Why has Verizon paid $4.8bn for Yahoo?

So Verizon has been at it again: bagging a former digital behemoth for a fraction of its peak market value in the hope that some of the old magic remains.

Last year, it bought AOL for $4.4bn – a tiny percentage of the company’s peak valuation of $160bn – and then last week, it bought Yahoo for $4.8bn.

To put that in perspective, Microsoft offered $45bn for the business in 2008, but was turned down by the Yahoo’s then management on the basis that the business was worth much more. Way to go, as they say in Silicon Valley.

Given that, it seems counterintuitive to suggest that Yahoo’s current management has done pretty well to extract even that paltry valuation from Verizon. But revenues have stayed pretty constant over the last five years and although profits decreased, shares have gone from below $20 in 2012 to $40(ish) now. When you factor in how the deal does not include Yahoo’s significant Asia portfolio, or some patents, the valuation looks even better from the seller’s perspective.

So what has Verizon actually bought? And how can it justify the deal to its anxious shareholders?

As the Economist points out this week, the combination of AOL and Yahoo with Verizon’s own web properties suddenly makes quite a powerful proposition: together, they have US visitor numbers second only to Google, and ahead of Facebook. If they can get the technology right, they can serve targeted advertising to a relatively affluent audience of loyal users.

Moreover, the acquisition looks pretty reasonable if we use the ‘cost of audience’ metric that I wrote about last month. Acquiring one billion monthly users for under $5 per head looks like good business, compared with other recent deals (including Microsoft’s acquisition of LinkedIn). That combined with AOL’s existing user base is pretty powerful.

Is it a plan for the future? Not really: it looks like the least bad solution for all parties, a sort of self-support club for failing tech brands which will slow the decline. But Verizon has now created the kind of scale of which others can only dream. If handled well, the old dogs could yet set a challenge for the young pups of Facebook and Google.