This article was written by Chris Ciaccia of The Deal
Yahoo! (YHOO) is firmly at war with hedge fund Starboard Value LP, as the fund led by Jeffrey Smith is proposing to nominate nine members for Yahoo!'s board, effectively calling out the current board of directors.
In a letter to shareholders, Starboard, which owns around 1.7% or $570 million of the Sunnyvale, Calif.-based Yahoo!, has noted that the board, led by Chairman Maynard Webb and CEO Marissa Mayer, have been ineffective and that it's time for a change.
"We believe that Yahoo! is deeply undervalued and opportunities exist within the control of management and the board of directors to unlock significant value for the benefit of all shareholders," Smith wrote in a letter to shareholders.
Smith went on to complain that the board is incapable of turning the company around. "We believe the board clearly lacks the leadership, objectivity and perspective needed to make decisions that are in the best interests of shareholders."
Smith is proposing Bridget Baker, Tor Braham, Brad Buss, W. Lance Conn, Dale Fuller, Eddy Hartenstein, Rick Hill, Debra Janssen and himself to the board. In the letter, Smith outlined various reasons why he contends they would be more effective than Yahoo!'s current board, with media and technology experience being the main one.
Some shareholders have previously taken issue with board members' lack of experience relevant to an Internet company, particularly one as vulnerable to the shifting changes in the advertising landscape as Yahoo! The company announced in February that Charles Schwab, co-founder of the online retail brokerage house bearing his name, was stepping down from the board.
The Wall Street Journal was the first to report that changes may be coming put forth by Starboard.
Yahoo! has had an extraordinarily rough time appeasing shareholders with its turnaround plan. Mayer, who took over in the summer of 2012, said in the fall of 2013 that it would take around three years to get revenue moving in the right direction. With investors clamoring for her head three years later, Mayer and her team are still talking about needing a few more years.
"The management team and board of Yahoo! have repeatedly failed shareholders," Smith continued in the letter. "Time and again, operating results have been decidedly negative and materially worse than management's guidance and external expectations."
In February, Yahoo! and Mayer laid out another plan to fix the embattled Internet giant, one that includes cutting operating expenses by more than $400 million this year.
Yahoo! has also said it would cut 15% of its work staff, closing offices in Dubai, Mexico City, Buenos Aires, Madrid and Milan, and would consolidate some of its digital magazines. Yahoo! has said it would explore selling non-strategic assets, like patents, which it hopes could raise anywhere between $1 billion and $3 billion, while continuing to focus on its MaVeNS (mobile, video, native advertising and social), all in an effort to try to boost the slumping stock price.
Over the past year, shares of Yahoo! have been crushed, losing more than a third of their value, as investors worry not only about the future of the core business but also its remaining 25% stake in Alibaba (BABA).
Even with the declines in Alibaba, Yahoo's stake in the e-commerce group and its Yahoo! Japan joint venture with SoftBank account for the bulk of its $32.4 billion market cap. Macquarie Capital estimates that Yahoo!'s core business is worth just $3.7 billion, or five times projected 2016 EBTIDA. UBS (UBS) has a more generous valuation of $4.85 billion, which is a blend of 1.5x 2017 sales, 6x EBITDA and 12x free cash flow.
Much of the turnaround at Yahoo! revolves around its focus on MaVeNS, an acronym Mayer came up with to focus on the future of the company. Yahoo! noted the initiatives generated $1.66 billion in 2015 revenue, up 45% year over year. Looking ahead to 2016, however, the group is only expected to generate $1.8 billion in revenue, a growth rate of just 8.4% year over year.
Part of the issue is that Yahoo! is still heavily reliant on desktop revenue at a time when ads are moving toward mobile devices. Yahoo! said PC-based revenue totaled $931 million in the fourth quarter and $3.52 billion throughout 2015. Mobile revenues over the same time frame were $219 million and $1.048 billion, respectively. By comparison, Facebook (FB) generated 80% of its $5.637 billion in fourth-quarter advertising revenue from mobile.
Adding insult to the fact is Yahoo! has written off a significant portion of the $2.3 billion in acquisitions it has made since 2012, with Tumblr being the most high-profile among them.
In the fourth quarter, Yahoo! took a $4.46 billion goodwill impairment charge on some of its assets, including Tumblr (written down by $230 million), noting that issues like "decreases in market capitalization, projected operating results and estimated future cash flows" led to the write-down.
Yahoo! paid $1.1 billion, mostly in cash, for Tumblr in 2012, with Mayer promising "not to screw it up." Even though Mayer touted that the blogging platform's daily active users grew 34% year over year (no base was given), it did not meet its $100 million revenue goal.
-- Chris Nolter contributed to this report.
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