Wednesday 28 September 2016

A push too far? Starboard's tilt at Yahoo is activist investor's biggest battle yet

Brian Womack and Beth Jinks

Published 31/03/2016 | 02:30

Starboard has form when it comes to shaking up companies. But the push to oust the Yahoo board, including chief executive Marissa Mayer, is its boldest move yet
Starboard has form when it comes to shaking up companies. But the push to oust the Yahoo board, including chief executive Marissa Mayer, is its boldest move yet

Starboard Value LP has proved its mettle as an activist investor by overthrowing the board at US restaurant chain Olive Garden's parent company and pushing a focus on real estate at store giant Macy's.

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Yahoo - the latest object of Starboard's proxy fight agitation - presents a far bigger challenge.

The hedge fund is pursuing a full sweep of the boardroom at the Web portal with a smaller stake than at past targets - 1.7pc - giving it less clout with less money on the line than some other Yahoo investors. Starboard is also taking aim at a more responsive management team than it has historically toppled, potentially making the idea that Yahoo needs new leadership a tougher sell.

To win, Starboard chief executive officer Jeffrey Smith must convince shareholders he has a compelling plan that Yahoo CEO Marissa Mayer and the current regime can't execute. The bid to oust the board comes even after the company acceded to some of the vacillating investor demands and put almost everything on the table, from spinning off its valuable stakes in Asian Internet companies to selling its main Web businesses.

"They're going to have to get specific, and it's hard as an outsider to really get specific - and know how you're really going to solve these problems," said Stephen Diamond, who teaches business law at Santa Clara University in California. "Can they come across credibly to the institutional investors and to the proxy advisory firms?"

After publicly lambasting Yahoo for 18 months and shifting its own demands - to sell Yahoo rather than spin off its stake in Chinese e-commerce giant Alibaba Group Holding - Starboard last week deployed an activist's boldest tool: seeking to replace an entire board.

Mayer, who for more than three years has been working to reignite sales growth by wooing advertisers and Web users with new products and content, in December yielded to the pressure from Starboard and other investors, cancelling Yahoo's plan to spin off its stake in Alibaba, and said the company was considering other strategic options.

That wasn't enough for Smith. The Yahoo board has failed to deliver results, he wrote in a letter to fellow shareholders last week, adding that Starboard's nominees can bolster credibility.

He said the current board can't be trusted to weigh the options that will best serve investors, and it's important for the activist to be involved to ensure a "full and fair sale process", according to the letter.

Still, some analysts questioned whether a whole new board is needed now that Yahoo is on the path that Starboard and other activists have demanded. Yahoo itself has tried to show it is serious about the process of looking at strategic options - drawing interest from private equity firms and companies in telecommunications and other industries.

Earlier this month, chief financial officer Ken Goldman said the board committee working on a possible sale of the core operations is "more active than anyone can possibly believe".

Mayer has also tried to step up her turnaround plan with a new focus on efficiency, and early last month said she would cut about 15pc of staff and shut some of the Web portal's properties. Yahoo installed two new board members - both with experience helping sell companies - earlier this month.

The current directors' fight to keep their seats could be a big distraction while the company weighs potential bids and other outcomes. Yahoo declined to comment, and Starboard didn't immediately respond to requests for comment.

"We were surprised that Starboard does not want a simple majority of the board seats, it wants all of the board seats,"

analysts at Mizuho Securities USA wrote in a note last week after the announcement. "This is gearing up to be an epic proxy fight, and we believe that this will create a significant overhang on Yahoo shares."

Being aggressive is part of Starboard's playbook. The firm has undertaken at least 33 activist campaigns at mostly small-cap companies since March 2011, when the hedge fund was created through a spinoff from Cowen Group's Ramius LLC.

Smith doesn't shy away from proxy fights. Starboard has sought board representation in the majority of those campaigns, sometimes settling for directorships before a shareholder vote is held, data compiled by Bloomberg show.

The most successful - a complete takeover of Darden Restaurants Inc.'s 12-director board - was part of a broader shareholder revolt over some of the most egregious corporate behaviour Starboard has confronted.

For example, according to a Starboard analysis in 2014, Darden was selling Red Lobster for just $100m more than the value of the chain's real estate, which could have been sold tax-free.

Starboard had lobbied Darden with an almost 300-page list of recommendations for improving the business, backed by another activist shareholder, Barington Capital Group LP.

Instead, CEO Clarence Otis sold Red Lobster outright and stepped down, raising the ire of most shareholders.

Starboard also isn't new to the Internet industry, having previously run an activist campaign at AOL.

The hedge fund lost a proxy fight at that company, also a fallen Internet pioneer, in 2012, when AOL CEO Tim Armstrong persuaded shareholders to reject the activist's three director nominees and support the company's slate.

Starboard still made a lot of money. The New York-based fund announced a 4.5pc stake in AOL via a letter to Armstrong and the board on December 21, 2011, criticising the company's spending on failed efforts such as the Patch news sites. Starboard raised its stake to 5.1pc by February 16, 2012, when it disclosed the holding in an activist regulatory filing.

AOL's stock gained 79pc from Starboard's original letter through June 13, the day before AOL said shareholders backed the existing directors.

Starboard is also adding to its Yahoo stake while it wrestles with management over board control.

The fund owned almost 8 million shares at the start of 2015, then halved that stake by mid-year, before doubling down again in the third quarter, according to data compiled by Bloomberg.

While it added shares, its holdings are still less than the 5pc or more that activists typically amass, giving them a larger base on which to build support and more credibility with investors.

Though it doesn't have a massive stake, Starboard's Yahoo holdings still put it among the larger shareholders in the company. Co-founder David Filo is the biggest, with more than 7pc.

Regardless of the size of its stake, the fund must still bear the costs and work of persuading other investors - and wouldn't take that risk lightly. It's also possible Yahoo announces a transaction before shareholders get to vote on Starboard's slate, at a meeting expected in June or July.

A settlement seems unlikely. Starboard would have canvassed enough Yahoo shareholders to be emboldened before launching this full-slate fight. Starboard publicly threatened a board battle in November, and in February had its proxy-solicitation advisers calling Yahoo shareholders.

"The logic here is still you're leaning on the big passive institutions," said Alon Brav, professor of finance at Duke University's Fuqua School of Business.

"I would think that you're probably going to go through a contest and spend all those resources - it's quite costly - if you think that there's a good chance they'll support you." (Bloomberg)

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