Friday, 26 September 2014
Starboard Pushes Yahoo CEO Mayer to ‘Unlock Value’
Activist investor Starboard Value LP, which
has acquired a stake inYahoo!
I
In a letter today to Yahoo Chief Executive
Officer Marissa Mayer, the New York-based fund said the Web company should also
cut losses in its display-ad business by $250 million to $500 million, stop
acquiring other companies and instead discuss a deal with AOL. A combination
with AOL could deliver cost cuts of as much as $1 billion, Starboard CEO
Jeffrey Smith wrote in a letter addressed to Mayer.
“Clearly Yahoo is deeply undervalued relative
to the sum of its parts,” Smith wrote, adding that the fund now has a
“significant” stake in Yahoo without disclosing specifics. “It is incumbent
upon management and the board to take immediate steps in committing to remedy
this valuation discrepancy.”
Sarah Meron, a spokeswoman for Sunnyvale,
California-based Yahoo, didn’t respond to a call for comment. Eoin Ryan, an AOL
spokesman, wasn’t available for comment, said a woman who answered the phone at
his office. Starboard representatives didn’t respond to requests for additional
comment.
Yahoo shares rose 4 percent to $40.53 at 1:41
p.m. in New York after Starboard released the letter. The stock had declined
3.6 percent this year through yesterday. AOL jumped 3 percent to $44.25, after
falling 7.8 percent this year through yesterday.
AOL would be a good fit for Yahoo, according
to Colin Gillis, an analyst at BGC Partners.
The Web portal would bolster Yahoo’s video and editorial content and is a
better option than buying a “high-priced startup,” he said.
‘It makes tremendous
sense,’’ Gillis said. “It will move the needle materially on both revenue and
earnings.”
Mayer’s Turnaround
Mayer has been working to turn around Yahoo
since she joined the Web portal in July 2012. The pressure for results has
increased since last week’s initial public offering of Alibaba Group Holding Ltd.
(BABA), in which Yahoo owns a stake and which had driven much of
the Silicon Valley company’s value.
As investors took gains on Yahoo after
Alibaba’s IPO, the true worth of the Web portal’s core online-advertising
business was laid bare. Yahoo was worth less than the value of its Asian
assets, which also include a stake in Yahoo Japan, following
Alibaba’s market debut. Yahoo’s market capitalization is $40 billion, little
changed from the beginning of the year, while AOL’s market value is $3.48
billion.
Mayer has tried to shore up Yahoo’s business
by acquiring startups and investing in content and services to woo more
Internet users and attract advertisers.
Sputtering Attempt
So far, her efforts have failed to narrow the
company’s widening gap in online advertising with Google Inc. and Facebook Inc.
Second-quarter sales, excluding
revenue shared with partner websites, fell to a less-than-projected $1.04
billion. Analysts on average estimate revenue this year will slip to $4.35
billion, the lowest level since 2005, according to data compiled by Bloomberg.
This isn’t Yahoo’s first encounter with an
activist investor. Daniel Loeb’s Third Point LLC targeted Yahoo in 2011, when
the fund bought a 5.2 percent stake and urged the board to resign. Loeb forced
the ouster of former Yahoo CEO Scott Thompson and took a seat on the board.
Loeb later sold the stake back to the company.
Starboard Letter
In Starboard’s letter, Smith said Yahoo’s
Asian assets are worth about $11 billion, or “$11 per share more than the
current enterprise value of the company.” That is the gap that needs to be
closed, he said. Enterprise value, a metric to gauge the takeover value of a
company, includes market capitalization and debt, minus cash and equivalents.
Yahoo should also pull back on its acquisitions,
which have already resulted in $1.3 billion of spending since the second
quarter of 2012. That includes the roughly $1 billion purchase of
blogging-service Tumblr last year.
“Focusing on acquisitions has not worked,”
Smith wrote. A combination with AOL would create “synergies,” he added.
In addition to acquisitions, investors are
concerned Yahoo will monetize its stake in Alibaba without finding ways to
escape big tax hits that can reduce proceeds by 38 percent, he said. Yahoo
hasn’t done enough to show how it will be more efficient with taxes, he said.
“We believe management should immediately and
clearly articulate how it intends to deliver value from these investments to
Yahoo shareholders in the most tax-efficient and expeditious manner,” he said.
Starboard’s Strategy
Founded in March 2011, Starboard typically
focuses on a small-cap activist strategy developed by Smith and Mark Mitchell
since 2002 and Peter Feld since 2005 -- buying stakes in companies they call
undervalued and pushing executives and directors for changes such as unit
spinoffs and asset sales.
Starboard recently targeted Darden Restaurants
Inc., the owner of the Olive Garden chain, Aaron’s Inc., a furnishing and
appliance supplier, and Emulex Corp., which sells chips that help computer
servers and storage networks transfer data.
Starboard knows AOL after previously pushing
for change at the New York-based Internet company. The fund went public with
its AOL stake in December 2011, building up ownership of more than 5 percent.
AOL fended off that challenge, which included a call to shake up the board.
Starboard exited its AOL stake by late 2012.
AOL CEO Tim Armstrong and Mayer were former
colleagues at their previous employer, Google.
Activist investors tend to buy at least 5
percent of a company’s stock and flag their intention to actively engage corporate
executives and directors by disclosing their holding in a 13D filing with the
U.S. Securities and Exchange Commission.
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