News hit the wires a little bit ago that activist investor Dan Loeb has a 5.15% stake in Yahoo!, just a day after the company botched the firing of former CEO Carol Bartz.
You can find a copy of the letter in its entirety on the SEC’s website.
Third Point LLC is now Yahoo’s third largest outside shareholder, and with this position, Loeb and Third Point are calling for massive changes at the Silicon Valley-based company. This includes the resignation of some board members, including Chairman Roy Bostock. Loeb was not kind in his letter, lashing out at Yahoo’s current Board of Directors for making a number of errors, including the hiring of Bartz, and turning down the Microsoft bid among other mistakes.
Loeb said in his letter that he believes that Yahoo is grossly undervalued, and he estimates the pretax Alibaba stake value at $25 billion. The entire marketcap of Yahoo right now is just under $18 billion, so there is significant value that Loeb sees.
In his letter, Loeb writes, “It is now widely accepted that the Board made a serious misjudgment in approving the hiring of Carol Bartz as Yahoo’s Chief Executive Officer, given her inexperience in the consumer-oriented internet space. Although we are pleased that the Board has terminated Ms. Bartz’s employment, we fail to understand why this decision was so long in coming given her abysmal performance over the last two and a half years. During this period, Ms. Bartz’s poor decision-making and communication skills publicly alienated the Company’s highly respected Asian partners, as well as its shareholders, sell-side analysts, bloggers, customers and employees.”
He goes on to thrash the board, saying the comments by Bostock to remain supportive of Bartz as recently as June 23, 2011, indicate that the board “lacks the courage to urgently make the difficult decisions required by the situation today.”
Further on in the letter, Loeb cites the egregious error to not take Microsoft’s bid back in 2008. The company wanted to offer $31 per share for Yahoo, but then CEO Jerry Yang (the company’s co-founder, and still board member), along with the board, declined the offer. Loeb cites this error, the Alipay error, and the three CEOs in four years as reasons for ripping the board to shreds. He says that the board has destroyed value for Yahoo stakeholders, and requests Bostock, and Kern resign from the board.
The Microsoft bid was valued at $45 billion. Yahoo’s market cap today? Less than $18 billion. It is painfully obvious that there is serious value destruction going on in Sunnyvale, Calif.
Loeb is especially bullish on Yahoo’s Asian assets, such as Yahoo! Japan and the Alibaba Group stake. He estimates these to be worth $3.10 and $5.24 per share, respectively. With $2.49 per share in cash, he values core Yahoo at $2.78 per share. He sees shares worth in the neighbourhood of $27-$28 per share, if you believe that core Yahoo should trade at 7 times 2012 EBITDA, instead of the 2.2 times it currently trades it. He also gets to the $27-$28 level by talking about “tax efficient outcomes for its Asian assets,” and lastly the giant stake the company has in the Alibaba Group.
Loeb is especially bullish on Alibaba, including Taobao, which he refers to has “essentially Ebay and Amazon on steroids in terms of market share and revenue growth.” Alibaba CEO Jack Ma has long been known as wanting to get rid of Yahoo’s stake either altogether or significantly lowered. His recent move to try to get the Alipay stake out of Yahoo’s control is evidence of this.
Dan Loeb is an activist investor that actually understands technology, whereas few of them actually do. Carl Icahn and David Einhorn have come and gone on Yahoo, and both have been unsuccessful. Einhorn actually exited his stake with a loss after the Alipay debacle. Perhaps Loeb will succeed where others have failed.
If not, the Yahoo board will have once and for all proven they are nothing but a bunch of yahoo’s and all hope is lost.
Traders who believe that Dan Loeb will agitate the board for the better might want to consider the following trades:
- If Loeb’s calculations aer right, there is significant upside in Yahoo shares from current levels. Investors may want to take a stab now, with Bartz gone and Loeb in.
Traders who believe that Loeb will fail may consider alternate positions:
- Yes Loeb does understand tech, but why would he succeed where others have failed before? If the board does not resign (and shareholders continue to vote for them), nothing will change. Yes, the company is actively shopping itself, but there is the chance that Yahoo’s board errors on this decision as well. Traders may want to short or buy puts if they believe this.
— Jonathan Chen
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