as the
buy-out was stabilized and synergized within the conglomerate, after it steadily
grew throughout the year.
(​Note :​ In the graph, daily recorded closing prices are taken from January 1, 2014
to November 30, 2014 using information from Yahoo Finance)

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Changes in the Company Pre and Post-Acquisition

Pre-Buyout Post-Buyout

Product Line

Geographical
presence

Management

15
 Financial Ratios

Parameter Pre-Transaction Transaction Post-Transacti Net Change

(2013) period (2014) on (2015)

Net Profit $9.53 $7.57 $13.58 42.5%

Margin

Basic EPS 4.01 2.42 3.22 -19.7%

RoCE 0.82 1.59 2.01 59.2%

ROE 0.30 0.78 1.09 263%

Dividend/share 2.090 2.160 2.230 6.7%

Conclusion

Moody’s Investors Services downgraded its rating on Verizon after the news of the
acquisition, to reflect an increase in debt leverage from the addition of about $67
billion of new debt which the credit ratings agency said will more than double
Verizon’s debt load to $116 billion.An article in ​The New York Times estimated
Verizon Wireless' valuation at about $290 billion. In 2019, Verizon Wireless
services were split between two new divisions: Verizon Consumer and ​Verizon
Business​.

16
 Chapter 2 : Vertical Integration - Market Expansion
The Acquisition of Terremark Worldwide Inc.

Terremark Worldwide Inc. (Merger Wave : VII)

Terremark Worldwide, Inc., is a provider of

information technology services.
Headquartered in ​Miami, Florida​, the
company has ​data centers in the United
States, Europe and Latin America. It was
initially incorporated as a real estate
company, constructing office buildings.
During the ​dot-com era​, an increasing
number of buildings were leased to
computer data centers. Over the years the
company morphed into an information
technology services company itself starting with the Network Access Point (​NAP)
of the Americas​, a large ​data center and ​Internet exchange point that hosts one of
the instances of the ​K-root​ of the ​Domain Name System​.
On January 27, 2011, ​Verizon Communications announced it would buy Terremark
Worldwide for $19 a share, in a deal valued at $1.4 billion. Manny Medina, the
CEO and founder of Terremark received about $83 million from the Verizon
acquisition. Verizon completed its acquisition of Terremark on April 12, 2011.

Details of the Acquisition

Transaction Completion Date :​ ​April 11, 2011

Transaction Value : ​$1.4 billion​. ​Closing and other direct acquisition-related costs
totaled approximately $13 million after-tax.

Type of Acquisition : S
​ tock Purchase

17
Execution of the Acquisition

Reasons for the Acquisition

18
 Extract of the Acquisition Agreement

Exhibit 2.1

EXECUTION COPY

AMENDMENT NO. 1 TO ​AGREEMENT AND PLAN OF MERGER

This AMENDMENT NO. 1 TO ​AGREEMENT AND PLAN OF MERGER​ (this “​Amendment​”) dated as of February
28, 2011, is by and among​ Verizon Communications Inc.​, a ​Delaware​ corporation (“​Parent​”), Verizon Holdings Inc., a
Delaware​ corporation and wholly owned Subsidiary of Parent (“​Purchaser​”), and ​Terremark Worldwide, Inc.,​ a ​Delaware
corporation (the “​Company​”).
​WHEREAS, Parent, Purchaser and the Company entered into that certain ​Agreement and Plan of Merger
dated as of January 27, 2011 (the “​Merger Agreement​”);
​WHEREAS, Purchaser commenced the Offer on February 10, 2011;
WHEREAS, Parent, Purchaser and the Company now intend to amend certain provisions of the Merger Agreement as
set forth herein; and
WHEREAS, the Board of Directors of the Company has approved the execution and delivery of this Amendment on
behalf of the Company and recommends the Transactions as amended hereby.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Parent, Purchaser, and the Company agree as follows:
SECTION 1. ​Defined Terms​. Capitalized terms used herein that are not otherwise defined have the meanings set forth in
the Merger Agreement.
SECTION 2. ​Amendments to Merger Agreement​. The Merger Agreement is hereby amended as follows:
2.1 The first sentence of Section 1.1(c) of the Merger Agreement shall be amended in its entirety to read as follows:
(c) ​Expiration and Extensions of the Offer​. The Offer shall initially be scheduled to expire at midnight, New York
City time, on March 21, 2011 (the “​Initial Offer Expiration Date​”); ​provided t​ hat, if at any scheduled expiration of the
Offer, any Offer Condition is not then satisfied or, to the extent permitted by this Agreement and applicable Law, waived,
then Purchaser shall extend the Offer on one or more occasions for consecutive periods of at least five (5) Business Days
but no more than ten (10) Business Days, each as determined by Parent, or for such longer period(s) as Parent and the
Company may otherwise

