Web

Yahoo versus the hedge fund billionaire: A Silicon Valley soap opera

yahoo_marquee_billboardYahoo!’s homepage was, until recently, the most heavily trafficked website on the planet — although its titular portal, Yahoo.com, recently fell to number 4 — behind Google, Facebook, and YouTube. Yahoo!’s search engine — monstrously popular throughout much of the oughts — is still competing with Bing for the number 2 spot. And its news website is the most visited in the world, maintaining an average of 110,000,000 unique monthly users — compare that to the venerable New York Times, which got about 59,000,000 uniques in March. The steady decline of the once-pioneering tech company, however, can be attributed to many things, depending on whom you ask: A failure of leadership, improperly sizing up competition, lack of innovation — but the sudden announcement last week that Yahoo! had laid off 2,000 of its nearly 14,000 employees was an ominous signal that the Sunnyvale, CA company may have more problems than ways to solve them.

Enter Daniel S. Loeb. He’s a New York hedge-fund guy that couldn’t fit the mold of the cocky, 1 percent, Wall-Streeter any better if he jumped off the pages of a Bret Easton Ellis novel. He bid up the asking price for his company’s Madison Avenue office space so that he could claim the 4,000 foot terrace, “perfect for walking Biggie, his miniature pinscher,” according to a New York Magazine article.

Loeb started his hedge-fund, Third Point LLC, in 1995 with a little over $3 million from family and friends, and even though you’ve likely never heard his name before this moment, he has since turned that business into one of the most successful on Wall Street — he and his partners now manage nearly $9 billion. Among the various complicated financial instruments, bonds, shorts, and everything else that Loeb uses to continuously generate astonishing amounts of capital for himself and his clients, Third Point also happens to own 5.8 percent of Yahoo! stock, making it the single largest shareholder in the web company, with an estimated value of over a billion dollars.

An outspoken activist

Dan LoebIn most cases, when investors see a company like Yahoo! headed in the wrong direction, they have one of two choices: Sell their stock and lick their wounds, or hold on and pray that through some miracle of luck and leadership the company will turn around, bringing their stock value with it.

Loeb however, has a third choice. As the largest shareholder of Yahoo!, he is entitled to certain perks of membership; one of those perks is a direct line of communication between him and the board of directors. In the past he has used his position to lobby for changes at Yahoo!, changes that he argues will add value for the company, and in turn, for shareholders like himself. But as Yahoo!’s fortunes have waned over the past years — search revenue was down over 15 percent in 2011, a potentially life-sustaining deal with China’s Alibaba e-commerce group fell apart at the last minute, CEO Carol Bartz was fired by the board after only a year in her job — Loeb has become increasingly critical of the company, and he has expressed his dissatisfaction very publicly, turning the usually staid world of corporate governance into a Silicon Valley soap opera. As Loeb wrote recently in an open letter to newly appointed Yahoo! CEO Scott Thompson, responding to Yahoo!’s rejection of Loeb appointing himself to Yahoo!’s board of directors:

“Am I conflicted to advocate for the interests of other shareholders because we are owners of 5.8% (over $1 billion) of Yahoo! shares (unlike the non-retiring and proposed board members who have never purchased a single share of Yahoo!…)?”

Loeb continued, “only in an illogical Alice-in-Wonderland world would a shareholder be deemed to be conflicted from representing the interests of other shareholders because he is, well, a shareholder too. This sentiment further confirms that Yahoo!’s approach to Board representation is ‘shareholders not welcome.’”

Loeb went on to state that he would be launching a proxy war against the company in order to force its board to accept his nominees (including himself).

Yahoo! responded to the statement by asserting that there is “value in avoiding the cost and distraction that inevitably accompanies a proxy fight”, and further offered that Loeb had “rejected” Yahoo!’s compromises, and “declined” to end the proxy war “unless he personally was appointed to the Board.”

 

yahoo

Difference of opinion

Both Yahoo!’s current board and Loeb obviously feel they are the only ones with the expertise necessary to steady the foundering ship that is Yahoo!, but in all fairness, Loeb has a point. Yahoo! has been in disarray ever since it rejected a nearly $45 billion buyout offer from Microsoft. At that time, CEO and founder Jerry Yang infamously said that the deal would “substantially undervalue” the search company, calling Yahoo! “One of the most admired brands in the world” in an email he sent to employees. At that time, Microsoft was offering $31 per share for Yahoo!. Today Yahoo! stock is trading at just under $15.

And Loeb isn’t just offering lip service. He has also taken the wildly unorthodox step of creating his own website, ValueYahoo.com, in which he lays out exactly the measures Yahoo! must take in order to remain competitive, as well as criticisms of current policies.

Loeb’s suggestions include expanding Yahoo!’s audience and reach in web video, reinforcing Yahoo!’s leadership position in News, Sports, Entertainment, and Finance, and re-committing the tech company to innovation — a move that may prove difficult now that the head of Yahoo! labs has defected to Google. What is conspicuously missing from Loeb’s list, however, is a focus on Yahoo!’s search business — a likely concession to the massive popularity of Google, and the futility of Yahoo! continuing to compete in that area.

 

value yahoo

Were layoffs just a short-term ploy?

Although Yahoo! recently took the distressing step of purging over 14 percent of its workforce, rumors are circulating that those layoffs are merely the beginning of a massive restructuring. Newly appointed CEO Scott Thompson, who used to be the head of e-commerce giant Pay Pal, said in a letter to employees that although the layoffs are upsetting, they are also necessary “to compete and win in our core business,” and will result in a “smaller, nimbler, more profitable Yahoo! better equipped to innovate as fast as our customers and our industry require.”

As you might imagine, Loeb has a slightly different take; while the layoffs were unfortunately expected, Loeb responded, he was “disappointed that this round of cuts occurred before CEO Scott Thompson has articulated his strategic plan for the Company,” perhaps insinuating that the firings were a slash and burn tactic to pump up short-term profits.

The reality is that both Yahoo!’s current board and the hedge-fund billionaire Daniel Loeb should both want the same thing for the company. A strong Yahoo! that innovates and competes is not only good for shareholders, but good for consumers and users of the Internet at-large. As tech continues its march toward consolidation, the more search engines, advertising platforms, and content providers, the better for us. However, the current Yahoo! regime’s focus on patent lawsuits, among other tactics, smacks of desperation. As our own Molly McHugh put it, “the minute a company becomes a patent troll usually signals a last ditch effort to appease shareholders in the face of insurmountable obstacles.” Perhaps a board shakeup wouldn’t be the worst thing in the world.

For the good of shareholders, and the good of the Internet, Yahoo! and Loeb need to make nice and get focused on turning Yahoo! around. There’s nothing worse than a bunch of rich guys seeing who can yell the loudest.

Image Credit of Daniel Loeb: Insider Monkey

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