Monday, October 01, 2007

Yahoo! and Motorola "Plan B" Investment Update

Back in January, I began a campaign against Yahoo!'s current management team and board. I was unhappy with the current direction of the company under then-CEO Terry Semel. With the help of input from many Yahoo! investors, we finalized a "Plan B" for the company, which was sent to General Counsel, Mike Callahan, in February. We met with the company in April, ran an "against" vote campaign directed at 7 of 10 directors leading up to the annual meeting in June (at which we spoke out against more aggressive changes at the company), and have continued to communicate our points to management.

Here is a quick update of the points in the plan and what has happened over the last 9 months. We are not "claiming credit" for these changes. The press has well-documented our involvement on behalf of shareholders earlier in the year. We are simply updating supporters on what we asked for and what has happened since (and we are not including our original arguments supporting each point, but refer here if interested):

1.Terry Semel should be immediately replaced as Yahoo!’s Chairman and CEO

  • Positive Result: Semel resigned on 6/18 six days after the Annual Meeting at which 35% of votes went against 3 of the directors and each other additional director received considerable "against" votes. These were historically high "against" votes laid at the feet at all directors. Yahoo! still hasn't really responded to this, except with Semel's departure. They also dragged their feet on releasing the data to shareholders until one of the last days possible by law, as part of their 10-Q, instead of making the data available within a day of the vote (because of most certainly the firestorm it would have caused in the press and with shareholders).

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

  • No change: All still on board; one new director (Maggie Wilderotter) added on 7/27 -- and one our group supports. The company appears to believe that Semel's move upstairs to Chair alone is sufficient to placate shareholder ire expressed in the June 12th vote.

3. Shutter the (original content aspects of) Yahoo! Media Group and campus in Los Angeles

  • Positive Result: Rumors (according to TechCrunch and PaidContent) of internally announced shutting down of “premium services” in favor of free services and cutting jobs in Los Angeles on 9/27; a step in the right direction but not as aggressive as we would have liked.

4. Make additional R&D Investments in the Technology Group

  • Positive Result: David Filo (co-founder) now at least acting CTO; hopefully, Filo's continued involvement will ensure this group gets adequate investment moving forward.

5. Reduce overlapping internal divisions within the Company

  • Positive Results: Killed Webjay, Yahoo! Auctions and combined Yahoo! Photos with Flickr in May; Killed Yahoo! Bill Pay on 7/6; Killed Yahoo! Podcasts on 9/26

6. Institute a “pay-for-performance” plan for all Yahoo! Management

  • Positive Result: No policy change but Sue Decker bought $1 million in stock on 8/4 and 8/5. Would be nice if she and others on the management team and board would buy even more (or some, in some cases).

7. Step up the pace of the $3 billion stock repurchase plan announced in October 2006

  • Positive Result: Company announced that it had done this on Q107 Analysts Call (4/17)

8. Begin a modest cash dividend immediately

  • No change

9. Remove anti-takeover provisions which are not shareholder-friendly

  • No change
We stand by our original plan and call on the company to continue to take steps that are in line with the points laid out above.

So: have we made any money on our investment? Yes, but we've lagged the market.

As of today, our group consists of about 100 supporters owning 2.1 million shares worth $55 million. Yahoo! has returned 6.81% (or 9.24% on an IRR-basis) since I took my position on 1/5/07 compared to 9.61% for the S&P 500. (Other supporters of our "Plan B" obviously have their own entry points for their YHOO investment.) Not great -- however, it's staged a significant comback in the last 6 weeks, amidst a general sense that expectations are so low that it has nowhere to go but up.

The best news I've heard since being a YHOO shareholder came out of last Friday's town hall meeting (as reported by Kara Swisher). No more Tom Cruise visits on First Avenue. This time Steve Jobs was brought in by Jerry Yang. I could care less about the motivational speaker du jour though (although can you think of a better choice for this company at this time?); I was much more relieved to hear that there appears to actually be hope and even belief from company employees that they can succeed.

