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Why Verizon probably won't back out of the Yahoo deal

Lowell McAdam, Verizon CEO
Justin Solomon | CNBC
Lowell McAdam, Verizon CEO

The disclosure of two big information hacks at Yahoo has led at least one Verizon executive to publicly wonder whether a proposed $4.8 billion merger between the two companies will happen.

But even if the telecommunications giant is getting cold feet about buying the once-iconic internet company, backing out of the deal makes little sense, said analysts who spoke with CNBC.

"If you believe that the ad technology is part of the play and you believe that access to a billion users is valuable, then I believe [Yahoo] still has value," said Greg Portell, lead partner at management consulting firm A.T. Kearney. "For all of Yahoo's flaws, you're not going to find a property that has a billion users that you are going to pick up for [less than] $5 billion. The deal's economics were good at the start of this. So, if Verizon is able to knock off a billion dollars and get protection against user data exposure, it's better for them."

As Verizon attempts to become a larger digital media and advertising presence, there are very few companies that it can acquire to grow technology and scale at that size and especially at that $4.83 billion price tag, Portell points out.

Twitter's market capitalization was about $12.43 billion in October 2016, and its 317 million monthly active users pale in comparison to Yahoo's billion. Vice Media, which has expressed interest in selling itself, has nowhere near the same audience, and comes with an almost $5 billion valuation. And, for comparison, if the AT&T-Time Warner deal goes through, it will cost the telecommunications company $85.4 billion.

"The core reason that Verizon made a play for Yahoo hasn't changed: They want the ad technology," said Portell. "They still need the ad tech. The breach as far as I heard doesn't compromise the ad technology."

But Marni Walden, Verizon's executive vice president and president of product innovation and new businesses, on Thursday said the company was unsure about the Yahoo deal. It was still looking at the impact of the second breach, which exposed information on about 1 billion user accounts in Aug. 2013 and was unrelated to a 2014 breach that leaked data on an additional 500 million accounts. Walden added she "can't weigh one way or the other" whether the deal would go through. (Verizon said it had no additional comment. A Yahoo spokesperson said: "We are confident in Yahoo's value and we continue to work towards integration with Verizon.")

AOL CEO Tim Armstrong, who is helping lead the Verizon acquisition, told CNBC he is "hopeful" the deal will close. He added to NBC News that Verizon will decide whether it will continue with the deal in the first half of 2017.

Still, the fact that Yahoo had over a billion accounts to hack actually works to prove its massive scale, pointed out Scott Kessler, deputy global director and industry analyst at equity research firm CFRA.

"There are not a lot of media properties on the planet that have a billion user accounts and leading categories," Kessler said, pointing out the company's strong media positions in the news, sports and finance verticals.

Verizon will be hard-pressed to prove the breach changed the company's worth given the fact the hacks took place years ago andYahoo has shown user activity has not changed since the news was revealed, Kessler said.

"The implications that the user would stop using their accounts because of the data breach up to this point haven't panned out," Kessler said.

As to the fact that the hacks may still affect the company's future with advertisers and onboarding of new users, Yahoo's brand perception had cooled long before news of the data breach, Portell said. Verizon knew exactly the kind of company it was getting as well as the challenges of integrating a legacy media and technology company since it had worked through many of the onboarding issues with the AOL acquisition, he added.

However, if Verizon can use the hacks to leverage an even lower-priced acquisition deal, it puts them in an even better situation. Just don't expect them to back out completely, Kessler said.

"Verizon still wants to do the deal," he said. "All of the underpinnings that led to the transaction, I think nothing has really changed."