Three years ago, a big Wall Street investor named Dan Loeb bought a huge stake in Yahoo and started writing a series of open letters telling the company what to do.
Eventually, the letters forced Yahoo’s board to get rid of Yahoo’s CEO and allow the Wall Street investor to hand-pick a new CEO.
That new CEO was Marissa Mayer, hired because of her experience developing products at Google. She’s been on the job for two years.
Now, history is repeating itself.
Once again, a big Wall Street investor has acquired a large stake in Yahoo.
This time, the investor is Jeff Smith, who runs Starboard Value — a firm that specialises in in activist shareholder campaigns. Starboard is the firm that forced AOL to sell-off Patch and just took over the board of directors at Olive Garden’s parent-company, Darden.
So far, Smith isn’t calling for Yahoo’s chairman to resign — the way Loeb did immediately out of the gate three years ago. Neither is Smith lobbying for Yahoo’s board to fire its CEO, Mayer.
He’s only implied that he’s willing to make those kinds of demands if Yahoo doesn’t follow his plan for the company.
Smith’s plan, basically, is to break Yahoo into two companies.
One company, the spun-out one, would consist of Yahoo’s core business — the Yahoo.com you know.
The second company — technically the same company as the one currently trading under the symbol YHOO — would consist of Yahoo’s stock holdings in two major Asian Internet companies, Alibaba and Yahoo Japan.
According to reporting and analysis from John Jannarone at CNBC, the reason Smith wants Yahoo to do this is that he believes Yahoo’s holdings in Alibaba and Yahoo Japan are actually worth more than Yahoo’s ~$40 billion market cap.
He believes that Yahoo’s market cap is being held artificially low for two reasons.
1) He says shareholders worry that when Yahoo finally sells its stakes Alibaba and Yahoo Japan that it will pay full taxes on the sale
2) Shareholders worry that Yahoo management will keep some of the proceeds from such a sale and use them on wasteful acquisitions.
Smith’s view is that If Yahoo were to spin-out its core business, it would not have to pay any taxes on its Alibaba and Yahoo Japan stakes because it would not be selling them. Also, shareholders would know the that the Alibaba and Yahoo Japan stock could not be sold to fund any more failed acquisitions for Yahoo.
Smith’s plan for Yahoo is a fascinating one, and a few calls have confirmed that major shareholders are interested in hearing more about it.
One potential problem is: Smith’s plan has been tried before.
According to a source familiar with the situation, Yahoo considered spinning out its core business a couple years ago — sometime around 2010.
The reason the spin-out halted back then was that neither Alibaba nor Yahoo Japan would agree to provide the YHOO, the investment company, with the detailed financial information the SEC requires. Our source says the SEC is particularly demanding of “investment companies,” which is how the SEC would classify the Alibaba/YJ holding company.
Getting financials from Alibaba should no longer be an issue. Since September, Alibaba has been a public company, required to disclose everything the SEC asks.
Getting Yahoo Japan to disclose financials to the SEC might be a bigger problem. Yahoo Japan is co-owned by Japanese conglomerate Softbank. Our source says that Softbank CEO Masayoshi Son was “extremely adamant” that Yahoo Japan only trade on one exchange.
The reason: “I think he feared losing [Yahoo Japan’s] high multiple on the Tokyo Stock Exchange if an exchange in the US valued the company on a lower multiple.”
What’s this all mean for Mayer and Yahoo?
Mostly that Mayer, hired because of her reputation as a software engineer and product development skills, is going to have to become an expert financial engineer if she wants to keep shareholders happy.
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