Yahoo Bracing for Possible Proxy Battle to Replace Board

Hedge fund investor Starboard said one reason for its desire to shake up the board is to ensure that the company's core businesses are auctioned off properly.

If Yahoo's board of directors—who hired CEO Marissa Mayer in 2012 and have backed her through thick, but mostly thin, ever since—are too slow to make big changes at the Internet pioneer, than some investors say they will do it themselves.

Activist hedge fund Starboard Value LP, which owns 1.7 percent of the company, in a letter to the board March 24, proposed overthrowing the entire board, including Mayer, through a proxy battle. Starboard, which has been advocating changes at Yahoo since 2014, said it would nominate nine new candidates for the board.

A proxy battle is an unfriendly contest for control over an organization. This occurs when a corporation's stockholders oppose some aspect of the corporate governance, often focusing on directorial and management positions.

The fight comes as Yahoo is beginning an auction of its core Internet business, which includes the search, email and news sites that constitute the family jewels of the company's advertising business.

Reduced Expectations by Investors

Because of reduced expectations, the Sunnyvale, Calif.-based company ostensibly is being forced by activist investors who don't believe in Yahoo’s competitiveness anymore to sell off its main businesses (search and editorial) and keep the corporate identity of Yahoo as a shell to manage the rest of its assets—which consist mostly of a $30 billion part of Chinese retail giant Alibaba, a deal engineered by co-founder Jerry Yang a decade ago.

A lot of conflict remains at the board and shareholder levels, because Mayer is still talking about a rebirth of sorts to analysts and journalists—although this may well be a tactic to try to fetch a higher price for the core business from possible buyers.

In a statement, Yahoo responded that it will review Starboard's nominees and respond in due course.

Yahoo and Starboard might still come to an agreement before the company's annual meeting, expected to be held in June. If they cannot avoid a proxy fight and the Yahoo board election is taken to a shareholder vote, attention will move to several large mutual and index funds that own the stock and are expected to wield heavy influence in the final vote.

Those funds are Fidelity Investments, Vanguard Group, State Street Corp. and BlackRock Inc., which own a total of 16.2 percent of Yahoo stock. Goldman Sachs owns another 4.2 percent, according to Thomson Reuters data.

Co-founder Filo One of Starboard's Targets

Yahoo co-founder David Filo, a board member high on Starboard's "remove" list, is the company's largest single shareholder with a 7.5 percent stake. Co-founder Yang, a former chairman of the board and CEO who left the company in 2012, holds a 3.6 percent stake in the company.

Stockwise, Mayer has piloted the company to success during her tenure, yet the activists are still not satisfied. Yahoo was selling for $14.92 in August 2012 when she came over from Google as the company's eighth CEO. The stock price was $34.86 on March 24, although it was up to $52.37 on Nov. 17, 2014.

The company is still in the black, but this is largely due to her cutting costs substantially. Last month, Mayer announced that she's trimming 15 percent of the entire workforce this year.

"We have been extremely disappointed with Yahoo's dismal financial performance," Starboard said in its latest letter to Yahoo, adding that its need to officially launch a proxy fight was "unfortunate," according to Reuters.

Starboard said it remained open to discussions with Yahoo and was hopeful it could reach an agreement to get involved with the company.

Proxy Fight Might Gum Up Auction Plan

"We think everyone getting into the stock over the past six months, and most of those easing their way out, will all side with Starboard," Don Bilson, head of event-driven research at research firm Gordon Haskett, told Reuters.

Other Yahoo investors are worried that a proxy fight could hinder the auction effort, since a buyer would want to know whether a stable board and management team is in place before putting in an offer, sources told Reuters.

Starboard said in the letter to the board that one reason for its desire to shake up the board is to ensure that the core business is properly sold, adding that it is concerned with how the process is going so far.

"The same management team and board that has failed shareholders for years wants shareholders to entrust them with one of the most crucial decisions yet to be made," Starboard founder Jeffrey Smith wrote in the letter, referring to the auction of the core business.

Yahoo decided to set up an auction of its core businesses last month after it shelved plans to spin off its stake in Chinese e-commerce giant Alibaba Group.

Starboard's board nominees include Smith; Eddy Hartenstein, the former chief executive of Tribune Co.; Bridget Baker, NBC Universal's former president of TV Networks Distribution; and Rick Hill, former interim chairman of Tessera Technologies.

The deadline for shareholders to nominate directors to stand for election at the annual meeting is March 26.

Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 13 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...