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Today, I submitted a finalized version of our "Plan B" for Yahoo! to their Corporate Secretary as nine points of business that I will ask to bring forward at this May's Yahoo! annual meeting of shareholders.
As you know, on January 7th, I first asked fellow Yahoo! shareholders to contribute your ideas towards a "Plan B" that we could present as an alternative to Yahoo!'s Board, Management, and Shareholders. You have responded with very thoughtful and creative advice, as well as with your support of the Yahoo! common shares you own.
I have spoken to half of Yahoo!'s largest institutional holders since then and, while none will publicly support our "Plan B," they all have vowed to review it thoroughly and vote independently. All acknowledge that they are aware that Google has performed 21 times as well as Yahoo! since Google's August 2004 IPO (+336% vs. +16%).
As of this morning, our group of stockholders collectively owns 911,666 shares worth $29MM. We aim to grow that group between now and the May annual meeting.
Today, I also put my name forward to the Yahoo! Corporate Secretary to be included on the slate of possible directors to be elected at the annual meeting by shareholders. I am running on this "Plan B" and because of your support.
Some have told me I will need $200,000 to run a "proxy contest" to get elected to the Yahoo! board and -- even with that -- the odds are stacked against us, as most institutional shareholders tend to be "pro-management." I don't have $200,000, but I have a love for Yahoo!, the great employees who work there, and we have a plan that has merit -- thanks to your input. We'll see what happens.
Thanks again for your support. Here's the plan....
Finalized Version of "Plan B":
1. Terry Semel should be Immediately Replaced as Yahoo!’s Chairman and CEO
We believe that Yahoo! requires a new Chairman and CEO and Terry Semel no longer deserves these key two jobs.
During his tenure, Terry Semel has made the following strategic missteps:
· Failing to buy Google in 2002. Mr. Semel claims that he could have done this in 2002 for $3B. It would have been a bargain, compared to Google’s current $144B market capitalization today.
· Destruction of Yahoo! Shareholder Value in Past 2 Years. Yahoo!’s stock price is down 7% for the past 2 years, compared to Google’s 151% increase and NASDAQ’s 20% increase over that same time period. This decrease for Yahoo! still includes the 14% increase in its stock price since our “Plan B” campaign of shining a light on Yahoo!’s underperformance which began on January 7th, 2007.
· Continued Loss of Share in Search. While Yahoo! has hastily pushed out the new Panama platform in the last month, partly in response to criticism from our stockholder group and other critics, there is no denying that it has lost critical momentum and share in the battle for search advertising dollars. In fact, according to numbers from Banc of America Analyst Brian Pitz, Yahoo! lost share faster than Microsoft in the last quarter and year vis-à-vis Google. Even with a better ad platform running, more and more users are turning away from Yahoo! for their search needs.
· Costly creation of Yahoo! Media Group and Burbank Campus. This entire investment has been a write-off for Yahoo!’s shareholders. Lloyd Braun was hired to lead this group in November 15, 2004. The company announced it was setting up stakes in Burbank on January 15, 2005. Braun left Yahoo! on December 6, 2006.
· Missing the Need to Overhaul the Overture Platform at a Critical Time in its Drive to Compete with Google. According to Fred Vogelstein’s Wired article last month: “When Yahoo decided it was going to buy Overture in 2002, Overture dominated search-related advertising; its revenue was two times Google's. By the time the deal was actually announced in 2003, the two companies were neck and neck. Two years later, Google's revenue was 2.5 times Overture's.”
· Failing to buy YouTube in 2006. Google purchased this in late 2006 and Yahoo! has yet to define a credible video offereing.
· Failing to buy MySpace in 2005. MySpace recently surpassed Yahoo! for total page views.
· Outsized Compensation for Small Shareholder Return. Mr. Semel’s first 4 years’ total compensation was $258.29MM. In 2005, he received $56.8MM in compensation. According to the 2006 proxy, Mr. Semel had $235MM in unexercised stock options, for a total of $550MM in total compensation, to date.
Bob Nardelli started as CEO of Home Depot on December 1, 2000, and collected approximately $300MM in compensation for his 6 year tenure with a $210MM severance package. Thus, his combined compensation for his time at Home Depot was $510MM. Terry Semel is already ahead of Mr. Nardelli, before mr. Semel receives any severance/retirement package.
Last June, Yahoo!'s compensation committee set Mr. Semel's annual salary to $1 for the next 3 years. However, it 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.
Terry Semel and his defenders will argue that Yahoo!’s stock price has gone up 227% since his start date of May 1, 2001 through today. However, if you properly analyze his tenure, there have been three distinct periods:
May 2001 – December 2002: Yahoo! drops 7% in value.
January 2003 – December 2004: Yahoo! grows by 355% in value.
January 2005 – Present: Yahoo! drops 14% in value.