(Source : ​https://www.lawinsider.com/contracts/7T4mOxcQ8WZ​)

19
 SWOT Analysis of Verizon-Terremark Acquisition

Strengths Weaknesses

1. Effectively strengthens Verizon's 1. Corporate culture clashes may lead

presence in the wireless market to potential write-down of the deal by
2. Boosts its ability to offer services in Verizon
the cloud, and to support providers of 2. Demotivation of employees due to
cloud services culture clash
3. Further strengthening of Verizon’s 3. May result in temporary suspension
managed services offering of Verizon’s R&D expenditure
4. Strong branding of both companies
5. Verizon plans to maintain the
management of Terremark
6. Utilization of joint financial strength to
support each other’s assets and
liabilities

Opportunities Threats

1. Enhances Verizon's global reach due to 1. Intense competition in the

Terremark’s presence in Europe, Asia, telecommunications industry
North America and South America 2. The company may face severe
2. Global presence will deliver added competition due to mergers by AT&T,
scope in both product and reach T-Mobile and Sprint
3. Terremark’s recent build of its NAP 3. Frequent checks by the government
(Network Access Point) of Capitol due to merger control, potential
Region data center facility in monopolies, etc.
Culpepper, Virginia, will deliver added
value to Verizon's strong federal
government business.
4. Terremark customers now have access
to Verizon data centers across North
America, Europe and in the Asia-Pacific
region.
5. Entry into the business intelligence
market with Terremark's excellence in
cloud services

20
 Pre-Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2013)

Post- Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2012)

21
Selected Notes to Accounts (Note no.2 - Acquisitions and Divestitures) :

The consolidated financial statements include the results of Terremark’s operations

from the date the acquisition closed. Had this acquisition been consummated on
January 1, 2011 or 2010, the results of Terremark’s acquired operations would not
have had a significant impact on the consolidated net income attributable to
Verizon. The debt obligations of Terremark that were outstanding at the time of its
acquisition by Verizon were repaid during May 2011.

The acquisition of Terremark was accounted for as a business combination under

the acquisition method.

The following table summarizes the allocation of the acquisition cost to the assets
acquired, including cash acquired of $0.1 billion, and liabilities acquired as of the
acquisition date:

(Source : Verizon Annual Report 2011)

22
Analysis

During the year, 2011, Verizon continued to execute its global cloud strategy,
rolling out an expanded portfolio of secure IT solutions and an operational model
for its Terremark subsidiary. Verizon also continued to deploy integrated IT and
communications solutions for multinational enterprise, medium-sized and
government customers. These solutions included expansion of the company's
managed mobility services for tablets, mobile access to cloud-based SAP
applications and enhanced security management programs for health care
providers.

1.Verizon and Terremark’s stock performance

From the illustrations, it surfaces that

Verizon’s share price hasn’t increased
substantially in the month following the
acquisition. This could be due to the relatively
less contributions of a small company to a
large conglomerate, considering the fact that
Verizon did acquire two more companies
within 2012. This is also in line with the
general rule that the shareholders of the
acquiring firm may experience a temporary
drop in the share price. In contrast, the
shareholders of the target firm, typically
observe a rise in share value during
the period, due to more trading
volume. As seen in Terremark, their
shares were bought at a premium of
35% by Verizon, which led to the
share price increasing to $19.
Verizon’s share price had reduced by
0.6% during the pre market trade of
February. In the table, around the date
of acquisition, the share price of
Verizon fluctuated a lot with a bulk
amount of trades being executed, however, no significant changes in closing price

23
can be recorded. As per the general there is a temporary slump till May 30, 2011,
when the share closed at $36.93.

Verizon Weekly Historical Data (Source : Yahoo Finance)

Date Close Adj Close Volume
May 30, 2011 36.93 24.5 10,904,400
May 23, 2011 36.67 24.33 50,814,900
May 16, 2011 37.15 24.65 53,225,100
May 09, 2011 37.26 24.72 50,889,300
May 02, 2011 37.28 24.74 84,252,500
Apr 25, 2011 37.78 25.07 68,331,500
Apr 18, 2011 36.91 24.49 67,677,000
Apr 11, 2011 37.85 25.11 55,304,600
Apr 04, 2011 37.72 24.71 62,375,300
Mar 28, 2011 38.47 25.2 28,888,400
(Source : Yahoo Finance)

The table also validates the general rule of acquisitions, i.e. the acquiring firm
experiences a slowdown in share price from March 28, 2011 when it was trading at
$38.47, after the acquisition on April 11, 2011 when it was trading at $37.85 and
reduced to $36.91 on April 18, 2011. The slump continued till May 30, 2011.

