The battle for Yahoo! as investor seeks to sack the entire board

Profile picture for user slauchlan By Stuart Lauchlan March 23, 2016
Starboard Value has lost all patience with the Yahoo! board and senior management and is launching a proxy battle to oust them. Is this the endgame for Yahoo! and CEO Marissa Mayer?


The battle for Yahoo! - and for the tenure of CEO Marissa Mayer - has escalated with the news that activist investor Starboard Value has lost patience and is set to launch a proxy battle to remove the entire board of directors.

Starboard had been seeking seats on Yahoo!’s nine strong board without a proxy fight, but Yahoo! chose to fill two vacant slots with former Morgan Stanley investment banker, Catherine Friedman, and Eric Brandt, chief financial officer of computer chipmaker Broadcom Corp. They replace PayPal co-founder Max Levchin and discount stock brokerage pioneer Charles Schwab who resigned earlier this year.

But those appointments were made before scheduled discussions with Starboard, a decision which looks awfully like a snub to the activist investor.

Today, The Wall Street Journal reports that it has seen a letter from Starboard that states bluntly that the board and management of Yahoo! have failed to deliver on promises and should not be trusted with the future running of the firm.

Later today, Starboard will nominate nine directors, including its own CEO Jeffrey Smith.

For her part, Mayer is sticking to her latest turnaround plans, which will involve axing another 1,700 jobs. She told TV interviewer Charlie Rose earlier this month that:

We have a three-year strategic plan. I can see how it will work and how we can actually get to a successful turnaround of Yahoo…I certainly hope that our services are here a year from now and that they run even better than they do today. I can see that that should easily be the outcome.

It's an interesting interview to watch, albeit one that is clearly conducted with Mayer on a back foot.

But given that the bad news just keeps coming in, that's hardly surprising.  

The latest bundle of joy is that, according to market research firm eMarketer, Yahoo!’s net digital advertising revenues, which includes both search and display ad revenues, will plunge 13.9% this year to $2.83 billion, from $3.28 billion in 2015.  That would be the single biggest drop in six years, three of which were under Mayer’s management.

Breaking that down further, Yahoo!’s net search revenue will shrink 12.7% to $1.41 billion in 2016, while its net display revenue will drop 15.1% to $1.41 billion in 2016.  

The end result - Yahoo!'s market share in the digital ad space would be around 1.5%, down from last year's 2.1%.

For its part, Starboard has long recommended a sale of Yahoo's core search and display advertising business.

Last month, Yahoo formed an Independent Committee to explore the possible sale of its core business as it continues to consider its planned reverse spinoff. CEO Mayer is not part of that committee, although last week CFO Ken Goldman went out of his way to dispel rumors of a rift between the board and senior management:

There are tons of people who are pulling for us, including many, many investors who may not be that outspoken.

My take

The endgame begins? How likely is Starboard to succeed? It only holds around 1% of Yahoo! stock, but it does have form when it comes to ousting company directors en masse. Just ask Darden Restaurants 12-strong board. Claiming the Yahoo! board’s scalp would be Starboard’s biggest win to date.

The key will be whether the existing board calculates that Starboard can 'rabble rouse' enough disgruntled investors to back its plans. With that in mind - and working on the principle of keeping your enemies close - the decision to make two director appointments might well have been well within the board’s rights, but it was extremely un-politic.

A vote on Starboard’s proposed directors would be several months out. But if the board comes to the conclusion that the investor tide has firmly turned against it, it may either accelerate efforts to find a buyer or it may need to make some sacrifices at the very top to buy time and show shareholders that it is ready to make tough decisions.

Neither option would really support Mayer’s ambitions to have another 3 years in the CEO seat to executive her latest turnaround plan.

We'll be keeping a close eye on events as they unfold.