Activist investorStarboard Value, which has dogged Yahoo over the years, on Wednesday sent a letter to the company demanding it make changes or face a proxy fight.
Yahoo “made the right decision” bysuspending the Alibaba spinoff, but “the continued downward spiral of Yahoo’s core Search and Display advertising businesses” has been “frustrating for us, and likely for you,” the letter, posted onValueWalk, states.
The management team hired to turn around the core business “has failed to produce acceptable results” despite more than three years of effort and billions spent on acquisition, the letter says. “It appears that investors have lost all confidence in management and the Board,” and most of Yahoo’s current value derives from its Alibaba shares.
Starboard demands “dramatically different thinking” and “significant changes across all aspects of the business starting at the board level, and including executive leadership,” according to the letter. It wants to see cost-cutting, paring off unprofitable businesses and research projects, and an overhaul of Yahoo’s incentives and compensation programs.
Yahoo should look at selling its core businesses, Starboard’s letter suggests. Otherwise, an election contest “may very well be needed” to replace members of the board.
Mixed Investor Feelings
The market immediately drove up Yahoo’s share prices briefly, but they closed at $32.16, down 4 cents from the previous day but up 35 cents from the opening bell figure.
Given the strong wording of Starboard’s letter, the market’s reaction might indicate that investors still have some faith in Yahoo CEO Marissa Mayer’s vision.
“Yahoo is in the midst of a multiyear transformation,” Yahoo said in a statement provided to the E-Commerce Times by spokesperson Rebecca Neufeld.
“We attract more than a billion people every month, and we’ve built a profitable billion-dollar business in mobile, video, native and social that we expect will drive sustainable growth,” Yahoo continued.
The company will “share additional plans for a more focused Yahoo on or before” its fourth-quarter earnings call, it said.
That probably will be held some time later this month.
Starboard is concerned by both the deteriorating financial performance of Yahoo’s core business and an “accelerating number of executive leadership departures,” the letter states.
Further, annual operating costs have increased by about $500 million despite falling revenues. Yahoo has spent more than $2.3 billion on acquisitions, most of which have “been misguided, poorly overseen, and, ultimately, shut down,” Starboard’s letter continues. “EBITDA continues to decline quarter after quarter while spending continues at an alarming pace.”
Starboard has “attempted to work constructively with management and the Board of Yahoo” behind the scenes for over a year, and has grown increasingly frustrated, the letter maintains.
“It took significant effort for us to convince you it was the right choice to suspend the [Alibaba] spinoff,” it says. “Unfortunately, instead of heeding our advice and concurrently announcing that you would explore a sale of the core business, you have now hid behind a plan to spin off the core business and Yahoo Japan without fully understanding the alternative options.”
“Apart from making acquisitions, Yahoo has not diversified,” contended Mukul Krishna, a senior global director of research at Frost & Sullivan.
Yahoo “is such a hodgepodge of different things that, unless they have a driving strategy, what you have is a zillion different things and a company that doesn’t have an identity,” he told the E-Commerce Times.
The board “might be to blame in that they haven’t been able to agree among themselves what Yahoo is,” Krishna said.
Light at the End of the Tunnel?
Mayer has a great opportunity if she defines Yahoo’s identity and strategy and strips out everything that’s not in line with that vision, he suggested.
“That means it will shrink in the short term, but in the long term, it will be much better in terms of continuity and moving forward,” Krishna remarked. “It’ll be a tough 24 to 36 months but, if they stick to that strategy, investors will back them.”