By Ryan Knutson 

In January, a month after Yahoo Inc. disclosed a second massive data breach, Verizon Communications Inc.'s top executives huddled at the company's headquarters and weighed their options.

They could walk away from their $4.83 billion deal to buy Yahoo's internet business; wait to learn more about the damage to Yahoo's brand; or plunge ahead with the purchase and their plans to build a digital media business.

Verizon Chief Executive Lowell McAdam wanted to proceed and took the lead in the negotiations that ended with a new deal announced Tuesday: Verizon would pay $350 million less than it first offered, and the two companies would still split any future costs from the data breaches.

Mr. McAdam was worried that delaying or calling off the deal would put on ice Verizon's ambitious plans to take on Facebook Inc. and Alphabet Inc.'s Google in digital advertising.

Verizon plans to fold Yahoo's digital advertising technology and portfolio of websites like Yahoo News, Sports and Finance into AOL, which Verizon acquired in 2015. Verizon plans to keep the Yahoo brand.

But the company has a long way to go to become a force in digital advertising. In 2016, Yahoo and AOL combined controlled about 2% of global digital advertising revenue, compared with Google's 32% and Facebook's 13%, according to eMarketer.

During the January discussions in Verizon's Basking Ridge, N.J., headquarters, executives wrestled with thorny issues. There were some things Verizon didn't know. User engagement with Yahoo had declined only slightly after the second breach, disclosed in December, but password resets were still under way, meaning more user defections could occur, people familiar with the matter said. Yahoo has not provided any update on defections. Also, after a recent meeting of technical staffers, Verizon realized that the breaches might have made some of Yahoo's systems more difficult to integrate with Verizon's AOL unit, according to the people.

The following day, McAdam spoke with Yahoo director Thomas McInerney, who was amenable to the idea, the people said. Yahoo also wanted to move on. Selling Yahoo's internet business was a "gating item" for the remaining businesses' ability to do other, more lucrative things, such as selling stakes in Alibaba Group Holding Ltd. and Yahoo Japan Corp., another person familiar with the matter said.

Mr. McAdam and Mr. McInerney met in New York the next week and reached an agreement. It took about two weeks to resolve the final sticking points, clearing the way for Tuesday's announcement. Yahoo shareholders still must vote to approve the transaction, which the companies hope will close in April.

An investigation under way at the Securities and Exchange Commission -- about what Yahoo knew about the data breaches and when, and whether it properly informed investors -- could slow that timeline. Before Yahoo can schedule a shareholder vote on the deal, it needs the SEC to approve its proxy statement. The SEC declined to comment.

As part of the revised agreement, Verizon will give up its right to sue over any allegations that Yahoo had covered up the hacks, one of the people said. The entity selling Yahoo will retain liability for the SEC investigation and any shareholder lawsuits related to the deal itself. Verizon will split costs and liabilities related to any lawsuits from consumers or partners about the breaches. Yahoo has said it is cooperating with federal, state and foreign agencies that are seeking information about the 2014 breach. Several lawsuits have arisen as a result of the disclosures.

Earlier this month, two influential U.S. senators criticized Yahoo for dragging its feet when responding to questions about the hacks.

The agreement marks the final act for the once-mighty internet pioneer. At the height of the dot-com boom in early 2000, Yahoo's market capitalization was more than $125 billion. After years of strategic U-turns, the drawn-out auction of its internet business and disclosure of the hacks, Yahoo's core business is now worth just $4.48 billion after the original deal's $350 million reduction.

The first hack occurred in 2014 and was revealed in September. It affected 500 million user accounts. Then, in December, Yahoo disclosed a hack from 2013 that exposed more than one billion user accounts. The stolen data included names, email addresses, dates of birth, telephone numbers and encrypted passwords, Yahoo has said.

In October, Verizon signaled it could consider the breach disclosed the prior month as a material event that could allow it to change the deal terms.

Since then, Yahoo CEO Marissa Mayer and Verizon executives Marni Walden and Craig Silliman have held regular calls to discuss Yahoo's investigation of the hacks, one of the people said. Tim Armstrong, who runs AOL, stayed focused on the pending integration for the most part, the person added.

The entity selling Yahoo will be renamed Altaba Inc. Ms. Mayer will step down from the board but it is unclear what role she will play after the transaction closes. "Today's announcement allows us to move forward with confidence and certainty, as we continue to plan for a successful integration," Ms. Mayer wrote in an email to staff on Tuesday.

--Deepa Seetharaman and Dana Cimilluca contributed to this article.

Write to Ryan Knutson at ryan.knutson@wsj.com

 

(END) Dow Jones Newswires

February 22, 2017 02:47 ET (07:47 GMT)

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