By Pete Gallo
For a company that helped pioneer the Internet term “search” and still serves as a digital hub for millions of computer users worldwide, Internet icon Yahoo has long had investors wondering aloud why it has been unable to find or execute a business plan to produce a larger market share and revenue growth online, while the likes of Google and Facebook seemingly thrive.
No single voice has been wondering so loudly, publicly and persistently as Daniel Loeb, whose activist investment group, Third Point, is the single largest investor in the company, with a 70.5 million–share stake worth more than $1 billion.
As regular readers of this column already know, Loeb’s fund group first began buying Yahoo opportunistically during the broader equity decline of 2008 and has remained a large shareholder since. Loeb late last year blasted the board in a letter noting that a revolving door of four CEOs in less than four years underscored management’s lack of direction at Yahoo. In one letter, Loeb scolded the board as “inept” in its decision making and decried the “abysmal” performance of then-outgoing CEO Carol Bartz. Loeb provided a laundry list of what he saw as missteps by management, including an alleged bungling of negotiations for a $31 per share buyout bid floated by Microsoft in 2008.
Hindsight may be 20-20, but there is no arguing that six months later Yahoo shares had dropped to about $12 and have managed only modest improvement since. As of May 16, shares traded at $15.28.
More recently, Third Point seems to have won a decisive battle in its proxy war — one that will transform Loeb from critic to frontline fighter in the struggle to unlock the company’s value and find a path to growth. In May, proxy efforts led to the removal of Scott Thompson (Yahoo’s fifth CEO in less than five years) and board members including chairman Roy Bostock, whom Loeb had previously called a “destroyer of value” at the company. Loeb and other investors had renewed their fight to reshape the board in February, an effort that prompted the Bostock-led board to declare in a statement that Loeb lacked appropriate experience to proffer solutions or serve as a company director.
This back-and-forth proxy posturing might have ended in a stalemate had it not been alleged that Thompson, a former PayPal exec, had inaccurate academic credentials listed on his résumé filed with Yahoo. Some Yahoo executives refuted the claims, but Thompson stepped down nonetheless shortly thereafter.
The net result is a sweeping management change that brings in Yahoo’s sixth CEO in a half decade, Ross Levinsohn, promoted internally to serve on an interim basis. Meanwhile, three new Third Point–backed board members are set to take the reins at Yahoo, including Loeb, who will serve on the transactions and strategic planning committee.
No one can say for sure what course Loeb and the new board will seek to chart for the company. But the manager’s outspoken views from the recent past may shed some light. Thematically, Loeb sees video and other media as a means of bolstering the company’s fortunes in an effort to shore up and expand its base of frequent users.
The manager also sees Yahoo’s strategic relationships — especially those in Asia — with Yahoo Japan, SoftBank and China’s Alibaba Group as bridgeheads to grow revenues and realize value. Filings with the Securities and Exchange Commission show that Loeb estimated Yahoo’s intrinsic value at about $20 per share, with about a quarter of that figure derived from midterm projections on the Asian e-commerce side. Yahoo recently got a windfall from the sale of half of its 40 percent stake in Alibaba for $63 billion in cash and up to $800 million in Alibaba preferred stock.
Loeb’s Third Point has provided one of the most colorful proxy fights in recent memory. Filings with the SEC outline, with remarkable specificity, this activist investor’s interaction with management and ensuing frustration, right down to abruptly ending phone calls.
Still, in some ways Third Point is back to square one. It remains the largest stakeholder in an underdog company with huge upside potential. After a steep decline, management upheavals and being written off by some Wall Street cognoscenti, on some level Yahoo looks a bit like Apple Computer did in the 1990s before Steve Jobs’s return brought new ideas and recapitalization. Recapturing even a fraction of rival Google’s search primacy would go a long way. If you think Google has grown beyond simple search, guess again. That company’s most recent 10-Q filings show that more than 90 percent of its revenues are tied to search. Such a stat may explain Third Point’s immense investment in Yahoo of not only cash but time battling the board to quickly find a rudder.