2. Verizon’s motive behind the Acquisition

As per the view of analysts, Verizon had executed this merger mainly to have
leverage with the federal government since Terremark had several data
centres in the Capitol region of the USA, and to mainly expand into the cloud
business, to compete with Microsoft, Google and Amazon, which were already
pioneering to provide cloud management services.​The federal government, in
2011, had adopted a “cloud-first” policy that makes cloud, or Web-based
computing, the default choice and has required agencies to move at least three
services to the cloud within an 18-month period. The policy announcements have
stoked a growing industry of companies — both those better known for
commercial work and traditional contractors — hoping to play a part in the shifts.
This may have resulted in Verizon seeking out the opportunity to acquire a small,
niche but rapidly growing company, like Terremark, with connections to the

24
federal government and more than 13 data centres all over the USA. This was also
executed to partially throw off one of Verizon’s major rivals, AT&T, which had
already been providing cloud solutions for companies to scale.

3. Financial Performance

(a) Revenue Growth

Post-Transaction (2011-12)
Pre-Transaction
Ratio (2010-11) 2011 2012
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
QoQ
Revenue
Growth 2.25% 2.02% 1.36% 1.87% -0.83% 1.09% 1.60% 3.57%

Comments​ :

Second-quarter 2011 operating revenues

were $10.2 billion, a decline of 0.3
percent compared with second-quarter
2010. This is an improvement from a
decline of 2.2 percent comparing
first-quarter 2011 to first-quarter 2010.
Verizon acquired cloud and managed IT
infrastructure leader Terremark
Worldwide in April, and the inclusion of
Terremark results added $98 million in
revenue, representing 100
basis points of wireline revenue
growth, in second-quarter
2011. Global enterprise
revenues totaled $4.0 billion in
the quarter, up 3.6 percent
compared with second-quarter
2010. Sales of strategic
services - including Terremark
cloud services, security and IT
solutions, and strategic networking - increased 17.8 percent compared with

25
 second-quarter 2010 and now represent approximately 48 percent of global
enterprise revenues.

(Source of Terremark Revenues: Data Centre Knowledge)

(b) Comparative Analysis of Statements​ :

Income Statement Analysis

Ratio Pre-Transactio Transaction Post-Transactio Net Change
n (2010) Period (2011) n (2012)

Revenue 106,565 110,875 115,846 8.01%

Basic EPS 0.90 0.85 0.31 -65.6%

Net Profit 9.58% 9.19% 9.11% 9.3%

Margin

Operating 13.74% 11.61% 11.36% 12.23%

Income Margin

Balance Sheet Analysis

Parameter Pre-Transaction Transaction Post-Transacti Net Change
(2010) period (2011) on (2012)

Total Equity $86,912 $85,908 $85,533 -1.58%

Total Assets $220,005 $230,461 $198,266 -9.88%

Dividend/Share $1.925 $1.975 $2.03 5.4%

ROCE 7.73% 6.44% 6.63% 6.93%

ROA 4.64% 4.42% 4.68% 4.58%

Goodwill $21,988 $23,357 $24,139 8.91%

Total Debt $52,794 $55,152 $51,987 -1.52%

(Long-Term +
Short Term)

ROE 0.117 0.118 0.123 5.12%

26
Comments​ :

(i) Debt and Goodwill : As per its annual reports, Verizon added $2 billion
worth of debt to finance the acquisition of Terremark, which showed the
usage of leverage by the company rather than equity. Verizon also paid off
all outstanding debts of Terremark by May, 2011, which balanced the total
debt in 2011, leading to a net increase of 4.5%. This also could lead to an
increase in confidence for the company and hence an increase in goodwill by
6.2% in 2011.

(ii) Basic EPS : The reason for the downfall in EPS was due to an apparent
increase in the number of stocks due to the acquisition which led the Basic
EPS per Common Share to drop while the company recorded higher
consolidated revenues post-acquisition.

