Monday, January 15, 2007

Latest Version of Yahoo! "Plan B" Available on Wiki

On the newly created Yahoo! "Plan B" wiki available at, I've updated and modified our "Plan B" to encapsulate many of the comments received thus far. I'm printing the current version below. Of course, if you are a Yahoo! shareholder and interested in editing/adding to the plan, and getting involved with our community, you are welcome to go to the wiki and contribute to the plan. Looking forward to more of your comments.

Yahoo! is one of the greatest companies in the world. Our group of Yahoo! shareholders believes strongly that the company could create more value for all shareholders if it took quick and decisive steps to unlock that value. The following points represent, after input/suggestions/comments from all members in our syndicate, our proposed "Plan B" for Yahoo! Until this plan is formally presented to Yahoo! management and its board of directors, we continue to welcome additional comments/thoughts from all Yahoo! shareholders.

Yahoo! Requires New Leadership at the Top.

Terry Semel has overseen Yahoo! for almost 6 years. The company went through a significant contraction in valuation during the early part of his tenure, hitting an all-time low of $7. In the period of 2003 - 2004, Yahoo!'s valuation improved in conjunction with the general recovery of all Internet stocks. In the last 2.5 years, as the the valuations of other stocks in the sector (most notably Google) have continued to rise meteorically, Yahoo's stock has stubbornly remained in neutral and then fallen back over 30% in the last year. At the same time, Mr. Semel is about to turn 64. While we are not agists, we point our simply that the timing is right for new blood in the CEO's office with a new energy and strategy to take this company forward. We would like the Yahoo! board to immediately announce a firm date within the next 12 months when Terry Semel will leave the company entirely (including the board) and begin a search process to find a new CEO. This CEO search should examine all qualified internal and external candidates. We will also be watching closely to ensure that Yahoo!'s Compensation Committee has not already approved a Nardelli-like exit package for Mr. Semel. As we mention below, Mr. Semel has already been extremely well-compensated for his time and effort at Yahoo! in the past 5+ years.

Pay-for-Performance for all Yahoo! Management.

At the same time as the new CEO is hired, the Yahoo! board should introduce a "pay-for-performance" plan for all Yahoo! management. Bonuses should be tied to preset goals for increases in revenues, cash flow, and EPS.

Restructure the Board Immediately with more Active Outside Directors who own Stock.

We believe some significant changes are needed in the structure of the board. The decline of the company's valuation in the past 2 years is not solely Terry Semel's fault. Some accountability also lies at the feet of the board. Therefore, we wish to see some changes in the make-up of the board. These changes should include replacing all current members of the Yahoo! Compensation Committee (Chaired by Arthur Kern and including Ron Burkle and Roy Bostock). In our opinion, the CEO's compensation has been excessive in the past 5+ years. Terry Semel is consitently ranked as the highest-paid CEO in the software industry and in the San Francisco Bay area. Stock options have been the primary way to reward the CEO. We note that Mr. Burkle is also a Director of KB Home, which is another board which has had a track record for approving outsized CEO compensation plans (for former CEO Bruce Karatz). Semel has received almost $250MM in compensation in the first four years since coming to Yahoo! and, as of the last proxy circular last year, holds stock granted to him or through options worth another $500MM. Even by Bob Nardelli standards, this is excessive. Last June, Yahoo!'s compensation committee set Mr. Semel's annual salary to $1 for the next 3 years. However, they included an annual grant of 1MM shares (which would amount to approximately $30MM at today's stock price) with further options that can be exercised above $31. A guaranteed $30MM a year is not the same as being paid $1. We wish to see each of the Compensation Committee members leave the board immediately. At the same time, we also support imposing 10 year term limits on all outside Yahoo! directors. At the moment, 2 of 8 outside directors have served on the board over 10 years (Messrs. Kern and Hippeau). Although they have obviously been with the company for a long time, we feel they lack the objectivity from past board decisions to make the best decisions now for Yahoo! We would additionally prefer a Non-executive Chair (or what Yahoo! calls a "Presiding Director") who is not currently a CEO. Robert Kotick leads Activision -- a demanding enough job. We prefer to see a "Presiding Director" not encumbered by active CEO duties. Finally, current directors receive their primary compensation from stock options and grants. We believe that there is a fundamental difference between the mindset of an individual who has bought stock from somone who is given stock. The latter is treated as "found money." All future outside directors need to meet requirements to purchase stock in the company themselves before coming on to the board (although allowances will have to be made for each person's net worth, as a Stanford professor's net worth will be different from a successfully retired executive - even though both might make strong directors).

Set up a Special Committee of the Board to Study "Strategic Alternatives" (Including Better Leveraging Its Strength in Non-Search Media) and Start Executing this New Vision.

To date, Yahoo! management has done a poor job of articulating to shareholders and Wall Street what is its long-term strategy and vision. We aren't the first to identify this. It was another critique surfaced in the internally-generated 'Peanut Butter Manifesto'. We believe that company has several significant strengths that it can better capitalize on and explain to shareholders and to the Street. For example, its lead in Non-Search Media (including Fantasy Sports, Launch,, Flickr, Web/media interactive shows), non-text ads, and its development in non-traditional search (e.g., Mobile Search). However, these strenghts are typically recounted in a laundry list fashion by the current CEO to the market, rather than explained as part of an over-arching strategy. We believe that Yahoo! can significantly increase shareholder value through a "go it alone" strategy and applaud it for some of the media innovation they have displayed with shows like "The Nine" and their recent "Talent Show." Yet, there needs to be some cohesion. We support, as Relational Investors proposed to Home Depot's board recently prior to it removing Bob Nardelli, that the board establish a Special Committee to study "strategic alternatives," consult with Yahoo! management and the new CEO, the company's strategy to better articulate and then execute it.

