Hedge fund Starboard proposes ousting entire Yahoo board

One of Yahoo's largest shareholders has written a letter to the internet group proposing to replace the entire nine-strong board of directors with its own nominees.

Hedge fund Starboard Value, which owns roughly 1.7% of Yahoo, expressed concern about the current board's reticence in dealing with prospective bidders, including Verizon, which has publicly expressed interest in Yahoo’s core business.

Starboard reiterated its disappointment with Yahoo’s "dismal financial performance, poor management execution" and other perceived failings, saying it believed the company was "deeply undervalued", with management having opportunities within its control "to unlock significant value for the benefit of all shareholders".

"We believe the board clearly lacks the leadership, objectivity, and perspective needed to make decisions that are in the best interests of shareholders."

Starboard added that it remained open to discussions with Yahoo and was hopeful of reaching an agreement to "get involved" with the company.

Time Inc, owner of titles ranging from People, Sports Illustrated and Time magazine, was reported last month to be considering a possible acquisition of Yahoo's core business.

Earlier in February Yahoo admitted it was still considering options over the separation of its core business and the Alibaba wholesale marketplace this week, though a 'reverse spin' - whereby the company would spin off Yahoo, rather than Alibaba.

The California-based internet giant has formed a strategic review committee of independent directors and management to lead the effort, with chief executive officer Marissa Mayer saying separating the stake in Alibaba from Yahoo's operating business was essential to maximising value for its shareholders after attempts to heave the internet giant out of a long period of stagnating growth seem to have hit a brick wall.

Outside of Yahoo's stakes in Alibaba and Yahoo Japan, some investors have claimed the effective valuation of the company's core US business is less than zero.

Some analysts suggested the search and display advertising business could reap the group close to $4bn, with analysts at Cowen estimating a value of $3.84bn but those at Pivotal pencilling less than $2bn.

Full text of the letter:

A LETTER TO THE SHAREHOLDERS OF YAHOO! INC.
Dear Fellow Shareholders,
Starboard Value LP, together with its affiliates (“Starboard”), currently has an ownership interest in approximately 1.7% of the outstanding shares of Yahoo! Inc. (“Yahoo” or the “Company”), representing an investment of approximately $570 million and making us one of the Company’s largest shareholders.
Starboard Value is an investment management firm with a long and successful track record of investing in underperforming companies and then driving changes that result in significant value creation.
We believe that Yahoo is deeply undervalued and opportunities exist within the control of management and the Board of Directors (the “Board”) to unlock significant value for the benefit of all shareholders. Unfortunately, as we have outlined in previous letters, we have been extremely disappointed with Yahoo’s dismal financial performance, poor management execution, egregious compensation and hiring practices, and general lack of accountability and oversight by the Board. We believe the Board clearly lacks the leadership, objectivity, and perspective needed to make decisions that are in the best interests of shareholders.
To that end, we will be delivering to Yahoo today a formal nomination notice of our intention to seek the election of nine highly qualified director nominees at the 2016 Annual Meeting. These nominees have been carefully vetted and selected following a several-month long process that included the evaluation of over 100 qualified potential candidates. As described in detail later in this letter, this group of individuals, collectively, has an extremely impressive and diverse set of skills spanning finance, operations, industry knowledge, mergers and acquisitions expertise, board governance and oversight, as well as decades of experience serving on well-performing public company boards. Importantly, this group of nominees, if elected, is prepared to serve the shareholders of Yahoo and ensure that the interests of all shareholders are of paramount importance.
It is unfortunate that this action is necessary. As you know from reading our prior letters, we have been attempting to work with Yahoo for the past 18 months. Over this time frame, we have repeatedly requested an opportunity to work with the Company, including offers to join the Board and work constructively with the current directors. At every step of the way, management and the Board have pushed us away.
The management team and Board of Yahoo have repeatedly failed shareholders. Time and again, operating results have been decidedly negative and materially worse than management’s guidance and external expectations. In fact, even after management publicly stated that EBITDA had troughed in the third quarter of 2014 and would grow going forward, EBITDA actually fell 47% year-over-year1. This atrocious performance is even more appalling when you consider the billions of dollars spent in recent years on what has proven to be wasteful acquisitions and research and development expenditures. As an example, Yahoo has spent over $2.3 billion on acquisitions since 2012 and has already written down $1.2 billion relating to those acquisitions2. Looking beyond the operating results, Yahoo has failed in many other respects, including abysmal pay-for-performance, significant conflicts of interest, and egregious hiring and governance practices.
Yet now, the same management team and Board that has failed shareholders for years wants shareholders to entrust them with one of the most crucial decisions yet to be made – the outcome of the strategic review process for the core Search and Display advertising businesses (the “Core Business”) and the eventual fate of Yahoo’s minority equity interests in Alibaba and Yahoo Japan. These are highly complex issues with many potential options, some of which will likely involve serious conflicts of interest for management and certain Board members. We have offered repeatedly to provide additional bandwidth and capability on the Board, while also providing shareholders with increased confidence in the independence of the Board’s deliberations and the integrity of the process. We believe this is crucial not only to reach the appropriate conclusion, but also to ensure that potential buyers believe the Board will take their interest seriously and impartially. Thus far, all of our offers have been rebuffed.
There are good reasons for shareholders to be highly concerned about the current strategic review process. Despite what appears to be strong interest from large strategic and financial buyers, as referenced in the media, nearly two months have gone by since Yahoo officially publicly announced its intention to pursue strategic alternatives for the Core Business, and it seems little progress has been made.
“Bidders are uneasy over what was described as an uncharacteristically long document, three to four times longer than usual, without inclusion of private financial information. ‘Yahoo’s asking for restrictions without offering information,’ said a sector banker. ‘An NDA is a two-way promise. The buyer agrees not to talk, and the seller agrees to disclose private information.’ However in this case according to the banker, ‘There’s no quid pro quo’ for Yahoo bidders.”
– CTFN, March 17, 2016
As referenced in the quote above, Yahoo is only now beginning to engage with prospective bidders on NDAs and appears to be demanding onerous and off-market terms. Further, it has been well-reported that Verizon, normally a conservative company, has utilized every public appearance to state its interest in Yahoo’s Core Business. Yet, as recently as March 9th, Verizon representatives stated that they have not actually received any information from Yahoo with which to consider a bid.
“…So there has been no discussions at all… And look, what I have said in – what Lowell has said, is it’s interesting. But…until we get under the hood and really see what’s there, there’s really nothing to talk about at this point. So, we’ll have – we’ll let the process flow and when the process is announced and there’s a due diligence room, we’ll take a look and then we’ll decide what we need to do…”
– Francis Shammo (CFO of Verizon, Deutsche Bank Media, Internet, and Telecom Conference, March 8, 2016)
These issues should be troubling to shareholders, and also cast doubts for prospective buyers of the Core Business as to whether the process is genuine and whether they should commit the time and resources to evaluating a bid and making a proposal. This is why we believe it is critical to elect a new Board that would provide much-needed credibility to a process that has been publicly criticized repeatedly for being too slow, fraught with conflicts of interest, and very difficult for highly qualified and motivated strategic and financial buyers to access much needed diligence information.
Given that the strategic review process is underway and the 2016 Annual Meeting will not take place until late June, we were hopeful that we could reach a mutually agreeable resolution with Yahoo that would allow us to get involved sooner to ensure a good outcome for all Yahoo shareholders. We remain open to continuing those discussions with Yahoo.
We believe our continued involvement is crucial to ensure a full and fair sale process and to put the best possible Board in place in the event a transaction for the Core Business is not achieved in the near-term. We cannot envision a scenario where the shareholders of Yahoo would entrust the current management team and Board with executing a standalone turnaround plan given the years of failed attempts under the current leadership.
We are confident that you will find the team of professionals we are nominating to be incredibly well-qualified to serve as directors of Yahoo. We have provided detailed biographies of each of our nominees below. Over the coming weeks and months, we intend to share our detailed views on Yahoo and look forward to engaging with you as we approach the 2016 Annual Meeting.