(iii) ​Dividends :

Verizon Monthly Historical Prices (March 1, 2011 - December 1, 2011)

Date Open High Low Close Adj Close Volume
Dec 01, 2011 37.68 40.25 37.49 40.12 27.34 264,643,500
Oct 05, 2011 0.5 Dividend
Oct 01, 2011 36.73 37.84 35.46 36.98 24.86 339,832,100
Jul 06, 2011 0.488 Dividend
Jul 01, 2011 37.06 37.87 34.87 35.29 23.42 298,386,900
(Source : Yahoo Finance )

Dividends paid by Verizon before the acquisition on April 6 and July 6, 2011 were
lower than the standard dividends of $0.5/share. This could be due to funds being
retained to finance the acquisition and paying off debts and other integration costs
after the acquisition. The dividends paid during 2011 were overall higher than
2010, which led to more shares being acquired in 2012.

(iv) ​Equity : Total Equity is a slightly different scenario, because we see a drop in
equity from 2010 to 2011, which was the year of acquisition. Shareholders may
not be too happy with the acquisition because of the weak performance of telecom
firms in cloud services, as compared to bigger giants like Amazon Web Services,
Microsoft, etc.

27
Changes in the Company pre and post acquisition

Pre-Buyout Post-Buyout

Product Line

Geographical presence

Management

28
Fate of the Acquisition :

In May 2016, Reuters published an article saying that Verizon was set to sell its 29
data centre assets to Equinix for $3.6 billion, the world’s biggest provider of data
centres. This piece of news, however, did not include the sale of Terremark. It was
reported that Verizon wanted to focus on its core business and was already in talks
to acquire Yahoo. On May 2, 2017, Verizon entered into an agreement with IBM to
sell its cloud hosting arm, including Terremark. The transaction value was
undisclosed. Verizon had acquired Terremark for $1.4 billion in April, 2011 and in
2012 began aggressively expanding Terremark’s capabilities but shut down the
cloud business in 2016. The company was facing stiff competition from Microsoft
and Google in the cloud business arena and did not manage to achieve the levels
of profitability and scale needed to compete in the cloud market.

29
 Chapter 3 : Subsidiary Merger - Forward Triangular
The Acquisition of AOL Inc.

AOL Inc. (Merger Wave : VII)

Originally known as America Online and
rebranded as Aol., AOL is an American ​web
portal and ​online service provider based in
New York City​. It is a ​brand marketed by
Verizon Media​. ​AOL was one of the early
pioneers of the ​Internet in the mid-1990s,
and the most recognized brand on the web
in the United States. It originally ​provided
a dial-up service to millions of Americans,
as well as providing a ​web portal​, ​e-mail​, ​instant messaging and later a ​web
browser following its purchase of ​Netscape​. In 2001, at the height of its
popularity, it purchased the media conglomerate ​Time Warner in the largest
merger in U.S. history. AOL rapidly declined thereafter, partly due to the decline of
dial-up and rise of ​broadband​.On June 23, 2015, AOL was acquired by ​Verizon
Communications​ for $4.4 billion.

As of 2019, following media brands became subsidiaries of AOL's parent ​Verizon

Media​:
● HuffPost
● Engadget
● Autoblog
● TechCrunch
● Cambio

Details of the Acquisition

Transaction Completion Date :​ ​June 23, 2015

Transaction Value :​ ​$4.4 Billion

Type of Acquisition​ ​:​ ​Stock Purchase

30
Execution of the Acquisition

Reasons for the Acquisition

31
 Extract of the Acquisition Contract

(Source : ​https://www.lawinsider.com/contracts/7T4mOxcQ8WZ​)

SWOT Analysis of Verizon-Aol Acquisition

Strengths Weaknesses

1. The deal allows it to take control of 1. Limited global presence.

a set of online advertising tools. 2. Less emphasis on research and
2. News places to grow and better development.
market reach. 3. Less innovation.
3. Global scale to offer a truly mobile 4. Less number of customer care
video service. centers.
4. Strong reputation of network
coverage.

Opportunities Threats

1. Increase in the usage of wireless 1. Cost pressure from the industries.

services.
2. Increase acquisitions to gain
greater market share.
3. International expansion.
4. Focus on increasing mobile usage
and target mobile user market.
2. Better cloud services available.
3. Fierce competition from Amazon,
AT&T, HP etc.
4. Customer service costs.

32
 Pre-Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2015)

Post-Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2016)

33
Selected Notes to Accounts : Note 2 - Acquisitions and Divestitures

The table summarizes the

consideration to AOL’s shareholders
and the identification of the assets
acquired, including cash acquired of
$0.5 billion, and liabilities assumed
as of the close of the acquisition, as
well as the fair value at the
acquisition date of AOL’s
noncontrolling interests.

