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NEW YORK (Reuters Breakingviews) - Verizon's M&A signal is starting to come in a little clearer. The U.S. telecommunications titan reported a 20 percent drop in quarterly profit as a new sales initiative failed to attract customers. Its strategy behind buying AOL and Yahoo is perplexing. All of it probably helps explain why Chief Executive Lowell McAdam just indicated he's open to the idea of a bigger deal.
Price wars in the maturing smartphone market – more than 80 percent of Americans already have one – are taking their toll. Verizon's surprise decision to reverse a six-year-old policy against unlimited data plans didn't work. Despite rolling out the offer in mid-February, the company lost monthly mobile subscribers – some 300,000 of them – on a net basis for the first time.
More worrisome is cash flow from operations, which tumbled to $1.7 billion in the first quarter from $7.5 billion a year ago. A pension contribution accounts for some of the decline. Capital expenditure, however, was essentially flat, while free cash flow was negative $1.4 billion. Verizon fell short of nearly every expectation on Wall Street.
That puts more pressure on $200 billion Verizon to chart a future with something more than just the $9 billion it invested in AOL and Yahoo, which have been curiously rebranded as Oath. Consolidation and competition is expected to pick up. Verizon's biggest direct rival, AT&T, is waiting for approval on its $85 billion Time Warner deal. Cable outfit Comcast just entered the wireless market.
It's no wonder McAdam was unusually blunt about a merger of his own. He said he'd consider a variety of pairings and even name-checked Comcast, Walt Disney and CBS during an interview earlier in the week. He didn't mention cable company Charter or satellite operator Dish Network, which could easily be on the list, too, especially considering the latter's stockpile of spectrum and the acceleration of data usage. It's not obvious that any of these combinations would necessarily make financial sense for Verizon, but its own lackluster numbers mean it's nearly time to make a call.