Starboard’s argument is that the market is placing zero value on the core business implying it has no confidence in Yahoo’s management to turn around the ship:
It appears that investors have lost all confidence in management and the Board. As of Tuesday’s close, the value of the “Yahoo Stub” (defined as Yahoo’s market value less the value of its shares in Alibaba) has collapsed and is currently trading near zero. The bulk of Yahoo’s current market value almost entirely derives from an extraordinary investment Yahoo made over ten 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.
The current valuation of Yahoo implies either a massive tax liability on Yahoo’s minority equity interests in Alibaba and Yahoo Japan Corporation (“Yahoo Japan”) or that the remaining operating assets of Yahoo are worthless, or some combination of the two…We are confident that both of these objectives are achievable, but will require a change in leadership and strategy.
As the letter notes, there is another possibility, namely that that Yahoo will be taxed on those non-core assets at a high rate. That approach would assign some value to the core business. Realistically, my guess is the current valuation is probably something in between and while there is likely to be some disagreement over the probabilities of the various scenarios, that seems reasonable. Given the recent tax-man extravaganza, why give the company 100% credit for being to avoid a massive tax bill?
There is no denying the fact that the core business is worse off today than it was years ago and that there is frustration, especially from the fact maybe things could have been different if only management listened to Starboard:
Yahoo’s current management has had over three years to demonstrate progress towards improving the Core Business, but despite these efforts, the Core Business continues to be plagued with deteriorating financial performance and an accelerating number of executive leadership departures…
If nothing else, the results of the past three years, which follow several other failed attempts to turnaround the business theretofore, should demonstrate to you that turning around this business is extremely difficult. To be successful, dramatically different thinking is required, together with significant changes across all aspects of the business starting at the board level, and including executive leadership. New leadership will have to develop and implement a plan to balance priorities between growth and profitability. This will mean prioritizing and investing in certain parts of the business while at the same time deeply reducing unnecessary costs, selling or exiting many unprofitable businesses and research projects, and overhauling the incentives and compensation programs to instill sound business behavior.
For over a year, we have attempted to work constructively with management and the Board of Yahoo. We have tried extremely hard to work “behind the scenes.” We have grown increasingly frustrated…We have had numerous conversations with you for over a year where we expressed our extreme concern with the trajectory of the Core Business. We told you that, aside from separating the minority equity interests, the performance and lack of turnaround execution on the Core Business was our primary concern and focus. You assured us for over a year that you had a plan for execution and that you were confident that 2014 would be a low point for EBITDA. We explained over and over again that we did not believe your actions, or lack thereof, would achieve the desired result of stabilizing the business. Unfortunately, it appears we have been right, and each quarter is worse than the last. Your solution to just announce a change in direction of the spin and that it will require another year for shareholders to wait while the existing leadership continues to destroy value is not acceptable
So that is what Starboard calls ‘working behind the scenes’? Sheesh. No doubt, turning around a company is hard and doing it in the public arena only adds to the difficulty. It requires extreme focus and dedication, which seemingly hasn’t really been an option for Ms. Meyer. Instead, she has seemingly spent the entirety of her tenure fighting with activists often about non-core issues. The first battle was over returning proceeds to shareholders of a smaller sale of its Alibaba stake and then over how to distribute the rest of the stake. In an interview last year, Ms. Meyer stated that the spinoff process ‘consumed almost her entire first two years at the company and required a small army of bankers and lawyers’. Astounding. While dealing with investors is part of a CEO’s job, that seems excessive and ultimately detrimental to the overall success of a turnaround effort.
The company’s response to Starboard’s letter was that a new plan for a more ‘focused’ company is forthcoming. Not very inspiring and it might be too little too late for Ms. Meyer. While slightly sympathetic, this isn’t meant to be a Meyer apologist piece. Many of her moves, including on the M&A front, have flopped and ultimately ended up destroying value. Financially, the business is in a worse position than where she inherited it. In the end, it’s a results based job and she hasn’t ‘delivered’ during her three year tenure (apparently CEOs get judged in the same time frame as NFL coaches) despite being paid ‘the big bucks‘ (especially in prior years). I doubt anyone really could have, but that doesn’t really matter. A new CEO favored by Starboard would at least have one less activist to deal with, although it seems plenty of other loud people have opinions about Yahoo’s future. Of course, Mondelez’s (MDLZ) CEO Irene Rosenfeld estimated that she spends about 25% of her time dealing with activists and she has generally been a receptive CEO!
Starboard recently waged war with Darden’s (DRI) board and emerged victorious so it does have a track record of success in proxy battles. Yahoo’s co-founders still hold a chunk of stock, but ultimately a proxy fight would come down to the big ETF funds and they have been much more receptive to activists. Even if Yahoo won the fight, as DuPont’s (DD) former CEO Ellen Kullman can attest, it doesn’t mean the war is over. Perhaps a sale is the best solution for the company at this point and it seems like the one most favored by Starboard. Dell appears to have benefited from a rehab outside of the public domain, but it remains to be seen if private equity would be interested in this situation. It’s a different type of company and Michael Dell was able to fund a portion of the buyout. This should only get more interesting though.
How do you think this ends? Do you think Ms. Meyer has gotten a fair shake? Does she deserve more time?
Disclosure: Author holds no position in any stock mentioned.