Verizon Communications Inc. (NYSE:VZ) recently agreed to purchase Yahoo Inc. (NASDAQ:YHOO) for $4.8 billion, but new disclosures about a massive security breach may lead to changes in the terms of the deal. Many merger agreements have provisions that allow buyers to withdraw from deals if the value of a transaction is hurt by a significant development. However, courts have resisted the use of material adverse change clauses for terminating contracts.
After a prolonged auction, Verizon emerged as the winning bidder for Yahoo’s core internet business. There were plans to close the deal by the end of March. Verizon is reportedly waiting for the results of Yahoo’s investigation into the breach before deciding how to proceed. Both companies have continued integration planning, according to people familiar with the matter.
The data breach occurred in late 2014 and affected more than 500 million accounts. Names, email addresses, dates of birth, telephone numbers and encrypted passwords were stolen.
Yahoo blamed “state sponsored” hackers for the theft. The massive breach was one of the largest thefts of personal user data in history. Yahoo officials said they considered the hack to be low risk because all stolen user passwords were encrypted.
While the breach occurred two years ago, it was discovered in July and disclosed after the merger deal was signed in September. Verizon may view the breach as a material event that could allow it to change the terms of the takeover. It is up to Yahoo to prove the full impact of the data leak and prove it wasn’t material.
A Yahoo spokeswoman said in a statement, “We are confident in Yahoo’s value and we continue to work towards integration with Verizon.” Much of Yahoo’s market value reflects its investments in Alibaba Group Holding Ltd. and Yahoo Japan Corp., which were not part of the deal.
General Counsel Craig Silliman has been leading Verizon’s review of the situation. The contract language for the deal gives Verizon leverage to renegotiate or walk away because of the security breach. Earlier this week, Verizon Chief Executive Lowell McAdam revealed that the company wasn’t planning to walk away from the acquisition. However, he didn’t rule out seeking changes to the terms.
Looking to renegotiate the deal could bring risks for Verizon. If the deal is terminated, Yahoo may be required to pay Verizon relatively small termination fee of $145 million and engage other bidders. Several suitors, including private-equity firms and a group led by Quicken Loans founder Dan Gilbert, have made bids to acquire Yahoo’s business.