Starboard Boosts Pressure on Yahoo to Unlock Alibaba Value

Activist investor Starboard Value LP intensified pressure on Yahoo! Inc. in a new letter urging Chief Executive Officer Marissa Mayer to disclose her plans for assets such as a stake in Alibaba Group Holding Ltd.

In the letter, addressed to Mayer from Starboard CEO Jeffrey Smith, the investor said it had become “increasingly concerned” by reports that the Web portal is looking to make major acquisitions. He reiterated that Yahoo should unlock value by monetizing assets -- which include stakes in Alibaba and Yahoo Japan Corp. -- trimming costs and exploring a combination with AOL Inc.

“Should you instead choose to proceed down a different path by pursuing large acquisitions and/or a cash-rich split, both of which have been speculated, such actions would be a clear indication to us that significant leadership change is required at Yahoo,” Smith wrote in the letter to Mayer, adding that he has met the CEO and is having discussions with her, Yahoo management and some directors.

Sarah Meron, a spokeswoman for Yahoo, declined to comment.

The message ratchets up the pressure facing Mayer from Starboard, which had initially demanded that the CEO make changes in September. In a letter that month, Starboard had said the Sunnyvale, California-based Web company should figure out how to monetize its stakes in Alibaba and Yahoo Japan in a tax-efficient manner, cut losses in its display-ad business, stop acquiring other companies and discuss a deal with AOL.

Mayer’s Defense

The letter put Mayer, who has been trying to reinvigorate Yahoo since joining the company in mid-2012, on the defensive. In an October earnings call, she ticked off a list of points to show that her turnaround effort was making progress and said she had “great confidence” in the Web portal’s business. Yahoo’s focus “is on sustainable market-share gaining growth,” Mayer said.

Yahoo shares rose 3.4 percent to $50.23 at the close in New York, while AOL rose 7.6 percent to $49.62.

Starboard owned less than 1 percent of Yahoo, or about 7.7 million shares, as of September 2014, according to data compiled by Bloomberg.

Yahoo’s performance has been increasingly in the spotlight since the initial public offering of Chinese e-commerce company Alibaba in September. Yahoo owned about a 24 percent piece of Alibaba, which had driven much of the Silicon Valley company’s value.

Yahoo reaped a one-time boost of more than $9 billion before taxes from selling some Alibaba shares in the IPO and still retains a valuable stake of about 15 percent of the Chinese company. How Yahoo treats that stake has become a major debate, with options including a cash-rich split-off and a tax-efficient spinoff, among others.

Which Priorities

“Starboard has a point,” said Brett Harriss, an analyst at Gabelli & Co., who has a buy rating on Yahoo. “There are a lot of acquisitions that haven’t generated any financial returns.” He added that there’s a concern that Mayer is “not a steward of shareholder capital.”

In today’s letter, Smith referred to an Oct. 27 meeting with Mayer and said Starboard has had “constructive and on-going dialogue” with the CEO, her management team and some Yahoo board members. Yet he expressed “concerns” that Yahoo has made no announcement for a tax-efficient separation of the equity assets and criticized the possibility of a cash-rich split-off structure for those assets as unnecessarily complex.

A cash-rich split-off could leave Mayer with a bigger company to run compared with the plan Starboard is proposing. The transaction would require Alibaba or another affiliated company to provide cash and an active business into a new unit, which it would give to Yahoo in exchange for its Alibaba shares.

No Split-Off

Smith said Starboard has spoken with large Yahoo shareholders, who also prefer a tax-efficient spinoff over a cash-rich split-off. In addition, he said Yahoo “must significantly reduce costs to improve profitability in its core business and should be considering a combination with AOL.”

Eoin Ryan, a spokesman for AOL, declined to comment.

Bloomberg News reported earlier this week that Verizon Communications Inc. is exploring a potential acquisition or joint venture with AOL to help expand mobile-video offerings. No agreement is imminent and Verizon CEO Lowell McAdam has said the company is more interested in partnerships.

Mayer has said she will outline more of Yahoo’s plans during the company’s next earnings report, anticipated in late January. The Web portal has hired tax experts and is looking at some “promising” options to help lower the tax hit when the rest of the Alibaba stake is sold, she has said.

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