May 09, 2008: 03:48 PM EST
SAN FRANCISCO (Dow Jones) -- As Yahoo Inc. gets ready to face the wrath of its shareholders, the company may learn from the plight of another tech firm, whose board directors rejected a sweetened takeover offer and are now on the verge of being booted out.
This happened just last week, shortly before Microsoft Corp. withdrew its blockbuster offer to buy the beleaguered Web portal.
At a little-known Massachusetts company called Axcelis Technologies (ACLS), three directors were voted down by investors after the company rejected what many shareholders felt was a generous $616 million takeover offer from Sumitomo Heavy Industries.
The shareholder revolt got some support from a company policy that says director-nominees who don't win a majority of the votes cast must offer to resign.
The Axcelis battle underscores a trend in the corporate world where more companies, responding to the clamor for greater boardroom accountability, have adopted similar policies often referred to as a "majority-voting rule."
Chris Young, director of M&A research at RiskMetrics Group, described the Axcelis case as "the first test case where a hostile M&A transaction and a relatively new innovation of majority voting for the election of directors collide."
An even bigger collision may be about to take place at Yahoo (YHOO). The company adopted its own majority-voting rule in early 2007 and is now facing a campaign urging shareholders to boot out its entire board, including Chief Executive Jerry Yang and Chairman Roy Bostock, at its upcoming annual meeting, scheduled for July 3.
The group blames Yang and the rest of the board for blowing the proposed $47 billion merger bid from Microsoft (MSFT), which pulled its offer after failing to agree with Yahoo management on a price.
Signs of trouble
Young at RiskMetrics said that there were signs of an even more serious shareholder uprising against Yahoo, possibly from an activist hedge fund. He pointed to a key indicator: 600 Yahoo million shares have traded since Monday, when the company's stock plunged after the collapse of the talks with Microsoft.
"Who is buying Yahoo?" he asked in a research note. "Unsubstantiated market rumors have run rampant in recent days that unnamed activist funds are accumulating Yahoo shares, with a view to doing precisely what unsatisfied vanilla investors will not do -- lead an opposition campaign at Yahoo's upcoming annual meeting."
Meanwhile, there is an open campaign already being waged by a group of disgruntled Yahoo shareholders, who are urging other investors to withhold votes for the company's board after it rejected Microsoft's merger offer, even after the software giant raised its bid to $33 a share from $31.
The group is led by Eric Jackson, who runs a small investment firm and was involved in a similar campaign last year against certain Yahoo directors, who were criticized for giving what some investors felt was excessive compensation to former chief Terry Semel. In a strong symbolic message, the targeted directors were re-elected, but with far fewer votes than in the past.
Jackson said he's aiming higher this year. "I'm shocked and angry like every other Yahoo shareholder I've spoken with," he commented. "All Yahoo shareholders should vote out the entire Yahoo board at the upcoming meeting."
While last year's campaign targeted select members of the Yahoo board, he added, "this year, I
think everyone should go. They are all responsible. They all have to wear this failure."
Yahoo declined to comment on the matter.
An activist opportunity?
The chances of Jackson's campaign succeeding are unclear. He said that he has a little more than 90 shares, and his group collectively has roughly 3.1 million of Yahoo's roughly 1.3 billion outstanding shares.
But this anger at Yahoo's board is shared by managers from two of its biggest shareholders -- Legg Mason, with about 7% of Yahoo shares, and Capital Research Global Investors, with roughly 6%.
The pair has publicly blasted Yahoo management for the way it handled the Microsoft bid. Capital Research portfolio manager Gordon Crawford told the Los Angeles Times that Yahoo drove away "a willing and fairly generous player, and all of us are the poorer for it today."
Neither institution has indicated if it will launch or join any campaign against Yahoo's board.
Young wrote that "normally 'plain-vanilla' investors" such as Capital Research and Legg Mason would typically not lead an activist campaign because of "a stigma attached to activism at traditional 'long-only' funds." But he said that these institutions "may and often do" support a campaign led by a hedge fund.
"Because activist hedge funds have no such reputational qualms, they would be free to run a highly public and critical offensive," the analyst elaborated in his note. "Yahoo certainly appears to present an attractive activist opportunity."
