Impatient with Yahoo, some investors cheer Starboard effort

Activist hedge fund Starboard Value LP’s campaign to replace Yahoo Inc’s board of directors is being welcomed by some investors who have grown impatient with the faded Internet pioneer’s drawn-out process of selling its Web business.

Starboard, which owns about 1.7 percent of Yahoo, said last week it was seeking to remove the entire board of the company after pushing for changes since 2014.

Four years after Marissa Mayer took over as chief executive and promised a turnaround, Yahoo continues its struggle to keep up with Alphabet Inc’s Google and Facebook Inc in the battle for online advertisers.

Yahoo shares have risen about 5 percent since March 23, the day before Starboard called for the changes. The stock has fallen 18 percent over the past 12 months, but is up 10 percent so far in 2016.

More than a half-dozen investors of various sizes and investment strategies contacted by Reuters this week, including an executive at one of Yahoo’s 10 largest shareholders, all praised Starboard’s move as one that would help provoke necessary changes.

Many investors declined to comment, making it hard to determine if Starboard’s move would succeed. The shareholders who spoke represent a small percentage of what Starboard would need to take control of the board.

Yahoo declined to comment for this article.

In February, Yahoo said it would auction off its core business while attempting to split its stakes in Chinese e-commerce leader Alibaba Group Holding Ltd and Yahoo Japan from the rest of the business. Yahoo holds a 15.27 percent stake in Alibaba and a 35.49 percent stake in Yahoo Japan.

Some investors said they have become disenchanted with Mayer. Others said they were never fans of her but bought the stock expecting strategic moves that would boost its value.

None voiced support for Mayer.

“There’s going to be overwhelming support for the Starboard slate if there is not material value creation ahead of the annual meeting” through an asset sale, said Jeff Lignelli, chief executive of Incline Global Management in New York, which owns about a million of Yahoo’s roughly 950 million shares outstanding.

Lignelli said he began buying Yahoo shares two years ago. “We weren’t necessarily Mayer fans, but we were fans of the future of Alibaba” and other parts of Yahoo, he said, adding he would now support the dissidents.

Ted Chen, a portfolio manager at Water Island Capital in New York, which has about 759,000 shares of Yahoo, said his firm also would likely support Starboard’s slate of directors if no deal is reached before the annual meeting in the summer.

“We have lost some faith in this board doing the right thing,” Chen said. “I want to make sure we have a chaperone in the boardroom.”

Last week, after Starboard’s announcement, Yahoo set an April 11 deadline for preliminary bids, which could yield a deal by June or July, before the annual meeting, the Wall Street Journal has reported.

Yahoo, whose core Internet business includes search, mail and news sites, said it has improved the Web properties by focusing on mobile, social networking, native advertising and video.

Starboard’s goal of selling the core business is in line with Mayer’s plan, and in a public letter on Thursday Starboard wrote that it wanted to ensure a “full and fair sale process.”

“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, referring to the auction.

Analysts said that after years of failing to restore growth, Yahoo’s management has a credibility problem with investors, who see a deal raising asset value.

“What’s taking place now puts the current board’s feet to the fire,” said Victor Anthony, analyst at Axiom Capital. Brian Wieser, an analyst at Pivotal Research Group, predicted that Starboard would easily win a proxy fight.

Mario Gabelli, whose investment firm owns 2 million Yahoo shares, and several others said they would likely support only some of Starboard’s slate. Gabelli said he would not want to give Starboard control of Yahoo without a significant premium, but that it would be important to send a message to Yahoo leadership.

“Something has to be done,” he said.