Verizon general counsel Craig Silliman. Photo: Carmen Natale/ALM

Last June, Verizon Communications Inc. announced that after more than a year, it had completed the acquisition of Yahoo Inc.'s operating business. Yahoo's revelations of two massive breaches soon after the ink had dried on the original agreement raised questions about whether the deal will go through, but with a price cut and a revision of language to allocate liability related to the security incidents, the sides were able to reach an agreement.

Or, as Verizon executive vice president of public policy and general counsel Craig Silliman described it in an interview Thursday, Yahoo and Verizon were ultimately able to find “an elegant way to move the deal to close.”

While Silliman was unable to discuss any litigation and government investigations related to the breaches, as these are ongoing matters, the Verizon GC spoke about the process of the negotiations and what it was like to navigate through the unique aspects of the deal.

Discussions with Yahoo began in the spring of 2016, Silliman said. By then, Yahoo's board had, for quite some time, been looking at what the best way forward for the company would be, which eventually included considering whether to put the operating part of the business on the market, U.S. Securities and Exchange Commission filings show.

Once the decision was made to sell, a “very structured process” was initiated and Verizon began doing due diligence in early 2016, according to Silliman. SEC filings show that “after a months-long bidding process” involving “multiple bidders,” Verizon came out as the winner and a deal was entered into on July 23, 2016, with the telecommunications giant slated to pay roughly $4.83 billion.

Quite a large team was involved in the due diligence and deal negotiation, Silliman said, to focus on everything from real estate holdings and tax questions to potential privacy issues. Silliman, along with the likes of the company's CEO and CFO, was part of the group that would consider the larger strategic questions around the deal. The foremost question was whether Yahoo's operating business was an asset that ultimately made sense for Verizon.

Then came the Sept. 22, 2016, announcement from Yahoo about a 2014 breach that impacted at least 500 million customer email accounts. Verizon had already started on integration planning at this point, Silliman said, but once the company was informed of the data breach on Sept. 20, the conversation turned to if the deal should still happen.

The question was whether there is “something about what … we've just discovered had happened that fundamentally affects the strategic rationale for why you wanted to buy the asset in the first place,” Silliman said. He added: “The reason we were buying the asset was the user base, the Yahoo user base. And so the question we had to ask ourselves is: Will this affect the Yahoo user base, their engagement with the Yahoo products and services?”

On Verizon's end, it was also critical to protect the company, Silliman said, because it wasn't clear at the time what the reaction would be to the news of the breach. “We put together a strategy almost immediately after the first breach was announced where we laid out how we wanted to move forward with getting more information from the Yahoo team in order to determine whether there had been an impact on the business, how great that impact would be,” he explained, noting those discussions continued into November of 2016.

Then, in December 2016, another breach was revealed, this one from 2013. This breach is now known to have likely impacted all of Yahoo's users at the time of the incident, or roughly 3 billion user accounts. “When they notified us of that,” Silliman said, “we essentially said, we now need to take a pause on renegotiating the deal because we have a new factor that needs to be evaluated to determine what the impact of the second breach is.”

As with all deals, closing with Yahoo came down to ensuring it was a smart move for Verizon, Silliman said. But what he said was so unusual about this particular deal was that there was a very public new development after the deal was signed, but before it was closed. “That happens sometimes, but rarely do you have an event that is so highly public, or in this case, two events that were very highly public,” the GC said.

To get to the point of closing the deal, which involved cutting the price by $350 million and amending the division of liabilities, Silliman explained it took plenty of negotiation and “a lot of very constructive and engaged conversations” with the other side.

Under the original deal terms, liabilities that might arise because of customer and partner lawsuits or government investigations would travel with the operating unit over to Verizon when the deal closed, according to Silliman. But when it came to the breaches, there was no way to know what the ultimate outcome of those proceedings might be, and thus, no certainty about the level of liability.

“The way we looked at it was, the only way to have certainty about what those numbers would be, would be to wait a very, very long time,” he explained. “But, if you wait a long time, you introduce uncertainty into your customer base, into your employee base.” The balance for Verizon then, he said, was to move quickly on close to get to certainty while also acknowledging that liability was still a question.

So the decision was made to split the costs associated with those liabilities. By doing this, he added, it “aligned the parties' incentives from the very beginning” because both then had the motivation to work closely together to get the best possible outcome when it came to any future proceedings.

“We thought it was an elegant way to move the deal to close, relatively close to our original timeframe, while also getting an equitable outcome for both sides,” Silliman said.

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