Activist Yahoo Investor Calls for Management, Board Changes, "Receptiveness" to Core Business Sale

2012-38 REP Marissa Mayer H

The new Yahoo CEO wins praise for her first investor call Oct. 22, explaining a plan to revitalize the company via mobile and search and revealing better-than-expected third-quarter earnings.

Starboard Value publishes its latest letter calling for changes at the Internet company led by CEO Marissa Mayer.

Activist investor Starboard Value on Wednesday sent its latest public letter to Internet company Yahoo, calling for a change in management and the board and saying the company must "clearly communicate" its "receptiveness" to offers to acquire its core Internet business.

"The past year has been an extremely frustrating one for shareholders of Yahoo,” Starboard wrote, arguing that there had been a "continued downward spiral of the operating and financial performance of Yahoo’s core search and display advertising businesses."

Added Starboard: "Despite over three years of effort and billions spent on acquisitions, the management team that was hired to turn around the core business has failed to produce acceptable results, in turn causing massive declines in profitability and cash flow."

The activist hedge fund said Yahoo, led by CEO Marissa Mayer, made the right decision recently to abandon its planned spinoff of its stake in Chinese e-commerce giant Alibaba and instead spin off its core Internet business. But it argued that "shareholders have no confidence that management and the board will be able to execute on a separation of these assets or improve the performance of the core business."

It also said that the new spinoff of its core Internet business would force shareholders to wait a year to see any results. It charged the company with "ignoring serious interest" in a takeover of its core business, concluding: "In order to ensure the best possible outcome for shareholders, it is imperative that you clearly communicate your receptiveness to discussions with parties who demonstrate an interest in an acquisition of the core business."

The Starboard letter continued: "Those parties can then confidently commit the time needed to make a bid. Only in this way can you truly compare the potential value received in a sale of the core business versus a substantial stand-alone restructuring of the core business."

The activist investor argued that "investors have lost all confidence in management and the board." As of Tuesday's stock market close, the value of the so-called "Yahoo Stub" — meaning Yahoo's market value less the value of its Alibaba stake — "has collapsed and is currently trading near zero," Starboard highlighted. "The bulk of Yahoo's current market value almost entirely derives from an extraordinary investment Yahoo made over 10 years ago in Alibaba and the good fortune that Alibaba's management team has executed well such that this investment today is worth over $30 billion. This compares to Yahoo's current market capitalization of approximately $30.5 billion."

Starboard concluded by saying that the Yahoo board "must accept that significant changes are desperately needed." It explained: "This would include changes in management, changes in board composition and changes in strategy and execution. If the board is willing to embrace the need for significant change and pursue a strategy along the lines of what we have proposed above, we are hopeful we can work constructively together and make changes to the board through a mutually agreeable resolution." Otherwise, the investment firm threatened to put forward its own slate of Yahoo board members.

Starboard owned a stake of less than 1 percent as of the most recent regulatory filing. But the company has been pushing for change for a while. It urged Yahoo to drop the Alibaba stake spinoff amid concerns that it could cause a big tax liability after the IRS denied the tech company's request for a ruling that the transaction would be tax-free. At the time, Starboard also called for a sale of Yahoo's core business.

Yahoo has lost a slew of top executives amid signs that Mayer's attempts to turn the business around have so far failed. The company's stock is down about 35 percent over the past year and was down in pre-market trading on Wednesday.

Starboard and its co-founder and managing director Jeffrey Smith also previously pushed for changes at AOL. It also considered buying full control of 3D technology company RealD.