(Source : Verizon Annual Report

2016)

Analysis

Taking another significant step in building digital and video platforms to drive
future growth, Verizon Communications Inc., in 2015 had announced the signing
of an agreement to purchase AOL Inc. for $50 per share — an estimated total
value of approximately $4.4 billion.

(i) Comparative Analysis of Statements

Income Statement Analysis

Ratio Pre Transaction Post Percentage/

transaction (2015) Transaction Net change
(2014) (2016)

Revenue (in $127.1 $131.6 $126 -0.87%

billions)

EPS $2.42 $4.37 $3.21 24.61%

Operating cash $30.6 $38.9 $22.7 -34.80%

flows

Dividend/share $2.16 $2.23 $2.28 5.26%

34
 Net Profit 7.57% 13.58% 10.42% 27.35%
Margin

Return on 62.59% 127.67% 60.45% -3.54%

Equity

Return on 1.59 2.01 1.201 -38.9%

Capital
Employed

(ii) Revenue : The increase in consolidated revenues during 2015 was primarily
due to higher equipment revenues in the Wireless segment, higher revenues as a
result of the acquisition of AOL and higher Mass Markets revenues driven by Fios
services at the Wireline segment. ​AOL pulled in $669 million in the first quarter of
2016 — its highest revenue in 5 years which pushed its parent company Verizon's
first quarter revenue to $31.2 billion. Without AOL, Verizon's total revenue would
have declined 1.5% in the quarter. Even though AOL represents a small portion of
Verizon's total revenue, the results demonstrate the impact AOL is having on
Verizon's growth. Verizon was looking to branch out beyond its broadband and
telecommunications capacity by growing its digital media and ad business. The
$4.4 billion acquisition of AOL was a crucial step in Verizon's ability to achieve this.

(in millions)

Year Ended Dec 31 2015 2014

Cost of Services $29,438 $28,306

Wireless cost of $23,119 $21,625

equipment

Selling, general expenses $29,986 $41,016

Depreciation, $16,017 $16,533

amortization expenses

Consolidated operating $98,560 $1,07,480

expenses

35
(iii) Operating Expenses :
Consolidated operating expenses
decreased during 2015 primarily
due to non- operational credits
recorded in 2015 as compared to
non- operational charges recorded
in 2014. Cost of services increased
during 2015 primarily due to an
increase in costs as a result of the
acquisition of AOL, higher rent
expense as a result of an increase
in wireless macro and small cell
sites, higher wireless network costs
from an increase in fiber facilities supporting network capacity expansion and
densification. Since AOL’s acquisition there have been a mix of devices sold thus
increasing the Wireless cost of equipment per unit sold, partially offset by a
decline in the number of units sold.Selling, general and administrative expenses
decreased during 2015 primarily due to non- operational credits, primarily
severance, pension and benefit credits, recorded in 2015 as compared to non-
operational charges, primarily severance, pension and benefit charges, recorded in
2014.

(iv) Earnings per share- ​After

the acquisition of AOL in mid-
2015, Verizon announced the
launch of OTT mobile video
services to its customers and
were very positive about the
second half of 2015. Earnings
increased from 2​nd quarter of last
year, with revenues up to 2.4%
and EPS up to 14.3%. However
there was a major decline in the
last quarter of 2015, where phone subscriptions declined owing to strong
competition being faced by smaller rivals such as Sprint and T Mobile. This in turn
brought down the EPS at the end of the year. Earnings per share in 2014 were
$2.42 and in 2015, increased to $4.37.

36
(v) Assets : ​The table shows that
there is a significant increase in
Verizon’s asset base after its
acquisition of AOL in 2015. The
acquisition helped Verizon, the
largest mobile phone operator in
US, to drive its growth and
strengthen its presence by entering
into the increasingly competitive
online video space wherein it used
AOL's advanced technology
developed for selling ads and
delivering high-quality web video. AOL also owned online news websites such as
The Huffington Post and TechCrunch, which became part of Verizon once the
acquisition was completed, along with its video and online advertising technology.
The key assets of the company, apart from The Huffington Post and TechCrunch,
include Engadget, MAKERS and AOL.com, as well as its millennial-focused OTT,
Emmy-nominated original video content, and its programmatic advertising
platforms. All these factors led to a major increase in the assets.

