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Yahoo! Remains Too Hot to Handle
09/21/2011 11:00 am EST
The Chinese symbol for "crisis" is a combination of the symbol for ’risk" and the symbol for "opportunity," and few stocks embody this better than Yahoo!, writes Jim Fink of InvestingDaily.
Along those lines, an old Chinese proverb is “may you live in interesting times.”
On first glance, this sounds like an expression of goodwill, but it’s actually a curse. This becomes clear when you learn of another Chinese proverb that says:
It’s better to be a dog in a peaceful time than be a man in a chaotic period.
The Chinese love stability because it signifies strength and peace of mind. In contrast, a time of instability signifies weakness and danger. Given this mindset, it’s no wonder that Sun Tzu’s The Art of War is one of the most revered books in all of Chinese literature.
Unfortunately for investors in Yahoo! (YHOO), these are very interesting times.
The latest string of corporate chaos started last May, when Yahoo! announced that Chinese e-commerce company Alibaba—in which it owns a 43% interest—had transferred its Alipay electronic-payment subsidiary to another Chinese company 100% owned by Alibaba founder Jack Ma.
The transfer was made without consulting Yahoo! and without agreeing in advance to a fair purchase price for the Alipay subsidiary. A settlement was reached in July between Jack Ma and Yahoo! in which Alibaba would retain a 37.5% interest in Alipay’s equity value.
Losing 62.5% of Alipay’s value for no compensation doesn’t sound like a good settlement, but it’s the best that then-Yahoo! CEO Carol Bartz could achieve. Hedge-fund manager David Einhorn was so disgusted with the situation that he dumped his entire stake in Yahoo!.
July also saw Yahoo! report poor second-quarter earnings that saw revenue decline 23% because, as then-CEO Bartz put it, “We didn’t have enough salespeople in front of the big clients.” The stock collapsed 8% in one day.
Bartz appeared to admit that the poor financial performance was her fault, but Yahoo! Chairman Roy Bostock said at the time that “this board is very supportive of Carol and the management team.”
Carol Bartz Gets Fired
What a difference a few months make. On September 6, Bartz was fired by Bostock over the phone with no advance warning. You have to be pretty out of the loop to be the CEO of a company and have no clue that the axe is about to fall.
Bartz didn’t take the news well, telling Fortune soon afterwards that the Yahoo! board “f---ed me over.” When Bostock finished firing her over the phone, Bartz questioned Bostock’s manhood:
"Roy, I think that’s a script. Why don’t you have the balls to tell me yourself? I got it. I got it. I thought you were classier."
When asked why she was fired, Bartz replied that the Yahoo! board was trying to deflect blame from itself: "They’re trying to show that they’re not the doofuses that they are."
Does calling someone a “doofus” constitute disparagement? Is the Pope Catholic? I would say so, and consequently there is a chance that Bartz forfeited her rights to a $10 million severance payment because her employment contract included an anti-disparagement clause.
NEXT: Dan Loeb Gets Involved|pagebreak|
Dan Loeb Gets Involved
With Bartz gone, Chairman Bostock may have thought he could breathe easier, but he was mistaken.
Just two days later, hedge-fund manager Daniel Loeb sent a letter to Yahoo!’s board disclosing that his Third Point hedge fund had acquired a 5.15% stake in Yahoo!, at an average price of around $14 per share, and that he wanted changes in Yahoo! management.
Specifically, he blamed Yahoo!’s board for hiring the foul-mouthed Bartz in the first place, arguing that her prior experience as CEO of architectural software firm Autodesk (ADSK)—which catered to corporations—was not relevant to the needs of a consumer-oriented Internet company. Bartz was allegedly responsible for alienating the company’s Asian partners, Alibaba and Yahoo! Japan, which resulted in the Alipay debacle.
Secondly, Loeb criticized the Yahoo! board for turning down Microsoft’s (MSFT) $31 per share offer, made back in 2008, to acquire the company. Loeb then demanded that Bostock and three of his fellow directors resign from the board immediately and be replaced by directors of his choosing.
Despite all of this criticism, Loeb also made it clear that he thought that Yahoo!’s situation was fixable and that the company’s shares were “grossly undervalued.” In fact, with new management, Loeb thought Yahoo! was worth “in excess of $20 per share,” which is more than 30% above its current market price.
Loeb followed up this letter with a telephone conversation on September 12 between himself, Yahoo! Chairman Bostock, and Yahoo! co-founder Jerry Yang. The call did not go well, and ended with Bostock hanging up on Loeb:
After Loeb questioned Bostock’s leadership and commitment to act in the best interests of shareholders, Loeb concluded from Bostock’s failure to acknowledge any responsibility for Yahoo!’s problems that Bostock was unaware of what it takes to be an effective leader and that Bostock was not likely to resign from the Board of Directors.
Two days later, on September 14, Loeb sent a letter to Yang pleading with him to dump Bostock, calling him a “destroyer of value.”
That same day, Loeb spoke at a CNBC-hosted Delivering Alpha conference in New York City, where he told the hedge-fund crowd in attendance that Yahoo! was his favorite investment right now, despite the fact that it had:
"One of the most horrendous management teams I’ve seen in 16 years. It is run by people who don’t know what they were doing. No one wants to work with clowns onboard. Yahoo! hasn’t changed since 2004. It has the same crappy interface and the same stupid logo."
Meanwhile, at the time of Bartz’ firing, Yahoo! announced that it would undergo a “comprehensive strategic review,” which usually means that the company will either be putting itself up for sale or—at the very least—divesting itself of substantial assets (like the Asian assets of Alibaba and Yahoo! Japan, which some analysts estimate constitute 80% of Yahoo!’s entire market value).
As part of the review, the company has hired two investment banks, Allen & Company and UBS, to provide guidance. In addition to fending off Loeb, Yahoo! has to deal with a merger proposal from AOL (AOL) and a possible takeover attempt from Silver Lake Partners and Andreessen Horowitz, a private equity firm and venture capital firm, respectively.
Since Bartz’ firing and Loeb’s shareholder activism, Yahoo! stock has risen 20% on speculation of a buyout. Yahoo! co-founder Jerry Yang insists that the company is “not for sale,” but he owns only a 3.6% stake and couldn’t stop it from happening.
Interesting times indeed.
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