Can Starboard Value Turn Yahoo Stock Around?
Activist hedge fund Starboard Value, which owns a large chunk of Yahoo! Inc. (NASDAQ:YHOO), has urged the Internet pioneer company to let go of its plans to divest its stake in Alibaba Group Holding Limited (NYSE:BABA), as this move could be heavily taxed. (Source: “Starboard Urges Yahoo to Drop Alibaba Spinoff Plan,” The Wall Street Journal, November 19, 2015.)
In a letter to the board, the president, and the CEO of Yahoo, as first reported by the Wall Street Journal, Starboard has urged the group to sell the activities that make up its very essence. In other words, Starboard is suggesting that Yahoo stock would perform much better if the company sold its core Internet business, including its search engine and display advertising, rather than selling its Alibaba holdings.
If that doesn’t actually sound like an endorsement, Starboard has a point: the proceeds of such a sale and the cash currently available to Yahoo shareholders could be given back more “effectively,” in fiscal terms, via share buybacks, capital returns, and dividends. In management’s defense, Starboard had initially approved the company’s plan to hold its stake in Alibaba, which is worth more than $20.0 billion, as a separate entity.
The U.S. Internal Revenue Service (IRS), however, refused to tell Yahoo if this would be taxable or not. If the IRS ultimately finds that the transaction should be taxed, Yahoo shareholders would have to repay about $9.0 billion in taxes. Nevertheless, Yahoo has said it would go ahead with the sale of Alibaba, a move it plans to complete before December 31.
What Do Owners of Yahoo Stock Want?
At first glance, owners of Yahoo stock might support Starboard’s foot-dragging over selling the Alibaba stake, regardless of fiscal considerations. Yahoo’s CEO, Marissa Mayer, who has now led the company for about three years, has managed to reward owners of Yahoo stock less through the core business and more because of Yahoo! Inc.’s ever more valuable stake in Alibaba. (Source: “Is Marissa Mayer’s Time at Yahoo! Coming to a Close?,” The Street, October 20, 2015.)
Robert Peck, an analyst at SunTrust, has warned investors about some of the risks that Yahoo is not addressing, the stagnation of its core Internet business being one and the recent departure of at least 13 top executives being another. (Source: “Yahoo’s board should start talking about firing Marissa Mayer, says SunTrust analyst Robert Peck,” Business Insider, November 13, 2015.)
As Peck writes, “Investors remain concerned that after approximately three and a half years and $7.0 billion in spending (M&A and R&D), management has been unable to show meaningful progress in the core turnaround.” (Source: Ibid.)
Yahoo CEO Does Have a Turnaround Plan
Nevertheless, Marissa Mayer has already started to consider alternatives to revive Yahoo’s core business in order to reverse the stock’s bearish trend. Peck, for one, negative as he has been about Yahoo’s CEO, maintains a “Buy” rating on Yahoo stock.
Meanwhile, as to whether investors should pay more attention to Starboard or Merissa Mayer, the facts are rather clear. Starboard was the one urging Yahoo to sell its large holdings in Alibaba and Yahoo Japan as early as last year: “Mayer obliged, and the company has been working on the massive spin-off all year.” (Source: “Marissa Mayer Has Lost the Narrative,” Fortune, November 19, 2015.)
Mayer has actually hired McKinsey & Co. to evaluate its business and she has also asked top executives to confirm their commitment to the firm in order to assure the success of a relaunch program known as “Project Index,” a mobile one-stop for search to revive the fortunes of the company’s core. Yahoo also announced a three-year search advertising deal with Google, through which Google AdSense will provide Yahoo’s search engine results pages with search-based advertising. (Source: “Is this the beginning of Marissa Mayer’s Yahoo turnaround?” Silicon Beat, November 9, 2015.)