There has only been one period in which Yahoo!’s valuation has increased under Terry Semel’s watch and we would argue that this had to do with a general recovery in the Internet Advertising market, which benefited Yahoo! and its two main rivals – Google and Microsoft – during this time. The rising tide lifted all boats/companies which were dependent on the ad market for the majorities of their revenues. As Yahoo! also had amassed enough cash before Mr. Semel’s arrival, it had the fortitude to go through the Internet Advertising drought which claimed the lives of many pre-Bubble competitors (e.g., Excite, Lycos, etc.). The only credible remaining search players post-Bubble were Yahoo!, Google, and Microsoft and advertising dollars could only go to these three players after the general market recovery began to happen. Yahoo! benefited from this rising tide (especially in display ads), for a while.
Yahoo!’s market share has been flat and steadily eroding over the past 4 years, while Google’s has dramatically accelerated. Yahoo! had a 28.9% share in February 2003 (according to Neilsen NetRatings), compared to 29.5% for Google. However, Yahoo!’s share had dropped to 19.5% as of December 2006, and Google’s had increased to 65.4% (according to Bank of America Equity Research). The total ad market has increased from $1.4B in 2002 to $15B annually today (and growing at 50% per annum). Had Yahoo!, under Terry Semel, been able to grow its share to even 30% today, Yahoo! shareholders would have received an additional $1.6B in revenues last year – or 25% higher than their reported $6.4B in revenues, but still well below Google’s $10.6B in revenues last year.
The bottom line is that – in the most relevant and direct comparison to its arch-rival, Google – since Google’s IPO in August 2004 through today, Google’s stock price is up 336% versus Yahoo!’s stock price being up only 16%. Google has grown its shareholder value 21 times more efficiently than Yahoo! over this time period, when the Internet ad market has been booming. We don’t believe that any CEO should keep his/her job when your #1 competitor is 21 times as successful as you over an extended period of time.
Conclusion: Yahoo!’s board needs to immediately remove Mr. Semel – who is 64 – and begin a search process to find a new Chairman and CEO. This Chairman and CEO search should examine all qualified internal and external candidates.
2. Terry Semel, Robert Kotick, Roy Bostock, Ron Burkle, Eric Hippeau, Arthur Kern, and Gary Wilson should be Immediately Replaced on Yahoo!’s Board of Directors.
Terry Semel ultimately reports to Yahoo!’s board of directors. The board must be held accountable for the numerous missteps outlined above. Of the 10 directors, we believe 7 should resign or Yahoo! shareholders should withhold votes for them at Yahoo!’s 2007 annual meeting of shareholders.
We are in favor of only Jerry Yang (a Yahoo! co-founder), Ed Kozel, and Vyomesh Joshi returning. The latter two recently purchased shares directly in Yahoo!, while the other Yahoo! directors have only exercised stock options of late.
3. Shutter the Yahoo! Media Group and campus in Los Angeles.
The Yahoo! Media Group has been a failure. There are no meaningful outputs from the group to speak of which have had any positive shareholder value-creating impact. Yahoo! shareholders should not incur additional investments in this group and repatriate key employees back to Sunnyvale, while eliminating other positions.
4. Make additional R&D investments in the Technology Group.
"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 improvements need to be made within the Technology Group. Cost savings from shuttering Yahoo! Media Group and other internal efficiencies (see next point below) should be plowed back into R&D investment in the underlying Yahoo! Technology Group.
5. Reduce Overlapping Internal Divisions within the Company.
The Peanut Butter Manifesto was one of the first internal recognitions that more efficiencies could be created within Yahoo! from streamlining the various groups. The del.icio.us group (coming from an external acquisition) is still a distinct group from the home-grown MyWeb. Flickr (another external acquisition) is still a distinct group from the original Yahoo! MyPhotos group. 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 – most notably as head of the Audience Group.
6. Institute a ‘Pay-for-Performance’ Plan 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.
7. 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. Yahoo!'s stock price bottomed out this same day at just under $23. The stock is up over 14% since we first announced our "Plan B" for shareholder value creation on January 7, 2007. We believe that there is considerable upside in the company's valuation – especially if the points in this plan are enacted. Therefore, we strongly wish to see evidence that the board of directors is accelerating the share repurchase now, rather than when the stock increases in value substantially further months down the road.
8. Begin a Modest Cash Dividend Immediately.
Fast-growing companies like Yahoo! 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! needs to use its $3B cash position wisely to effectively compete and succeed for the long-term. Yahoo! should introduce an immediate annual dividend of 5 cents a share, which would only amount to $40MM a year (therfore, not 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.
9. 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. These anti-takeover provisions are not shareholder-friendly. They do not serve shareholders' interests, but management's. They should be swept aside immediately.
 According to Pitz: “In December 2006, worldwide search query share for Google was 65.4% (+51 bps M/M, +294 bps Q/Q, +647 bps Y/Y), compared to Yahoo!’s search share of 19.5% (+24 bps M/M, -140 bps Q/Q, -167 bps Y/Y) and Microsoft’s share of 7.9% (-29 bps M/M, -71 bps Q/Q, -155 bps Y/Y).”
Friday, February 23, 2007
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