I still have several criticisms with the management team and board of this company -- which I won't be shy to air, as I did last week -- but I wouldn't be a shareholder in the company if they didn't have a huge upside. But Kara's review offers shareholders a glimmer of hope that the company's leadership and employees are starting to see that Yahoo!'s destiny is in their hands -- instead of thinking that things will come around of their own accord to put the company back on top.

We said we are long-term holders of stock in the company and we still believe that.

Our Motorola "Plan B" campaign -- launched on July 9th -- has been more successful than Yahoo! in some ways and less so in others.

Today, we have 132 supporters owning 600,000 shares in MOT worth just under $12 million. After putting together a good last week of trading sessions (based on analyst upgrades of the industry and Samsung shortages predicting increased demand for Motorola's products), our MOT investment has returned 5.22% since July 9th (or an IRR of 22.44%) compared to 0.95% for the S&P 500 over that same time period.

That's the good news.

Unfortunately, Douglas Warner III and Motorola's other independent directors have refused to meet with our group to discuss our "Plan B" for Motorola. As a result, much of the plan remains unfulfilled.

Here is a recap of what we asked for and what they've done (or haven't done):

1. Ed Zander Must Leave Immediately as CEO and Chairman
  • No Change

2. Replace Judy Lewent, Nicolas Negroponte, Samuel Scott III, and Dr. John White on the Motorola Board of Directors

  • No Change; in fact, they added 2 new directors on 7/25

3. Appoint Edward Lampert to the Motorola Board and others with Deep Communications Experience

  • No Change

4.Reduce the Size of and Insiders on the Board

  • No Change: In fact, they added a new insider to the Board (President and COO Greg Brown) and one outsider on 7/25; the board now has a bureaucratic 14 members.

5. Outline Motorola’s Strategy and How You Will Add Exciting New Products

  • No Change, although new Mobile Devices head, Stu Reed, tells us to wait for "wave upon wave of new announcements"... we're waiting.

6. Appoint a Permanent Head of the Mobile Devices Business

  • Positive Result: Stu Reed appointed on 7/11, 2 days after the draft “Plan B” first appeared.

7.Give Motorola’s Culture an Inspirational Transfusion

  • No Change

On Friday, they announced the sale of their embedded computing group to Emerson for about half of its revenues from last year. It was a continued focusing of the company on its Mobile Devices Business.

Today, Nokia went to Motorola's backyard to make its largest acquisition ever of Navtaq, where, with delicious irony, Ed Zander's predecessor - Chris Galvin -- is now Chair after leaving Schaumburg. Since Galvin joined the Navteq board on Oct. 22, 2004 through today, Navteq has returned 101% to its shareholders, while Motorola has returned 1.89%. Navteq's $8.1 billion valuation is now one-fifth of Motorola's -- not bad for a company which did less than $400 million in revenues in 2004.

The Navteq deal underscores how Nokia is consciously choosing to believe industry supremacy will be fought in the future in (high-margin) software and services. Until recently, Motorola didn't have a lead software architect for the company - so, clearly, it's playing catch-up in this arena.

Stu Reed was unimpressive in his debut at last month's Financial Analysts' Meeting in New York, promising fixes to problems created under the watchful eye of CEO, Ed Zander, and COO, Greg Brown (as well as the board, of course) without any details on how.

So, the bottom line is that Motorola hasn't yet taken the steps within its control to best position the company for future growth and to ensure it will not repeat the mistakes of the past. Put another way, there is still lots of opportunity to turn this company around. But it will need to make some tough decisions -- not just cut R&D spending, cut jobs and wait for an industry rebound to pick it back up, which -- along with "Seamless Mobility" -- appears to be the strategy.

In a few weeks (although the date hasn't been released by the company yet), we'll see how things are going for Motorola in its turnaround when it discusses its Q3.

We will be watching and continue to hope this board will be open to listening to thoughts and views from its shareholders. Onwards, "Plan B."

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