Microsoft has said that it does not plan to launch a proxy campaign to take over the Yahoo board, despite earlier suggestions that it might do so. The company acknowledged that it has released the candidates it had tapped prior to calling off the Yahoo bid, but has declined to comment further.
However, Jackson said that his group is also contemplating fielding an alternative slate of directors. Shareholders have until May 15 to submit the names of candidates.
Under Yahoo's current bylaws, a director-candidate in an uncontested election needs to win a majority of the votes cast. However, like at Axcelis, the board also has the power to accept or reject the resignation of a director who got voted down.
If the elections are contested, however, directors will be elected based on a plurality of votes cast.
This has typically been the way elections have been run in the past, even though many felt the winners were not always popular among shareholders, according to Young. "Everybody may be against you and one vote gets you elected, " he said. "Some people found that distasteful."
Charles Elson, director of the Center for Corporate Governance at the University of Delaware, said that the push for the majority-vote rule intensified after the Enron debacle as shareholders sought a bigger role in board elections.
"It's a way for shareholders to veto a director," Elson commented. "It's a way to make a no vote count."
However, Michael Klausner, a corporate-law expert at Stanford Law School, said that a "vote no" campaign would also have limitations, since the company would retain the power to replace a rejected director-nominee.
"The effect would be symbolic," he added, conceding that "it does add an element of pressure on the current management."
That kind of pressure led to the stunning outcome earlier this month at Axcelis, a semiconductor-equipment maker. The campaign involved the company's second-largest holder, Sterling Capital, which announced that it was withdrawing votes from three incumbent directors up for re-election.
The Axcelis battle, similar to the Microsoft-Yahoo dispute, began in February when Sumitomo announced an unsolicited bid to buy the company for $5.20 a share, sweetening the deal later to $6. But the Axcelis rejected the offer, saying it undervalued the business. That set the stage for a proxy battle between Axcelis and its shareholder base.
Young speculated that Sumitomo may have been indirectly involved in the proxy battle by waging what he described as a "stealth vote no" campaign. Sumitomo did not immediately have a comment on the speculation.
In a stunning blow to the Axcelis management and board, the three directors failed to win majority of the votes. In a letter to shareholders, Chief Executive Mary Puma announced that the rejected directors will offer to step down from the board, but added that the board will decide whether to accept the resignations. Spokesman David Snyder said a decision will be announced "in the next few weeks."
Sumitomo, for its part, has said that it was willing to resume talks with Axcelis. Snyder said the firm "clearly communicated our willingness" to discuss "a mutually beneficial transaction" with Sumitomo.
A stealth campaign
Could the Axcelis battle be replayed at Yahoo, and could Microsoft launch a similar stealth campaign?
The software giant has suggested it didn't see a proxy campaign as practical. Young at RiskMetrics said that Microsoft could follow Sumitomo's game plan "in theory," but he added:
"They cannot be seen as soliciting proxies. Sumitomo was very careful to ensure that no one could accuse them of running a campaign, and Microsoft would face the same issues."
But in his note, the analyst also wrote that Microsoft "could continue to claim, with a straight face, that it is not a hostile acquirer, a particular sensitivity in the technology space, while perhaps egging the activists on behind the scenes."
In any case, Yahoo faces serious problems even if Microsoft doesn't join the fray.
In a separate note, Young described the "blood in the water" effect in a hostile-takeover fight, in which a target company that succeeds in beating back a "shark" is left "wounded and vulnerable to a future, second attack."
This will become clearer in the coming weeks. Yahoo finally announced that its much-anticipated shareholder meeting will be held Thursday, July 3.
"Great date if you want to minimize attendance!" analyst Katherine Egbert of Jefferies & Co. quipped in a note, referring to the July 4th holiday weekend.
Despite the seemingly inconvenient timing, she said: "This promises to be one of the most controversial meetings considering shareholders' anger with management and the board for not having negotiated an acceptable outcome with Microsoft."
Jackson, the dissident shareholder, still hopes that Microsoft will return to the negotiating table. "I think Microsoft is sitting back, enjoying watching this civil war erupt," he said. "As shareholders, we have to take control of this situation and can't just leave it in the hands of the existing board. Whether or not Microsoft comes back, this board needs to go."
Saturday, May 10, 2008
May 09, 2008: 03:48 PM EST