CCS: Yahoo hack likely to be a 'painful and expensive' lesson for Verizon

Source: Flickr user Neon Tommy

The massive hack of 500 million Yahoo users’ accounts could be costly to Verizon should its acquisition of the company’s online assets eventually go through, CCS Insight said.

Yahoo said last week that “a copy of certain user account information” was stolen in late 2014 by what it believes was a state-sponsored hacker. Account information may have included names, email addresses, phone numbers, birth dates, passwords and security questions and answers.

The admission comes months after Verizon agreed to pay $4.83 billion to acquire Yahoo’s core online businesses. The nation’s biggest mobile operator plans to integrate Yahoo with the AOL business it acquired last year for $4.4 billion in an effort to build a digital media empire.

“Liability from the breach could port over to Verizon adding additional risk and uncertainly to the deal,” CCS Insight wrote. “If the agreement goes through, it could lead to a painful case of buyer's regret.”

Class-action lawsuits against Yahoo are already under way, CCS Insight wrote, and the potential of additional liability might provide an opportunity for Verizon to walk away from the deal. The firm noted that Yahoo or its partners could automatically be held accountable for damages in some countries; in the U.K., for instance, the business could see claims of as much as $1,300 per customer.

“Combining large companies carries a level of risk,” CCS Insight wrote, “and the hacking attack adds another dimension if the deal between Verizon and Yahoo is completed. It's not entirely clear why Yahoo made news of the breach public two years after the event, which took place well before discussions with potential suitors began. Yahoo says the breach is a ‘complex’ problem that is being investigated. Verizon said it's evaluating the situation.”

Verizon has yet to indicate whether news of the breach will have an impact on its acquisition plans, as The New York Times noted. Verizon doesn’t own Yahoo yet and can’t access its servers to conduct its own investigation, and it’s unclear how long Yahoo executives waited before notifying Verizon of the hack.

Abandoning the acquisition could be difficult for Verizon, according to the Times piece, because Verizon would have to prove that the hack “amounted to a material adverse effect on the value of Yahoo.” The carrier could try to return to the bargaining table, though, using the hack to renegotiate terms of the acquisition. But doing so might also risk Yahoo reopening talks with the suitors it spurned when it accepted Verizon’s offer.

Verizon is clearly intent on building a substantial business based on digital media and advertising, but it already faced huge challenges in elbowing its way into a market in which it has little expertise. The Yahoo breach may not ultimately affect Verizon’s plan to acquire Yahoo, but it did up the stakes on a gamble that was already teeming with risk.

“Verizon is unlikely to alter its strategy of morphing into a more-expansive digital company; abandoning its deal with Yahoo entirely seems improbable at this point,” CCS wrote. “One windfall of the deal will be the painful and expensive lessons learned.”

For more:
- see this CCS Insight post
- read this New York Times report

Related articles:
With Yahoo acquisition, Verizon faces huge challenges in putting the pieces together
Lowenstein's View: Verizon-Yahoo Deal: Now What?
Verizon to buy Yahoo for $4.83B, doubling down on digital media and advertising