(vii) Stock Performance Post Acquisition : ​Aol shares ​shot up 19%, after the
Internet content company agreed to be acquired by Verizon Communications Inc.
in a deal valued at $4.4 billion. The company posted credible growth for its
Advertising business in 2013 and 2014.
The recent surge in the AOL stock
price, after the acquisition
announcement, has yielded a return of
over 235% for AOL shareholders.
Verizon paid $50 for each AOL share,
which represented a 17% markup to
the previous closing price. However,
shares of Verizon fell 1.6% after the
deal was announced, meaning
stockholders weren’t too keen on the
success of the deal. There was a drop in closing prices for Verizon in the
beginning of the month of June, just before the announcement of the deal.

(Note : ​The source of information in the graph is Yahoo Finance - Verizon Monthly
Historical Stock Prices. The time period taken is mentioned in the graph.

37
Changes in the Company Pre and Post-Acquisition

​Pre Acquisition ​ ​Post Acquisition

Product Line

Geographical
presence

Management

38
 Chapter 4 : Concentric Acquisition
The Acquisition of Yahoo! Inc.

Yahoo! Inc. (Merger Wave : VII)

Yahoo! is an American web

services provider
headquartered in Sunnyvale,
California, and owned by
Verizon Media. Yahoo was
one of the pioneers of the
early Internet era in the 1990s. It provided a Web portal and search engine along
with related services such as social media, news, etc. ​At its height it was one of
the most popular sites in the United States. ​According to third-party web analytics
providers Alexa and SimilarWeb, Yahoo was the most widely read news and media
website – with over 7 billion views per month – ranking as the sixth-most-visited
website globally in 2016.​Once one of the largest Internet companies, Yahoo slowly
declined starting in the late 2000s, and in 2017 Verizon Co​mmunication​s acquired
most of Yahoo's Internet business for $4.48 billion, excluding its stakes in Alibaba
Group and Yahoo! Japan, which were transferred to Yahoo's successor company
Altaba. Despite its decline from prominence, Yahoo domain websites are still
among the most popular, ranking 10th in the world according to the Alexa
rankings as of October 2019.

Details of the Acquisition

Transaction Completion Date : ​June 13, 2017

Transaction Value : ​$4.48 billion​. ​Yahoo! announced in September and December

2016 two major ​Internet security breaches affecting more than a billion
customers.​[14] As a result, Verizon lowered its offer for Yahoo! by $350 million to
$4.48 billion

Type of Acquisition :​ ​Stock Purchase

39
 Execution of the Acquisition

● On July 23, 2016, Verizon entered into a stock purchase agreement (the
Purchase Agreement) with Yahoo! Inc. (Yahoo). Pursuant to the Purchase
Agreement, upon the terms and subject to the conditions thereof, Verizon
agreed to acquire the stock of one or more subsidiaries of Yahoo holding all
of Yahoo's operating business, for approximately $4.83 billion in cash,
subject to certain adjustments.
● On February 20, 2017, Verizon and Yahoo entered into an amendment to the
Purchase Agreement, pursuant to which the transaction purchase price will
be reduced by $350 million to approximately $4.48 billion in cash, subject to
certain adjustments.
● The deal ends Yahoo as an operating company and leaves it with its stake in
Chinese e-commerce company ​Alibaba and Yahoo Japan, its cash,
convertible notes, certain minority investments, and a non core portfolio of
patents called Excalibur. These ​assets will be renamed Altaba​.
● Subsequently, Yahoo sold the stock in the single subsidiary to Verizon. Since
it is a sale of a subsidiary, the $4.8 billion was paid to Yahoo. In accordance
with the original Transaction agreements, Yahoo will continue to retain
100% of any liabilities arising out of any shareholder lawsuits (including
derivative claims) and investigations and actions by the Securities and
Exchange Commission (SEC).

