In a surprise move on Thursday, Yahoo! Inc. (YHOO) named two new members to its board of directors, a drastic measure that effectively pits it up against activist investor Starboard Value in a proxy battle for control of the board.
And while some prominent analysts and investors have already weighed in on the decision, saying that it was a net negative for YHOO stock owners, Yahoo shares are up modestly on Friday.
I don’t know why.
There are only so many options for Yahoo going forward: Basically a break-up or sale of the struggling digital media company is guaranteed, but the devil is in the details. Investors should prep themselves for more stress and uncertainty as YHOO and Starboard go head-to-head in an ugly battle for a faltering company with an uncertain future.
Woohoo!
YHOO: The Background
In December, YHOO announced it was looking into spinning off its core internet biz, creating a standalone company separate from its 15% Alibaba Group Holding Ltd (BABA) stake, which accounts for essentially all of the company’s current $31 billion valuation.
Yahoo’s stake in Alibaba has been a blessing for long-term investors, who have seen YHOO stock soar 90% in the last five years, driven by BABA’s meteoric growth. But now that Yahoo shares are little more than a proxy for Alibaba shares — which are down 10% from last year amidst a downturn in China’s stock market — investors are understandably antsy for a change.
After all, if Yahoo shareholders wanted that much exposure to Alibaba, they could just buy BABA stock straight-up. Stripping away the BABA holding from Yahoo exposes a deteriorating core business, one that CEO Marissa Mayer has been unable to invigorate since being lured away from Alphabet Inc (GOOG, GOOGL) in 2012.
Investors are sick of it.
Starboard Value in particular has had enough. In January, it appeared that YHOO was reconsidering a sale of its core business at the pressure of the activist investor. Now, after the surprise appointment of two directors to the board, Starboard is expected to nominate a new slate of directors in an effort to seize control of the company and move forward with a sale.
The two new directors bring the size of the board to nine members, and put the onus on Starboard to get five board seats instead of four for majority control. Starboard will likely nominate its choices before March 26, the deadline for investors to name such candidates.
For what it’s worth, there seems to be no dearth of interest from potential buyers. Verizon Communications Inc. (VZ), IAC/InteractiveCorp (IAC), Time Inc (TIME) and AT&T Inc. (T) are all in the mix.
Mayer herself is also an investor in a private-equity fund reportedly interested in buying YHOO’s core business, as it turns out. Sound like a conflict of interest?
That’s because it is.
I don’t like that aspect of this situation at all, despite the fact that this blatant conflict has kept her off the committee of Yahoo directors leading the auction process.
The Bottom Line for YHOO
Mayer should have been gone a year ago, and she tops a recent list I compiled of CEOs that should be toast before 2017 rolls around. I feel genuine pain for Yahoo investors. They are seeing the company’s last days played out slowly, and ultimately, in a manner that isn’t good for share prices.
As time drags on, and Yahoo’s core business continues to stagnate, Yahoo’s suitors will have less interest and more leverage over the company and its exhausted shareholders, many of whom just want this to be over.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
