AOL Wards Off Starboard Challenge, Maintains Full Board

AOl Ceo Tim Armstrong
Tim Armstrong, chief executive officer of AOL Inc. Photographer: David Paul Morris/Bloomberg

AOL Inc. Chief Executive Officer Tim Armstrong persuaded shareholders to reject an activist investor’s bid to shake up the board, overcoming one of his toughest challenges since taking charge of the Internet company.

AOL’s slate -- Armstrong, Richard Dalzell, Karen Dykstra, Alberto Ibarguen, Susan Lyne, Patricia Mitchell, Fredric Reynolds and James Stengel -- won the preliminary tally of votes at the company’s shareholder meeting. Starboard Value LP, an investment firm owning 5.3 percent of outstanding shares, had fought to install three directors, saying AOL was spending too much money on failed efforts such as the Patch news sites.

“The shareholder vote was a very clear indication the value of the company will be larger in the future than it is today,” Armstrong said after the meeting, held today in Boston.

Armstrong’s case was bolstered by a rising stock price this year, and the vote may give him more leeway as he tries to transform the once-dominant Web-service provider into a digital media company driven by advertising. Still, the shares tumbled as much as 7.9 percent today, dragged down by concern that Starboard will now dump its stake in the company. The firm, run by Jeffrey C. Smith, is AOL’s fifth-largest shareholder.

“Event-driven traders are exiting ahead of Starboard’s likely exit,” said David Joyce, a New York-based analyst with Miller Tabak & Co. He has a buy recommendation on the shares.

Stock Decline

AOL shares, up 69 percent this year, fell 5.7 percent to $25.37 at the close today in New York. That marked the biggest one-day decline in more than two months.

Armstrong has made bets on Internet content, including the purchase of the Huffington Post news-and-opinion site for $315 million last year, and he’s spending as much as $300 million investing in Patch -- a “hyper-local” news service that Armstrong co-founded and sold to AOL.

“The company is re-energized and refocused, and we have one of the best brands in the Internet space,” Armstrong told shareholders at the meeting. “We are going to grow the brand back to where it should be.”

Armstrong invited Starboard’s Smith to address the crowd of fewer than 50 shareholders at the meeting, held at Boston University.

‘Terrific Company’

“I believe all shareholders in this room, including ourselves, management and the board, are all in agreement AOL is undervalued,” Smith said. “AOL is a terrific company with wonderful assets and brands -- the business should be more profitable, and the company should be more highly valued.”

Smith had criticized Armstrong’s content strategy over the past few months, saying his investments have cost the company profits. Starboard says that Patch, a network of about 860 community-news sites, lost as much as $147 million last year.

“We do not believe Patch is a viable business,” Starboard said in a report before the meeting.

The firm also estimates that AOL’s display-advertising business is losing as much as $500 million annually. The company’s ad revenue increased 5 percent in the most recent quarter to $330.1 million, while its U.S. display advertising fell 1 percent to $118.9 million -- the first decline in the past five quarters.

At the meeting, Armstrong cited a patent sale to Microsoft Corp. for $1.06 billion as evidence the directors are “making smart decisions.” While Smith claimed credit for inspiring that decision, Armstrong said the company had already been looking into selling patents last year. The company said the sale, announced in April, will be completed soon.

Advisory Firms

Earlier this month, proxy-advisory firm Glass Lewis & Co. recommended shareholders vote to elect Smith as director, while Institutional Shareholder Services Inc. endorsed both Smith and Dennis Miller, a second Starboard nominee who is an adviser to film company Lions Gate Entertainment Corp.

The third Starboard nominee was James Warner, the principal of advisory firm Third Floor Enterprises, a company specializing in digital marketing and media.

“I don’t have a tin ear as to what happens outside this company,” Armstrong told investors after the results were announced. “I’m really hoping we’ll be able to get back to work, and as much as we’ve returned shareholder value in the last year, it’s a fraction of what’s possible.”

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