40
 Reasons for the Acquisition

Extract of the Acquisition Contract

41
 SWOT Analysis of Verizon-Yahoo Acquisition
Strengths
1. Verizon has the ability to track users’
online behavior perhaps even more
broadly than Google and Facebook
do—including their location.
2. Verizon is in a process of building a
portfolio of online content, with their
successful acquisition of Yahoo.
3. For Verizon, the deal paves the way
to assembling a new media empire
capable of delivering potentially
billions in advertising revenue and
offsetting slowing growth in its
wireless and wireline business units.
4. Yahoo’s widely distributed content
capabilities will provide Verizon with
the ability to both expand their digital
advertising endeavours and continue
to reach wider (and younger)
audiences.
Opportunities
1. International expansion.
2. Strategic partnerships and launches.
3. Growing search engine advertising.
4. The Internet sector and technology
are rapidly improving and changing.
Weaknesses
1. Verizon executives reportedly feel
that Yahoo’s value has been
diminished by the hacks, which
could adversely impact future
growth in user accounts.
2. With Yahoo they have a litany of
failed acquisitions: Broadcast.com
for $5.7 billion, GeoCities for $3.6
billion, Tumblr for $1.1 billion.
3. In its quest to avoid a Yahoo-like
decline, Verizon risks repeating
one of its key mistakes.
4. Yahoo, too, sought to fight
irrelevance through diversification.
But in the process of tacking on
acquisitions, it lost sight of its
identity.
Threats
1. Intense competition from market
search firms. (Google,MSN,etc.)
2. Competition from free social media
networking sites.(facebook,etc.)
3. Online advertisement blocking
technology.
42
 Pre-Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2017)

Post-Acquisition Consolidated Financials : Verizon

(Source : Verizon Annual Report 2018)

43
 Analysis

In order to extend its reach to more customers and boost its presence in the
mobile and online video space against the likes of Google and Facebook,
Verizon-owned AOL acquired the internet’s oldest business Yahoo. In June 2017,
the transaction was completed. The aggregate purchase consideration of the
transaction was approximately $4.7 billion, including cash acquired of $0.2 billion.

Comparative Analysis of Statements

Financial Items and Ratios

Ratio Pre-transaction Transaction Post- Net Change

Period (2016) Period (2017) transaction (%)
Period (2018)

Revenue $125,980 $126,034 $130,863 3.87%

EPS $3.22 $7.36 $3.76 16.77%

Operating $21,689 $24,318 $34,339 58%

Cash Flows

Dividend/share $2.285 $2.335 $2.385 4.37%

Return on 58.28% 69.84% 29.21% 50.12%

Equity

Return on 129.8% 63.63% 41.9% 32.2%

Capital
Employed

Net Profit 10.41% 23.88% 11.86% 113.9%

Margin

44
 (i) Revenue ​– The revenue of
Verizon for the year 2018,
which is after the transaction of
the acquisition of Yahoo
increased by almost 4%. The
acquisition of Yahoo has been
accounted as a business
combination to diversify and
strengthen its base in the
internet market. The
combination of the three
Verizon AOL and Yahoo is known as ‘OATH’. Oath has generated revenue of almost
7.7 billion at the end of the year 2018, and proved the fact that this acquisition is
profitable in terms of revenue to Verizon.Oath, had an increase in operating
revenues of 89.7% to $6.0 billion during the year ended December 31, 2017
primarily due to the acquisition of Yahoo! Inc.’s (Yahoo) operating business in June
of 2017

(ii) Operating Expenses :

(in $ millions)

Ratio 2017 2018

Cost of services 30,916 32,185

Wireless cost of equipment 22,147 23,323

Selling, general & 28,592 31,083

administrative expenses

Depreciation and
amortization expenses
16,954 17,403

Oath goodwill impairment 0 4,591

Total 98,609 108,585

45
The table above shows the
changes in the two years for
operating expenses. The main
reason for the increase in
expenses of Verizon for the
year 2018 is expansion. By
acquiring Yahoo the firm
made entry in the search
engine and native ad-market
which increased their selling,
general and admin expenses.
After the acquisition of Yahoo, Verizon had to incur Goodwill impairment, which
actually is the reason for around 1/3rd increase in expenses, Goodwill impairment
is an accounting charge that companies record when goodwill's carrying value on
financial statements exceeds its fair value. These are the main factors which
affected the operating expenses of Verizon. The below graph shows the difference
of the expenses before and after acquisition.

(iv) Earnings per share - ​Earnings per share can be defined as a company's net
earnings or losses attributable to
common shareholders per diluted
share base, which includes all
convertible securities and debt,
options and warrants. During the
transactional year i.e. 2017 an
unnatural rise in earnings per share
was observed. The increase was
about 130%, it may have been the
effect of the acquisition of Yahoo. In
2018 the company’s earnings per
share came back to its original and natural trend of 3.76, here below is the table
depicting the same.

