For the first time since it set out to buy Yahoo in July, Verizon is making unhappy noises. The Washington Post reported yesterday that Verizon has said the hack of 500 million user accounts that Yahoo revealed last month could be “material” to the one-time internet titan’s business. This casts doubt over the $4.8 billion acquisition, because a “material adverse effect” is a get-out clause in the deal for the buyer.
Verizon’s general counsel, Craig Silliman, told reporters it’s now on Yahoo to show the hack was not material. “We’re looking to Yahoo to demonstrate to us the full impact they believe it’s not,” he said.
Things may not be as dire for Yahoo as they seem, however. “Material adverse effect” clauses are commonly baked into merger and acquisition contracts, but they’ve rarely been used to get a deal in front of a judge. That’s because when courts have scrutinized them, the burden of proof has usually been on the buyer, and judges have rarely ruled in their favor, according to analysis in the Columbia Business Law Review and the Wall Street Journal (paywall).
Nonetheless, the threat of a court hearing gives Verizon leverage to renegotiate key parts of the deal, including the price. As the Columbia Business Law Review notes: “As is so often the case, perhaps only the specter of [material adverse clause] litigation is necessary for the clause to remain an effective component of merger agreements.”
In other words, Silliman’s comments to journalists can be interpreted as simply the opening gambit in talks with Yahoo to get a discount. How big a discount is anyone’s guess, but estimates so far range from $100 million to $1 billion. Let the haggling begin.