Marissa Mayer's Next Headache May Be a Nasty Proxy Fight

  • Starboard Value pushes to halt Alibaba share spinoff
  • Yahoo board is considering path forward for Web portal

The risk of a proxy fight against Yahoo! Inc.’s board is mounting as directors debate how the company can satisfy investors fed up with lackluster performance and persistent uncertainty over the spinoff of a $30 billion stake in Alibaba Group Holding Ltd.

Chief Executive Officer Marissa Mayer and her fellow directors met this week amid reports they were considering drastic options, including scrapping the spinoff or selling Yahoo’s main Internet business. The meeting came after activist shareholder Starboard Value publicly demanded changes last month and threatened a fight for board control. For now, the company and its board haven’t signaled a change in direction.

Marissa Mayer, president and chief executive officer at Yahoo! Inc.

Photographer: David Paul Morris/Bloomberg

Yahoo, more than three years into Mayer’s turnaround effort, is struggling to expand sales and stem market share losses. The Alibaba stake, which has helped prop up the company’s stock price, is slated to be divested next month, but Yahoo failed to get preapproval from the U.S. Internal Revenue Service on its tax-free status. Mayer can go forward with the spinoff and risk getting hit with a tax bill of more than $12 billion, or choose a safer route, such as selling Yahoo’s main business and turning it into nothing more than a shell that owns shares in Alibaba and Yahoo Japan Corp.

“The board’s under tremendous pressure,” said Stephen Diamond, a professor at Santa Clara University’s School of Law. A proxy fight is “a credible threat certainly to the board if they can’t find another solution.”

Proxy Fights

Starboard is one of the most prolific U.S. activists and has successfully forced companies to heed its wishes in the past. Last year, the activist persuaded investors to replace Darden Restaurants Inc.’s entire 12-member board after the unpopular sale of its Red Lobster chain to Golden Gate Capital. The activist investment firm also recently helped push office-supply rivals Staples Inc. and Office Depot Inc. into a merger.

A problematic spinoff of the Alibaba shares may spur a similar battle for control of Yahoo’s board. In November, Starboard CEO Jeffrey Smith sent a letter to the board and management, saying he wasn’t happy with Yahoo’s direction despite “numerous conversations and meetings” over the past year.

“The market has a dim view of the company’s current strategy,” Smith wrote. “Selling the core business now is the best outcome for Yahoo shareholders. We urge you to change direction and do the right thing for shareholders. As we have expressed to you, we expect the shareholders’ interest to remain of paramount importance and will look to make significant changes to the board if you continue to make decisions that destroy shareholder value.”

Representatives of Yahoo and Starboard declined to comment.

Declining Value

Yahoo, a Web pioneer, has lost ground in the consumer-Internet market amid the rise of Google and Facebook Inc. The company’s shares have declined 31 percent this year and investors are no longer giving Yahoo’s main business any significant valuation. Yahoo’s market value of $33 billion is less than the sum of its $30 billion Alibaba stake, $8 billion in Yahoo Japan shares and $6.8 billion in cash and equivalents, according to data compiled by Bloomberg.

“The board is going to end up having to negotiate something with Jeff one way or the other,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business, referring to Starboard’s CEO. “They can do it behind closed doors or they can do it after he prevails in a proxy fight.”

In September of 2014, Starboard sent its first salvo with a letter urging Mayer to find a solution to escape a hefty tax bill, with some proposed options, including a tax-efficient spinoff of the Alibaba shares and a similar move for the company’s stake in Yahoo Japan. It also sought an overhaul of Yahoo’s core Internet advertising and search business, including a potential merger with a rival. Then in January, Yahoo unveiled the Alibaba plan, quieting critics.

That hit a snag in September, when tax authorities declined to bless the deal in advance, throwing it into doubt. While the IRS expressed concerns about how these spinoffs, which combine a small operating business along with investment assets, escape tax hits, Yahoo decided to move forward with the Alibaba divestment, predicting completion in January 2016.

Earlier Battles

The fight with Starboard isn’t Yahoo’s first run-in with disgruntled activists. In 2012, Third Point LLC’s Dan Loeb succeeded in getting himself and two nominees on the board after tangling with former CEO Scott Thompson, who stepped down after failing to correct errors in his credentials. Later that year, Loeb was instrumental in getting Mayer to lead the company.

In 2008, Carl Icahn, the billionaire activist investor, joined Yahoo’s board after threatening a proxy fight when the company failed to sell itself to Microsoft Corp. and co-founder Jerry Yang stepped down as CEO. Icahn left the board in 2009.

The most likely scenario, as Starboard steps up pressure on Mayer and Yahoo’s board, will be a decision by the company to pause the spinoff as it works out other scenarios, according to Robert Peck, an analyst at SunTrust Robinson Humphrey Inc. A potential proxy would also be months away, as Yahoo’s annual meeting is generally held in June, meaning dissident director nominations would be expected around March.

“We believe that the work and expenses put into the spin process are sunk costs,” Peck said in a note. “We think entertaining other, less risky and value optimizing alternatives would be well received.”

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