Starboard, which said it holds a 4.5 percent stake, sent AOL a letter dated today that outlines its poor performance, estimating the Internet company sees “staggering” operating losses in display ads.
AOL Chief Executive Officer Tim Armstrong has been struggling to revive sales after the separation from Time Warner Inc. in December 2009, as AOL competed for ad dollars with Google Inc. and Facebook Inc. Revenue has dropped in four successive quarters, and AOL has lost $792.2 million since the spinoff.
“Although there is substantial skepticism about AOL’s display business, we believe there is significant value embedded in the company’s content properties,” Starboard CEO Jeffrey Smith wrote in the letter.
AOL, based in New York, gained 1.4 percent to $15.01 at 1:33 p.m. in New York. The shares had dropped 38 percent this year before today, while Google jumped 6.1 percent.
Smith created the New York-based Starboard in March through a spinoff of Ramius LLC, where he co-founded the small- capitalization value funds. Starboard invests in undervalued small-cap companies and “actively” engages with management teams and boards to identify and execute on opportunities to unlock value, according to its website.
AOL is “deeply undervalued,” and there are opportunities to improve the performance based on actions “within the control of management and the board,” Starboard said in the letter, requesting a meeting with the board. It didn’t specify what type of actions.
The investment group estimates AOL’s local Patch business will lose as much as $150 million this year on high fixed costs and “immaterial” revenue of as much as $20 million.
Over the past two years, AOL has “significantly” reduced costs, sold assets and made investments, the company said in a statement in response to the letter. AOL, which recently bought back 10 percent of its own shares, has a “clear strategy” and will continue to “aggressively” execute on it in 2012, according to the statement.
Starboard sent the letter ahead of a Feb. 25 deadline to nominate board members for AOL.
Investors are ascribing almost all of AOL’s value to its legacy Internet dial-up business, which has about 3 million subscribers, according to Smith.
“This valuation discrepancy is primarily due to the company’s massive operating losses in its display business, as well as continued concern over further acquisitions and investments into money-losing growth initiatives like Patch,” Starboard said in the letter.
The Wall Street Journal reported on Starboard’s letter to AOL earlier.
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