Yahoo might be up for sale, but who would want to buy it?
via Flickr © Ian Muttoo (CC BY-SA 2.0)
- Company's recent travails partly the result of the influence of one 'activist investor'.
- Contradictory demands by hedge fund 'Starboard Value' has distracted senior management and pushed Yahoo's own recovery strategy off-course.
- Reports of Yahoo's death exaggerated as bigger shareholders have yet to reveal their dispositions.
- Are several potential buyers waiting in the wings?
It is hard to think of a better or worse example of the influence that a so-called activist investor can have on a target company's strategy and fortunes than the effect Starboard Value has had on Yahoo over the past year or so. It is no exaggeration to say that Yahoo has been so in thrall to the contradictory demands of this little-known hedge fund that it has, perforce, changed direction three times in a year and is now being compelled to make another u-turn that will send it back to where it was in the first place - somewhere down the Swannee.
Starboard Value is a fairly new and comparatively unknown New York-based hedge fund with some US$4.4 billion in investment assets under its control. It is run by one Jeff Smith, a man who, in an audacious corporate raid in 2014, seized control of the Fortune 500 company, Darden Restaurants, the parent of the US 'Olive Garden' chain of Italian restaurants.
Starboard Value owned just 10 per cent of Darden's shares at the time but nonetheless managed to oust the entire company board in a savage coup after setting out it's take-over/asset-stripping rationale in a stack of PowerPoint slides 300 thick. It was of such overpowering detail that it even critiqued the number of 'free' breadsticks put out on the restaurant tables and the 'insufficient' salting of water used to boil pasta.
Starboard Value later turned its attentions to AOL and, although the hedge fund owned a mere one per cent of Yahoo's shares, it demanded that Yahoo's embattled CEO, Marissa Mayer, should merge the company with AOL. In the end AOL was actually bought by Verizon but the die was cast and Starboard Value began to buy more Yahoo stock and watch the company very closely indeed.
As Starboard strengthened its position it continued to pressure Yahoo and now demanded that the company divest itself of its lucrative 15 per cent, (383.6 million shares), holding in Alibaba, the huge Chinese e-commerce and web portals conglomerate. Starboard further stipulated that Yahoo do it in a “tax-efficient” way, that it should not thereafter make any corporate acquisitions with any of the monies raised from the sale of the Alibaba Group shares and that it must immediately return the cash raised back to shareholders.
Obviously Starboard Value was hoping to make a killing from any such deal and continued relentlessly to ratchet-up the pressure on Marissa Mayer and the board. Yahoo eventually acceded to Starboard's dictate and prepared to sell its stake in Alibaba whilst consulting simultaneously with the US Internal Revenue Service (IRS) in an attempt to have it confirm that the sale would a tax-free transaction, thus ensuring that no stockholders would be liable for their share of the likely $9 billion tax bill due on the mooted $30 billion deal. The IRS refused to do so, saying only that it was considering the matter but was minded not to grant a 'tax-free' status to the deal.
This so worried Starboard Value that it immediately changed tack, brought it's previous demand around by 180 degrees, and is now calling on Yahoo to abandon the sale of its share in Alibaba and instead get rid of its original core online search and display businesses which, for years now, have been dwindling assets mightily overshadowed by the looming likes of Facebook and Google.
Last week, Jeff Smith wrote a letter to Marissa Mayer that reads, “For over a year now, we have attempted to work privately and constructively with you, management, and the Board. Unfortunately, time is now of the essence and the momentum around the proposed… spin-off is pulling our investment down the wrong path. If you stay on the current path, we believe the potential penalty for being wrong is just too great, and the potential reward for being right is not materially better than the other alternative.”
So, once again, Yahoo and its CEO find themselves between a rock and a hard place. To its credit, Yahoo has not yet cravenly capitulated but says that it is "considering all options" - one of which is, of course, to go ahead with the disposal of the Alibaba assets as planned and originally slated to be completed next month (January 2016), and "damn the Starboard torpedoes" as it were.