Step up the Pace of the $3B Stock Repurchase Plan Announced in October 2006.

In October 2006, in conjunction with its disappointing Q3 earnings, Yahoo! announced that its board had authorized a $3B stock repurchase over the next 5 years. YHOO's stock bottomed out this same day at just under $23. The stock is up over 6% in the first week since we announced our "Plan B" for shareholder value creation. We believe that there is considerable upside in the company's valuation. Therefore, we strongly wish to see evidence that the board is commencing the share repurchase now, rather than when the stock increases in value substantially months down the road.

Begin a Modest Cash Dividend Immediately.

Dividends are typically utilized to create additional shareholder value in older companies that have slow- or no-growth, but are generating tremendous cash. The best use of this cash is to return it to shareholders, rather than redeploying it for internal uses. High-growth companies typically pay no dividend, in favor of spending all cash on internal growth purposes (e.g., R&D). However, examples of tech companies growing and paying a dividend include National Semi, TI, and HP. Yahoo! is certainly a fast-growing company in a dynamic market with strong competitors. It needs to use its $3B cash position wisely to effectively compete and succeed for all shareholders. In our opinion, Yahoo! has been judicious in how it has used its cash for general corporate purposes (e.g., new building expansion) and M&A (although we believe it has been too judicious in passing up on earlier opportunities to buy Google for $1B and YouTube). R&D investment is another important area and, in recent years, Yahoo! shareholders have not seen a strong return on this investment vis-a-vis Yahoo!'s competitors. Yahoo!'s technical leadership needs to be accountable for this (hence a later suggestion), although we are strong believers in the many talented engineers working for the company. In our opinion, Yahoo! should introduce an immediate annual dividend of 5 cents a share, which would only amount to $40MM a year (therfore, no inhibiting the company's ability to compete effectively). More important than the cash to shareholders (which does increase value in and of itself), the dividend would be an additional discipline to Yahoo! management to spend its cash wisely. It would also symbolize management's confidence in the business, moving forward, that it will plan for and can sustain this dividend to shareholders.

Reduce Overlapping Internal Divisions.

The Peanut Butter Manifesto was one of the first examples of an internal recognition that more efficiencies could be created within Yahoo! from streamlining the various groups. The group (coming from an external acquisition) is still a distinct group from the home-grown MyWeb. Flickr is still a distinct group from the original Yahoo! MyPhotos group. Although an argument could be made my management (which we have yet to hear) that these kinds of groups should always be separate from an external perspective because they increase page views and therefore ad revenue, no justification can be made from keeping them as separate internal groups. This must be corrected immediately to improve the profitability of the organization. It would also help to clarify who, within Yahoo!, has distinct ownership and accountability for key deliverables.

Remove Anti-Takeover Provisions which are not Shareholder-Friendly.

In the most recent Yahoo! 10-Q filing with the SEC, the final Risk Factor facing the company cited is: Anti-takeover provisions could make it more difficult for a third party to acquire us. The filing goes on to detail how the board of directors can thwart a takeover of the company by diluting shareholders, if necessary. We believe these anti-takeover provisions are not shareholder-friendly. Although we believe in the long-term future of Yahoo! as an independent entity -- one that can serve as a role model for the next kind of global media company -- we strongly oppose these anti-takeover provisions if they inhibit the valuation of the company, as we believe they do. We feel they do not serve shareholders' interests, but management's. They should be swept aside immediately.

Make Changes to the Technical Leadership.

"Plan B" is about accountability to Yahoo! shareholders. The last two years have not delivered the appropriate value to shareholders compared to Yahoo!'s competitors. Partly, this is due slowness to respond in the technical area of the business. While we continue to think that the company has some of the most talented engineers in the tech world, we believe that Farzad Nazem should be replaced as the head of the Technology Group. The December 5th most recent Yahoo! reorganization kept the Technology Group as it was, with Nazem still in place as its head. We believe the organization would be better suited with a new leader. We also wish to see both co-founders and Chief Yahoo!s -- Jerry Yang and David Filo -- more actively leading this critical group in the organization. [Others in the "Plan B" community: please expand upon the next three suggestions: Other suggested value-creating actions for the technical group to study include: opening up the YPN from beta, eliminating the minimum bid within Panama, and email profit development (i.e., customized CPC ads within Yahoo! mail)].

Next Steps:

"Plan B" will continue to be modified by members of the "Plan B" Community through this wiki in the coming days.

Once finalized, we intend to communicate it to Yahoo!'s management and board for action. In the meantime, we will continue to build up our community and shareholdings.
It is the group's aim to amass a stake of 10% in the company, so that our concerns will be voiced as the largest group of shareholders in the company. Relational Investors was able to recently effect change at Home Depot with only a 1.6% stake in the company.

We will also be in touch with Yahoo!'s largest shareholders, as our plan is intent on increasing value for all shareholders. At present, the 10 largest Yahoo! shareholders include: Legg Mason, Axa, Capital Research, Janus, Barclays Global, Fidelity, T. Rowe Price, State Street, Vanguard, and Goldman Sachs.

Thank you for being part of this "Plan B" group, intent on using the power of the web and our collective wisdom through this wiki, to help one of the greatest companies in the world.

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