Yahoo faces proxy fight as activist investors seek to oust board

Time is running out for Yahoo to turn around its fortunes, as pressure mounts from activist investors seeking to oust the struggling tech firm’s board and sell its core business.

Starboard Value said on Thursday it will nominate nine directors to Yahoo’s board, a move that, if successful, would likely end Chief Executive Marissa Mayer’s 3.5-year effort to revive the Silicon Valley giant that was once the definitive guide to the Internet.

The New York hedge fund, which is one of Yahoo’s largest shareholders with 1.7% of outstanding shares, says Mayer has not worked hard enough to find a buyer for Yahoo or to pursue new methods to spin off its lucrative Yahoo Japan and Alibaba holdings after an earlier attempt collapsed because of tax concerns.

“The management team and board of Yahoo have repeatedly failed shareholders,” Starboard wrote in a letter to Yahoo shareholders. “Time and again, operating results have been decidedly negative and materially worse than management’s guidance and external expectation.”

Yahoo did not respond to Starboard’s letter, instead issuing a statement that said the company’s board nominating and governance committee “will review Starboard’s proposed director nominees and respond in due course.” Yahoo’s annual shareholder meeting is generally held in June.

Starboard's nominees include Eddy Hartenstein, former publisher of the Los Angeles Times and current board director of the paper's owner, Tribune Publishing Co. He is among a cadre of candidates Starboard touted in its letter for their board experience and knowledge of finance, operations and mergers and acquisitions, among other qualities.

Jeffrey Smith, CEO of Starboard and chairman of Darden Restaurants Inc. — the Olive Garden parent company he took over through a past proxy victory — would take a seat on the board as well.

“This is essentially a vote of no confidence by one of Yahoo’s largest investors,” said Patrick Moorhead, president and principal analyst of Moor Insights and Strategy. “It’s true that company turnarounds do take five to seven years, but to keep people happy along the way you have to show progress, and that’s what Yahoo and Marissa Mayer haven’t done.”

Analysts say the proxy fight isn’t wholly unexpected. Investors, particularly Starboard, have lost patience with Yahoo as its share price has taken a downward trajectory since November 2014. In the last 16 months, Yahoo shares have lost 32% in value. Shares in the company traded at $34.71 as of 10:50 a.m. Pacific time Thursday, down since news of the proxy battle broke.

Recently announced office closures, layoffs and financial losses come as investors have grown increasingly frustrated with Mayer’s turnaround strategy, which has not proved successful. There have also been rumblings of discontent that Mayer and Yahoo’s chairman, Maynard Webb, have expressed less-than-enthusiastic sentiment about pursuing a sale of the company.

Based on Starboard’s past letters to Yahoo’s board members and the CEO, the activist investor has made clear it would rather see a new board take over and prepare the company for sale than watch the existing board and executive leadership drag their feet as the Yahoo continues to lose money.

“Investors are tired of hearing excuses,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “Every three months or so investors are told to wait a little longer because there are some positive signs. But nothing happens and the company seems to get worse.”

Gordon believes that because of Yahoo’s weakened position, Starboard has a good shot at convincing large institutional investors it’s time for a significant change. A Starboard victory will most likely result in new leadership and a sale of the company’s core assets.

“The existing board won’t fire the CEO,” Gordon said. “The new board will fire the CEO and probably sell the company to somebody who has a viable plan.”

Even if Starboard doesn’t succeed in overthrowing Yahoo’s board, its proxy filing puts pressure on Yahoo to act. Analysts say the company might accelerate the process of engaging with potential buyers or Mayer may decide she’s finally had enough and resign.

“What sometimes happens to CEOs is the distraction of these things just takes over your life, and as a consequence, you can’t do your job anymore,” said Rita McGrath, a strategic management scholar at the Columbia Business School. “At a human level, eventually it becomes too heavy.”

Mayer would be fine financially, Gordon added. “She has a parachute so golden it should be stored at Ft. Knox,” he said. But it could be a blow to the high-profile Mayer, a longtime Google executive who surprised the tech world when she accepted the Yahoo job in 2012.

And that is likely a great source of conflict as Yahoo figures out what to do next. A Yahoo sale could be seen as an admission that Mayer failed in her efforts to reignite growth. There’s been no shortage of rumored interest from larger companies to snap up Yahoo and its assets, but Mayer and Webb’s seeming lack of interest in those options has led to shareholder confusion and strengthened Starboard’s argument.

Come Yahoo’s annual shareholder meeting, it is possible that Mayer and her current board will prevail. But that won’t make Yahoo’s problems go away.

“The biggest challenge this proxy fight poses right now inside of Yahoo is just the embarrassment and potential derailing of the separation of the company,” said Moorhead.

And no matter how shareholders vote in the coming months, Starboard is unlikely to go away soon. “This is going to be a protracted, ugly fight.”

Starboard's slate of board candidates

• Bridget Baker: Former NBCUniversal president of TV networks distribution
• Tor Braham: Former head of technology mergers and acquisitions at Deutsche Bank
• Brad Buss: Former CFO at SolarCity and Cypress Semiconductor
• W. Lance Conn: Former president of Vulcan Capital
• Dale Fuller: Founder of WhoWhere
• Eddy Hartenstein: Former Los Angeles Times publisher and DirectTV CEO
• Rick Hill: Former CEO of Novellus Systems
• Debra Janssen: COO of Bankers Trust
• Jeffrey Smith: CEO of Starboard Value

Yahoo's current board

• Erik Brandt: Former CFO of Broadcom
• David Filo: Yahoo co-founder
• Catherine Friedman: Former managing director at Morgan Stanley
• Sue James: Former partner at Ernst & Young LLP
• Marissa Mayer: Yahoo CEO
• Thomas McInerney: Former executive vice president and CFO at IAC
• H. Lee Scott Jr.: Former Wal-Mart CEO
• Jane Shaw: Former president and COO at Alza Corp.
• Maynard Webb, Jr.: Founder of Webb Investment Network

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