The tail that wags the dog can provoke a nasty bite from bigger brutes
Marissa Mayer's tenure as CEO at Yahoo has hardly been the turn-around triumph the company board and a shareholders were expecting. She has lurched from crisis to crisis and initiative to initiative since the failure of last year's much-vaunted comeback strategy, "Mavens". This, billed as a mighty and relentless focus on mobile, video, native and social media advertising, did not result in increased revenues as desktop search advertising continued its long, slow death spiral and dragged Yahoo further down towards the grave with it.
Ms. Mayer has looked out of her depth at Yahoo for some time now, and a series of flip-flop strategic initiatives half-heartedly or incompletely implemented hasn't helped. Neither has the exodus of talented senior executives who have recently voted with their feet and upped and left the company. There has long been a big question mark over her future as CEO and it's likely the Starboard Venture machinations will serve only to make it bigger and darker.
But, while most industry analysts think Ms. Mayer, won't, indeed can't, last much longer , she does still have her champions - of sorts. The trouble is that while evidently intending to be supportive and positive, as often as not they end up damning with faint praise. For example, one industry insider commented, "Look, it's not like she took a great company and made it crappy. What she did was take a crappy company and made it a little less crappy in some ways and a little more crappy in others." Like they say, "with friends like those…"
Currently, Marissa Mayer is pregnant with twins, due this very month, and so has not an excuse but rather a perfect reason to leave office with honour. However, she's always saying that she's "not a quitter" and so is unlikely to jump voluntarily before she is pushed - and although many shareholders and doubtless some board members would like to see her go, there's big question as to whether anyone, anywhere of the right mettle can be found to take her place.
Currently Starboard Value is the tail wagging the dog - and all the yapping it is doing is taking attention away from the fact that Yahoo is already conducting yet another strategic analysis of itself. Analysts McKinsey & Company were commissioned to undertake it and to come up with a list of those Yahoo divisions considered moribund or redundant enough to be amputated. It might well conclude that its online search and display units may have to be sold or closed.
It is also worth noting that bigger and more important shareholders have (so far) kept quiet and input from the likes of major investors such as Fidelity and Yahoo's ousted but interested co-founder Jerry Yang, when it does come, may well be decisive. But whatever happens, and when, it won't be overnight and that gives Yahoo some breathing space and a chance to try to find a buyer.
More potential buyers than you might think
And who might that buyer be? If you listen to the Cassandra's wringing their hands and bemoaning Yahoo's imminent demise, there won't be one. And that's probably true: there won't be one, there'll be several.
To begin with there's Alibaba itself. Already a huge power in the People's Republic of China, the company has ambitions to become a global player and buying Yahoo's operating assets would be a quick and fairly easy way of breaking into overseas markets. It would also be a convenient an splendidly ironic way to buy back its own shares.
And than there's SoftBank of Japan. Yahoo owns 36 per cent of Yahoo Japan, an entirely independent company, of which SoftBank, with a 43 per cent share, is the largest stockholder. SoftBank has its eye on the main chance and, in the person of Nikesh Arora, as President and COO, might have just the man to take Yahoo by the scruff of the neck and slap it back into life. The fact that prior to joining SoftBank just over a year ago, Mr. Arora had spent 10 years at Google, simply adds extra gloss to his already shiny credentials.
Furthermore, SoftBank also owns 83 per cent of US mobile carrier, Sprint, which is struggling in a market more and more dominated by AT&T and Verizon. Were SoftBank to acquire Yahoo it would help to increase Sprint's profile and presence in the wireless video arena where so many battles are now taking place.
Others in the frame include AT&T and Microsoft (which actually made a previous bid to buy Yahoo back in 2008 and, had it succeeded, who knows what the world would look like now?) while rank outsiders also mentioned include Apple, Comcast, Disney and even Twitter - which surely would be a marriage from hell, doomed to disaster from the screaming row at the wedding breakfast an so onwards. And then there's always the possibility that a private equity company could swoop in and take the lot. After all, several Wall Street analysts opine that, as they stand, Yahoo's core assets probably aren't worth much more than $2 billion. Chicken feed in the world of high finance.
And finally, just to give an additional indication of the scope and depth of Yahoo's troubles, StatCounter, the Dublin, Ireland-based web analysis company calculates that while Google has an 89.1 per cent share of the global search and display market, Yahoo has just 3.4 per cent. Put's it into stark perspective, doesn't it?