A few years ago, one of the older internet companies hired a rockstar executive from Google to become CEO.
The new Googler CEO brought in a bunch other Googlers. The Googler CEO brought energy and passion to the job, infusing a dying internet company with a new culture and a new sense of optimism.
The Googler CEO went on an acquisition spree, buying up all sorts of small and big companies.
Unfortunately, optimism alone can only get a company so far. The company’s results were disappointing. Revenue barely grew, and in its core business — display advertising — was going nowhere.
Sensing an opportunity, an activist shareholder group stepped in, bought a big stake and made demands for the old internet company to change its ways.
Until today, this story was about AOL and its CEO Tim Armstrong.
Now, this story is going to be about Yahoo and its CEO Marissa Mayer.
The activist fund Starboard Value LP has launched an attack on Yahoo. In a letter to Mayer, it says it is “a significant shareholder of Yahoo” and has ideas to “unlock tremendous value for the benefit of all Yahoo shareholders.”
Here, verbatim, are Starboard’s ideas:
- Unlocking the substantial value from Yahoo’s non-core minority equity stakes in Alibaba Group Holding Limited (“Alibaba”) and Yahoo Japan in a structure that delivers value directly to Yahoo shareholders in a tax-efficient manner;
- Realising substantial cost efficiencies by reducing expenses throughout the Company, specifically with a goal of reducing losses in the Display business by between $US250 and $US500 million;
- Halting Yahoo’s aggressive acquisition strategy which has resulted in $US1.3 billion of capital spent since Q2 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased; and
- Exploring a strategic combination with AOL, Inc. — a company we know well — which could improve Yahoo’s competitive position, deliver cost synergies of up to $US1 billion, and potentially facilitate the realisation of value from Yahoo’s non-core equity stakes with minimal tax leakage.
These are completely reasonable ideas from Starboard. And, if history repeats, they will be happening in the near future.
You see, in 2012, Starboard went after AOL. It had a big presentation about what it wanted AOL to do. The four big takeaways:
- AOL needs to kill Patch. It just doesn’t work as a business, and advertisers hate it.
- AOL needs to make its display business profitable by cutting the fat and investing properly.
- AOL has made the once profitable Huffington Post unprofitable. This is a metaphor for the company at large.
- AOL needs to analyse each business division on its own and make it profitable.
Today, in 2014, Patch is dead. AOL has invested in its display business properly. The Huffington Post is on its way to being profitable, Tim Armstrong says.
How all of that happened is a long and involved story. This is the truncated version. If Marissa Mayer is smart, she’ll read the long version, because what happened to AOL is going to happen to Yahoo.
Armstrong didn’t want to give in to Starboard. He fought and he won, sort of. Armstrong is still the CEO of AOL, but he had to bend to Starboard’s will.
The first thing he did to fend off Starboard was find some patents laying around that he could sell for $US1.1 billion. When that was announced, AOL’s shares shot up 43%. AOL returned that $US1.1 billion to shareholders.
To keep shareholders happy, as we previously reported, Armstrong made five commitments to AOL shareholders on an earnings call.
He said AOL would increase its earnings expectations for 2012 and 2013, distribute 100% of the patent sale proceeds back to shareholders, more clearly report which parts of AOL were doing well and which were not, appoint an independent board member, and, importantly, bring Patch to profitability by the end of 2013 “through revenue and cost improvements.”
Patch never reached profitability under AOL. So AOL sold Patch.
We fully expect the same sort of thing to happen to Mayer at Yahoo. She will try to resist. She will scramble to find a solution, but eventually she will capitulate.
Starboard’s demands are entirely reasonable, and it has the power and the money to make them a reality.
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