By Marshall Hargrave
It’s been a long decade for Yahoo! Inc. (NASDAQ:YHOO). The search and tech company has seen its stock rise just 10% over the past 10 years.
This comes after years of battling activist investors, a carousel of CEOs, and a declining business. The saving grace has been Alibaba Group Holding Ltd (NYSE:BABA), where Yahoo has a 15% stake in the company. The success of Alibaba has helped overshadow Yahoo’s own problems.
However, a perfect storm has been brewing at Yahoo. The company announced plans to spin-off its stake in Alibaba in early 2015. Yahoo invested in Alibaba back in 2005 and was finally looking to unlock value from the appreciation. However, Yahoo abandoned the plan, because the spinoff won’t be tax-free as initially anticipated — and the tax bill would be sizable given the growth in Alibaba. Instead, Yahoo decided to try and spinoff its own core business, including the search business and websites such as Yahoo Mail and Yahoo Finance, which would still be a taxable transaction. Then, just last month, Yahoo also said it’s willing to sell the core business. There are now tensions over the future of the company and whether Marissa Mayer is the best CEO for the job.
This all came to a head last week when Starboard Value, a well-known activist hedge fund, nominated 12 directors for the Yahoo board — which would be a full takeover of the entire board. This is an unprecedented move, as most funds only go after one or two board seats.
Starboard Value took the current Yahoo board to task, citing a lack of “leadership, objectivity and perspective needed to make decisions that are in the best interests of shareholders.” Starboard Value has been involved with Yahoo since 2014 and thinks the board has been lackluster in trying to engage buyers for its core U.S. business.
Starboard Value has a history of shaking up boards. And I think that’s something that should excite current Yahoo shareholders.
Starboard Has A Track Record Of Successful Takeovers
Starboard Value is no stranger to board room battles. Close to 70% of its activist battles over its five-year history has involved pushing for board room change. Starboard Value has won 60% of all the board seats it has vied for in the past.
Starboard is the same fund that overthrew the entire Darden Restaurants board just a couple years ago. Darden runs several well-known restaurant chains including Olive Garden and Longhorn Steakhouse. The shake-up made headlines when Starboard criticized everything from Darden’s management of its real estate holdings to how much salt was used to cook pasta at the Olive Garden chain.
Granted, Starboard Value owned 8.8% of Darden, and only owns a 1.7% stake in Yahoo. However, in terms of position size, the $500 million or so that the hedge fund has invested in Yahoo is in-line with its Darden position in 2014.
Since Starboard won control of the board, Darden shares are up 29%, outpacing the S&P 500 by nearly eightfold.
Yahoo Is An Activist Magnet
Yahoo has a recent history of having a revolving door of CEOs — five different people held the title from 2011-2012. The current CEO is Marissa Mayer, who came out on top in 2012. The company has also had a revolving door of activist investors. In 2008, billionaire Carl Icahn got involved with Yahoo in hopes of forcing the company to sell to Microsoft Corporation (NASDAQ:MSFT).
Another activist, Dan Loeb, waged a proxy battle in 2012 and ultimately got Marissa Mayer appointed to the CEO spot. Starboard Value showed up in 2014 and has since pushed for a myriad of things, including a merger with AOL, spinoff of the Alibaba stake and a full blown sale of the entire company.
This Time It’s Different
Based on shareholder sentiment, Starboard has a very good chance of winning over the board. Other disgruntled shareholders include longtime owner, SpringOwl Asset Management, which recently put out a 99-page presentation trying to persuade Yahoo to cut its workforce by 75%. Canyon Capital, another hedge fund investor, has penned a number of public letters pleading for a sale the core U.S. business.
The question is, how will Starboard unlock value once it has control of the board? The best thing for Yahoo is to get its core U.S. business sold, sooner rather than later. Then, the company can focus on monetizing its stakes in Yahoo Japan (where it owns 35%) and Alibaba.
And there have been rumors that there are a number of interested parties for Yahoo’s core business, from private equity to larger tech companies, including Verizon Communications Inc. (NYSE:VZ) which bought AOL last year. Microsoft recently came forward, noting that it might be willing to provide financing to a group of investors interested in taking the company private. Microsoft has a vested interest in keeping ties with Yahoo, which has been a search and advertising partner for years.
However, Yahoo’s current board, Mayer included, has been reluctant to entertain offers — hoping to buy time for a turnaround.
In my opinion, their time is up, and there are a couple ways for shareholders to win here. Either Starboard wins over the board, or the news of Starboard’s plans finally pushes Yahoo management to start entertaining buyout offers. Everything will come to a head in late July at the Yahoo annual shareholder meeting.
Risks to Consider: Yahoo has failed in the past to monetize its assets, with failed attempts to spinoff both its Alibaba stake and its core business. And even if the core business does get sold, there’s still not a clear plan for monetizing the stakes in Alibaba and Yahoo Japan.
Action to Take
Buy Yahoo for upside between $45 and $50 in a relatively short period. With pressure from Starboard Value, Yahoo should get its core business sold for roughly 5 times earnings before interest taxes depreciation and amortization (roughly $3.5 billion). Adding in the company’s net cash, stake in Alibaba and Yahoo Japan, and I estimate Yahoo’s fair value at close to $45 billion.