Year 2016 2017 2018

Earnings Per Share $3.22 7.36 3.76

46
(v) ​Assets - The above chart shows that there is a significant increase in
Verizon’s asset base after its acquisition of Yahoo in 2017. Verizon has been
making a concerted push into the mobile advertising and content markets over the
last two years, investing in Internet TV providers (OnCue), content delivery
networks (Edgecast) and ad technology. By acquiring Yahoo, the firm is making
inroads into the search engine and native ad market. Yahoo’s key advertising
assets include Gemini – which combines search and native ads for superior results
– and BrightRoll, which offers programmatic buying and selling tools for video,
display and native advertising. This would give Verizon a wide spectrum of ad tech
assets, ranging from programmatic video and display to native advertising and
search, potentially allowing it to compete with digital ad titans such as Google.
These factors and the acquisition of Yahoo led to the major increase in assets for
Verizon.

(vi) Stock Performance Post

Acquisition : After acquisition by
Verizon, the stock price of Yahoo did
not go up, partly because investors
were expecting a higher transaction
value which was reduced by 7% to
approximately $5 billion and the
lower value of its residual assets
(rebranded as Altaba), associated by
the market. Yahoo was already a
fundamentally unstable company since its inception, rotating many CEOs,
struggling to find an identification as a media or technology company and making
unprofitable acquisitions. The two massive security breaches by the company gave
the final blow. As for Verizon, this deal was a disaster, leading to an eventual
writedown and merging Yahoo with Aol to form Oath. Investors predicted the
unprofitability of the deal and hence, the lower prices that are observed from June
16, 2017 to July 25, 2017.

(Note :​ The source of information for the graph is Yahoo Finance - Verizon Daily
Historical Prices. The time period in consideration is mentioned in the graph)

47
Changes in the Company Pre and Post acquisition

Pre-Buyout
Post-Buyout

Product line

Geographical
presence

Management

48
Fate of the Aol and Yahoo Acquisitions

The AOL deal and subsequent

Yahoo! purchases were led by
Verizon's management team,
including Lowell McAdam (CEO),
Marni Walden (EVP Product) and
Tim Armstrong​. Walden had
been tasked with merging the
two entities and delivering on
the promise of moving Verizon
from an analog to digital
platforms business. Walden exited Verizon in 2017 and as later events revealed,
the integration did not deliver the expected value. ​Two months before
closing the deal for Yahoo!, Verizon announced it would place Yahoo! and AOL
under an umbrella named Oath. ​The deal closed on June 13, 2017, and Oath was
launched. Upon completion of the deal, Yahoo! CEO ​Marissa Mayer resigned.
Yahoo! operations not acquired in the deal were renamed ​Altaba​. ​After the
merger, Oath cut 15% of the Yahoo-AOL workforce. ​In December 2018
Verizon announced that it was cutting 10% of Oath's workforce and ​would
write down the value of the business by $4.6B. Verizon management blamed
competitive pressures ​and that the business never ​achieved the anticipated
benefits. ​The move wiped out all of the goodwill ​on the balance sheets that
accompanied the acquisitions. Oath was renamed Verizon Media ​on January 8,
2019.

49
Project Conclusion

Verizon is a conglomerate that is known for acquiring even the most weak
companies, such as Enron and WorldCom immediately after their scandal in 2003.
A total of 22 acquisitions and counting, the company has grown mainly through its
strategic integrations in different areas. ​Verizon Communications, Inc. implements
a generic strategy and intensive growth strategies. Michael Porter’s model states
that a firm uses its generic strategy to ensure competitive advantage. This
competitive advantage is essential in surviving the external forces that impact the
business, based on the condition of the competitive landscape. Verizon’s generic
competitive strategy represents business efforts to stand out in the
telecommunications industry. These efforts translate to competitiveness and brand
value. Recently, the company is under intense competition from its biggest rival
AT&T and the merger between T-Mobile and Sprint, with Sprint hiring the person
that created Verizon’s most famous slogan - “Can You Hear Me Now?”​.

In doing this project, our ​main learnings​ were as follows :

● Understanding the analysis of acquisitions with different parameters

● Evaluating the effectiveness of deals through pre-acquisition and
post-acquisition stock performance
● Potential reasons and motives in the acquisitions carried out by firms
● Understanding the complexity of deals through legal contracts
● Understanding how acquisitions can have an effect on the acquiring and
acquired companies
● Understanding various divestitures carried out by companies
● Understanding the effects of acquisitions and divestitures on various
financial items in the Annual Reports of Verizon
● Understanding how both companies have performed in integrating their
culture, core businesses and extending product lines post the transaction
● Understanding the various actions taken by the acquiring company based in
the success or failure of acquisitions
● Understanding the strategy of Verizon in extending its reach and market
depth in the telecom industry through many acquisitions

50
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51