Yahoo Activist Starboard Draws in Smaller Investors

Starboard Value LP is gaining support from small investors in Yahoo! Inc. amid concerns about how Chief Executive Officer Marissa Mayer will turn around the Web portal and manage its assets.

Jacob Asset Management, Eagle Global Advisors LLC and other shareholders have endorsed efforts by Starboard, which last month said it acquired a significant stake in Yahoo. The activist investor wants Yahoo to explore a breakup and merge with AOL Inc. in a move that would help it keep more of the gains from its stake in Alibaba Group Holding Ltd.

“The scrutiny increases the chance that Yahoo will spend its cash wisely,” Brian Baker, a portfolio manager at Baker Ellis LLC, which owns Yahoo shares, wrote in an e-mailed statement. “We would like to see the value of the assets realized.”

Mayer, who was appointed CEO in July 2012, is facing more pressure to reward stockholders, who have valued Yahoo’s business at less than its stakes in Alibaba and Yahoo Japan Corp. Starboard CEO Jeffrey Smith wrote in a letter that Yahoo should also cut losses in its display-ad business, stop acquiring other companies and instead discuss a deal with AOL, which could deliver cost cuts of as much as $1 billion, the fund said.

Sarah Meron, a spokeswoman for Sunnyvale, California-based Yahoo, declined to comment for this story. After the initial letter by Starboard, Mayer said in a statement that Yahoo is focused on creating value for its shareholders and will update investors on its progress during a call later this month when the Web portal announces third-quarter results.

“We have great confidence in the strength of our business,” Mayer said. “We will continue to focus on evaluating various capital allocation initiatives.”

Douglas Snyder, a managing director at Starboard, didn’t respond to a request seeking comment.

Different Scenarios

Starboard hasn’t disclosed its stake in the Web portal. Before sending the letter to Yahoo, the New York-based investor was known for targeting small public companies, including Darden Restaurants Inc. In 2012, Starboard sought to put three directors on AOL’s board and gain influence over the Internet company. While Starboard lost a proxy vote, the shares of AOL had climbed 79 percent since Smith started that campaign.

Days after Starboard called for changes at Yahoo, Alternative Investment Management & Research SA, a Geneva-based investment advisory firm, wrote in a letter that SoftBank Corp., which also owns part of Yahoo Japan, should merge with Yahoo. That would put the company under the leadership of Masayoshi Son, SoftBank’s chairman.

Stepping Up

Yahoo made more than $9 billion in Alibaba’s initial public offering and kept a stake of about 15 percent in China’s largest e-commerce company, which has a market valuation that puts it ahead of Facebook Inc. and Amazon.com Inc.

In his letter, Starboard’s Smith said a breakup of Yahoo could add about $16 billion of value. The most efficient path would be to make Yahoo a holding company for the Chinese and Japanese assets, and spin off its Internet operations, he said.

“I think the concern among shareholders is that somehow that might be squandered,” said Ryan Jacob, who manages Yahoo shares as part of his Jacob Internet Fund.

Being the target of activist investors isn’t a new experience for Yahoo. In 2012, Daniel Loeb’s Third Point LLC was instrumental in forcing the ouster of former Yahoo CEO Scott Thompson. In 2008, activist Carl Icahn’s efforts eventually landed him on the board, after an effort by Microsoft Corp. to acquire Yahoo faltered.

Activist shareholders have been stepping up their campaigns in various industries and executives are taking notice, according to Jill Fisch, a professor at the University of Pennsylvania Law School.

“For a lot of the sort of passive institutions, they’re happy that a hedge fund is in there because they think maybe something will happen,” Fisch said.

Money Moves

One of the key issues for Starboard is Yahoo’s tax strategy. The Web portal said the proceeds from its sale in the Alibaba IPO were fully taxed at a rate of almost 40 percent, as was a prior sale of $3 billion in shares of Alibaba in 2012.

“We believe management should immediately and clearly articulate how it intends to deliver value from these investments to Yahoo shareholders in the most tax-efficient and expeditious manner,” Smith said in the letter.

Yahoo, a pioneer in early Web services in the 1990s, is struggling to attract new users and advertisers as they spend more of their time on mobile, search and social services offered by Facebook, Google Inc. and Twitter Inc. Sales, excluding revenue passed onto partner sites, declined in the second quarter by 2.9 percent after rising 1 percent in the prior period. Revenue declined 1 percent in 2013.

Spending Plans

Mayer has sought to counter the slowdown with acquisitions and investments. Yahoo has spent about $1.3 billion in acquisitions since Mayer became CEO, according to Smith, including its purchase of blogging-service Tumblr last year for about $1 billion.

The company could spend more. Yahoo is close to investing in mobile-messaging service Snapchat Inc. in a funding round that values the startup at $10 billion, a person with knowledge of the situation said earlier this month.

Yahoo’s investment plans are a concern for John Gualy, portfolio manager at Houston-based Eagle Global Advisors, which owns shares of Yahoo and has more than $5 billion in assets under management. The Web company might make big, risky bets as it seeks to expand and grow sales, he said.

Starboard could keep Yahoo from making costly acquisitions with the Alibaba proceeds, Gualy said.

“The core business is just so -- for lack of better words -- sort of behind the times,” Gualy said. “It’s going to be very expensive for them to transform the company.”

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