Late last week, Marissa Mayer got the kind of letter a public company CEO never wants to get. It was an open letter from a major shareholder, telling her what to do…or else.
The letter was from a type of shareholder known as an “activist investor.”
Activist investors buy lots of stock in public companies they believe are being run incorrectly.
Usually, there is one specific thing the activist investor would like their public company targets to do, e.g. spin-out a division, merge with a rival, or commit to cost cuts.
After they buy their stake, activists will often launch media-friendly campaigns to convince the people running the public company to change their ways.
Behind these recommendations there is a sometimes explicit, sometimes implicit threat: Take my advice, or I will convince enough of your shareholders that you are a fool and together, we will vote out your board of directors and get you fired.
The letter Mayer got last week was from an activist named Jeff Smith. His firm is Starboard Value.
Starboard is the same firm that thinks Olive Garden is doing a bad job executing its unlimited breadsticks strategy. A couple years ago, Jeff Smith and Starboard put so much pressure on AOL CEO Tim Armstrong that he promised to make a division of his company, Patch, profitable by the end of 2013. When Patch wasn’t, Armstrong spun it out.
Smith wants Mayer to do four things:
- Divest Yahoo’s stakes in Alibaba and Yahoo Japan in a tax-efficient manner and return the proceeds to Yahoo shareholders.
- Cut costs by $US250 million to $US500 million per year.
- Quit buying startups that don’t add to revenues.
- Combine with AOL, perhaps in a sale that would leave AOL as the remaining company.
In his letter, Smith pointedly does not say that Yahoo’s board should fire Marissa Mayer or that she should resign.
The most threatening he gets is in his conclusion, when he writes, “We hope, and expect, that the management team and the Board will execute on the suggestions in this letter.”
But the truth is, behind those polite words there’s a very clear message.
If Yahoo doesn’t do what Smith says, he is likely to propose an alternate slate of directors for the Yahoo board.
If shareholders voted those directors onto the Yahoo board — and kicked some of its current directors off — Marissa Mayer would, in effect, have new bosses to report to, bosses that want her to do the things Smith is demanding. She would have a very short leash, and could easily be out of a job.
The good news for Mayer is that this activist campaign doesn’t have to go that far.
In fact, she can diffuse the whole situation by taking some sort of bold action that pleases Smith and/or the rest of Yahoo’s shareholders so much that there is no support for changing up the board.
Under similar pressure a couple years ago, Microsoft announced that it would increase its dividend. Apple also increased its dividend after activist investor Carl Icahn lobbied it to do so.
Here are some things Mayer could do:
- When giant Chinese Internet company Alibaba held its IPO two weeks ago, Yahoo netted approximately $US10 billion before taxes. Previously, Mayer said she plans to give half that money back to shareholders. She could give back the whole amount.
- Mayer could do a deal that’s called a “cash-rich split” wherein Alibaba acquires another company, and trades it to Yahoo for the ~400 million shares of Alibaba that Yahoo owns. Yahoo’s taxes would be much lower through this type of transaction than they would be if the company sold its Alibaba shares in the traditional manner. Shareholders might reward Mayer for that kind of value increase.
- Yahoo currently outsources its search business to Microsoft. Insiders say the deal is disappointing, and that Microsoft’s payments to Yahoo are only as big as they are because they were guaranteed. Mayer will have the opportunity to opt out of that deal next Spring. Some insiders speculate that Yahoo could immediately add $US1 billion in EBITDA if it signed a deal with Google instead of Microsoft.
- Likewise, Mayer could sign a deal with Google where Google would sell all of Yahoo’s unsold advertising inventory. That would get revenues growing again for sure. It would also allow Mayer to cut costs in Yahoo ad tech. Shareholders would eat it up.
- Mayer could use the threat of going to Google as leverage with Microsoft, and work a deal where MSN.com gets rolled in Yahoo.com. Such a combination would create lots of cost-savings — something shareholders love.
- Instead of selling to AOL, Mayer could sell Yahoo to Alibaba. Since Alibaba would be re-acquiring 400 million of its own shares at a higher price, it would not have to pay taxes on them. That would create about $US18 billion in tax savings. Some of those savings could go into the premium Alibaba would pay for Yahoo, making shareholders happy. If Mayer wanted to keep her job, she could have it so that Alibaba would spin Yahoo out as a new, separate company following the transaction. Yahoo could do a similar deal with Softbank, which, with Yahoo is a co-owner of Yahoo! Japan.
- Mayer could acquire a company that helps it charge higher rates for its advertising inventory. Lots of people in the ad tech world believe she could grow Yahoo’s margins with the purchase of a company like Turn or PubMatic. Shareholders would love an acquisition gets revenues growing again.
- Similarly, Mayer could go out and buy a company with a large cache of premium video advertising inventory — something like Hulu or VEVO.
Pretty much the only thing Mayer can’t do is nothing. If there’s no sign that Yahoo will be able to monetise its stakes in Alibaba or Yahoo! Japan, and Yahoo’s core revenues remain stagnant, shareholders will flock to Smith.