Spying news put Yahoo's buyout deal with Verizon in danger
Denis Balibouse/Reuters
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Verizon, the buyer of the struggling Internet company, demands a huge $1 billion discount off the $4.8 billion deal because of the recently discovered news about Yahoo participating in spying activities of the U.S. governmental agencies.

Yahoo got some bad news again. The almost-completed acquisition deal between Yahoo (NASDAQ: Yahoo! [YHOO]) and Verizon (NYSE: Verizon Communications [VZ]) is about to get renegotiated. Verizon, the buyer, feels like the deal was not made on the terms of full disclosure between the parties as the company was as surprised as everyone else when the news of Yahoo's participation in the hacking and spying activities went public this week.

Reuters was the one to break the news about Yahoo repeatedly scanning all of its users' email accounts by a custom-build software on the U.S. National Security Agency and FBI demand. The incident happened last year and was approved by Yahoo's CEO Marissa Mayers who authorized the development of a scanning program for this purpose. When Yahoo's Chief Information Security Officer Alex Stamos discovered that the program, which he initially thought was a hacking attack, was approved by Mayers, he filed for a resignation in June 2015.

On top of that, another similar incident that happened even earlier was recently revealed by the media. Back in 2014, Yahoo was attacked by "state-sponsored" hackers that swiped the information of over 500 million user accounts including such sensitive data as email addresses, names, dates of birth, phone numbers, passwords as well as answers to security questions, reports the New York Post. This was officially the biggest data security breach ever, yet it has not been disclosed to the public until last month. It caused a serious public outrage this week while the major industry players such as Google (NASDAQ: Alphabet Class A [GOOGL]), Microsoft (NASDAQ: Microsoft Corporation [MSFT]) and Apple (NASDAQ: Apple [AAPL]) rushed to announce that they have never been involved in the secret email scanning activities or associated with governmental agencies.

Both of these cases happened long before Yahoo got in talks with Verizon about its possible acquisition, yet they were discovered shortly after the deal was agreed upon. TechCrunch said that Mayers was informed about the data breach in July when Yahoo's sale was still in the negotiation stage. Understandably, Verizon is questioning why exactly this information was withheld from them during the negotiations of the buyout.

“In the last day we’ve heard that Tim [Armstong] is getting cold feet. He’s pretty upset about the lack of disclosure and he’s saying can we get out of this or can we reduce the price?” the NY Post cited a source familiar with the matter referring to Tim Armstrong, the CEO of Verizon's AOL business.

That is why Verizon is now pushing for a big $1 billion discount off the $4.8 billion deal with Yahoo. According to the NY Post, the company believes that Yahoo's value was "diminished" by this and, therefore, the price tag cannot stay the same.

“The key will be what was actually disclosed by Yahoo before signing. No one should be surprised that Verizon wants a significant reduction,” Frank Aquila, a famous M&A lawyer told TechCrunch.

But Verizon is not the only one who is put off by Yahoo's secretive behavior. The U.S. Securities and Exchange Commission has been repeatedly invited to investigate Yahoo's data breach case as many industry experts along with several politicians were outraged by Yahoo withholding critical information about the large security incident. They say that this raises concerns about "truthfulness in representations to the public" of the IT companies. In the light of these news, Yahoo seems to be in a very dark place right now.

The analysts believe that Verizon's push for the price deduction is justified as Yahoo's brand value is hurt by the cybersecurity problems and this can seriously affect the company's relationships with investors as well as its stock price. And this is definitely not something Verizon wants to deal with upon the acquisition.

In the interview with CNBC following the news of the first hacking incident, Tim Armstrong made it clear that his company was negatively surprised with the news and wondered when Yahoo was planning to inform Verizon about it. With the news on the email scanning incident, the situation got even worse. The NY Post reported that Armstrong was about to meet with Yahoo's management to discuss the situation and demand the deal's price deduction. Yet Yahoo's executives previously said that "a deal is a deal" and Verizon had no legal grounds to change the price.

Both companies declined to comment on the matter.

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