Why Alphabet Buying Verizon Makes Sense (GOOGL, VZ)

With some $73 billion in cash (not including possible offshore holdings) on its balance sheet and another $26 billion in operating cash flow, there's not much Alphabet Inc. (GOOGL), the parent of search giant Google, can't afford.
With its recent title as the world's most valuable company, Alphabet – which is no stranger to acquisitions – is eager to maintain that status, given the projected rise in 2016 capital expenses to fund things like Google Fiber, its data center infrastructure, and various other bets. Or Alphabet can just pick up wireless telecom giant Verizon Communications, Inc. (VZ) and maximize what it expects to achieve from these projects. And the synergies with Verizon will be instant. (See also: Is Alphabet the best FANG for 2016?)

Why Fight 'Em When You Can Buy 'Em?

Controlling access to the Internet is something both behemoths want. Google's search dominance has allowed Alphabet to become a gatekeeper, of sorts, leveraging the company's massive global reach to serve up tons of digital video content and mobile advertising. It's for this reason Google is investing so heavily not only in Google Fi but also spending billions to outfit various U.S. cities with Google Fiber, the company's lightning-fast gigabit speed internet service.
Why is Alphabet doing all of this? Obviously, the more users are exposed to its services, the more revenue it can generate for both mobile and display ads. At the same time, the company has looked upon Verizon, which has its own high-speed broadband FiOS service, as a formidable foe. And the fact that Verizon last year picked up AOL, which I then described as a direct attack on both Google and Facebook Inc. (FB), Verizon – thanks to AOL's strong video assets – is positioning itself to supplant YouTube as the world's most dominant video platform.
AOL's ad platform, though not as effective as that of Google and Facebook, is now a critical part of Verizon's strategy to topple Google. AOL has tons of data from its wireless network customers it can use to serve its growing video library. Additionally, the deals AOL has forged with prominent broadcasting networks like ESPN and CBS, can now be used by Verizon to draw even more users to its platform. In other words, Verizon's revenue in the years ahead is poised to grow via targeted, smarter ads and wireless data. (For more see, Mobile Ad Competitors: Facebook Vs. Google.)

The Bottom Line

Does Alphabet want to risk Verizon becoming an even stronger foe? More critically, does Alphabet want to risk Verizon being acquired by Facebook? Imagine the problems this will pose. To avoid either scenario, Alphabet can pick up Verizon and be done with it. With Verizon's market cap of around $203 billion, its enterprise value is in the ballpark of $308 billion, when factoring its cash and debt. Alphabet can seal the deal with an offer of $350 to $370 billion, or a premium of around 20%.

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