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Starboard Calls for Mutiny at Yahoo

By Jim Pearce on March 25, 2016

After trying privately to convince Yahoo’s board of directors to pursue a new direction for more than a year, hedge fund investor Starboard Value went public this week with its plan to oust the entire board and replace it with one of its choosing. In a letter released to the media on Thursday, Starboard announced it will submit a slate of proposed nominees to Yahoo’s board to be voted on at the company’s annual shareholders meeting this June.  

It remains to be seen if an entity that controls only 1.7% of a company’s outstanding shares can force such a radical transition, but given the level of shareholder frustration with the current board and CEO Marissa Mayer, it’s possible Starboard will succeed. But even if Starboard is not successful, this event may trigger a flood of similar actions at other companies that so far have fended off activist shareholders.

Still, Yahoo may be in a class by itself when it comes to shareholder resentment, and Mayer generates just as much antipathy with her opaque approach to articulating the company’s growth strategy. Former colleagues have described Mayer as an aloof introvert who surrounds herself with sycophants, preferring to trust her instincts, which have yet to produce meaningful results.

Recently, the company announced it was putting up some of its prized Internet assets for sale, hoping to spark a bidding war among the tech sector’s largest media players. Although several companies expressed interest in bidding on certain assets, none have stepped forward with the blank check Yahoo is looking for.

Since divesting itself of Chinese e-commerce giant Alibaba Group in September 2014, Yahoo’s share price has declined 25%, while the S&P 500 index has broken even despite two corrections. To make matters worse, expectations for Yahoo are tainted by comparisons with rivals such as Alphabet (Google’s parent company) and Facebook, both of which have seen their stock appreciate considerably while Yahoo’s has languished.

Therein lies the source of frustration for many Yahoo shareholders, who have concluded that the current management team simply does not know what to do with the company’s considerable assets. Unlike former tech titans Hewlett Packard and Xerox, which built their fortunes in an analog world only to see them destroyed by the digital revolution, Yahoo is not a case of old tech getting overtaken by new tech.

Instead, Yahoo is more like a sports team that despite its many talented players is stuck with a coach that doesn’t know how to help them make the playoffs, let alone win a championship. Sooner or later something has to give, and with Yahoo, Starboard would like to fire the entire coaching staff and choose the replacements. Although many Yahoo shareholders may agree to oust the board, they may be far more reluctant to delegate the hiring of its replacement to a hedge fund.

For that reason, I expect to see heightened interest in Yahoo’s assets before the June meeting from buyers who prefer to deal with the company’s current management rather than risk the possibility of a new executive team pulling those assets off the market altogether. Mayer is under pressure to deliver value to her shareholders, and closing a significant asset sale before the annual meeting might be enough to save her job and force Starboard to abandon its plan.

In the meantime, don’t be surprised if other underperforming companies also face shareholder mutinies. In the past, these uprisings were limited to a small number of activist investors, such as Carl Icahn, who last year attempted to bully Apple CEO Tim Cook into distributing more of the company’s considerable cash reserves to shareholders.

Icahn failed to elicit enough support from other investors because of Apple’s strong financial performance. In fact, Icahn probably did more harm than good. Since he publicly released his letter demanding change, Apple’s share price plummeted in value more than 20%, suggesting his plan may have backfired. Instead of inducing positive change, his efforts may have had the unintended effect of drawing unwanted attention to some of the company’s operating challenges.

In Yahoo’s case, most if not all of its dirty laundry has been aired already, so that demanding a shakeup of its board can’t do any harm. But shareholders of other companies should think twice before engaging in a public brawl with management. Those shareholders not only may fail to get the change they seek but could even make matters worse by stigmatizing the company and its management as weak and inept.

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