TheStreet.com: The Activist Investor: Boot Yahoo!'s Board
Cross-posted from the May 6, 2008 TheStreet.com:
By Eric Jackson
05/06/08 - 03:01 PM EDT
The past weekend delivered a round of shock and awe for Yahoo! (YHOO - Cramer's Take - Stockpickr) shareholders. I -- and every single shareholder I've spoken to since the news broke that Microsoft (MSFT - Cramer's Take - Stockpickr) had revoked its offer for Yahoo! -- expected a friendly deal to happen by the open of U.S. markets Monday.
Instead, we got word that a meeting at Sea-Tac airport on Saturday between Microsoft and Yahoo! had led nowhere.
According to reports, Microsoft offered $33 a share for Yahoo!, to which Yahoo! CEO Jerry Yang and Co-Founder David Filo said they wanted $38 and their board had only authorized them to agree to $37.
By pulling its offer, Microsoft was effectively saying, We've had enough of this amateur hour foot-dragging and unrealistic sense of valuation.
When the markets opened Monday morning, Yahoo! shareholders saw $13.7 billion in market capitalization eviscerated (although the stock has climbed since then on hopes that Microsoft is going to re-emerge as a suitor).
Shareholders are irate.
Although Yang and Filo deserve blame (why was David Filo at Saturday's meeting?) for this outcome, the real blame lies at the feet of the board. This whole negotiation has been botched by Yahoo! from the beginning.
Bungled Negotiations
First it was the interminable foot-dragging just to get a response from the company to Microsoft's Feb. 1 offer. Then, they approved a poison pill-like severance and retention plan to make any acquisition much more expensive for Microsoft. Next, they clung to the belief that the company was "significantly under-valued" for anything less than $41 a share, even though they'd only briefly reached that valuation once (in late 2005) since the bubble days.
These were the actions of a board that didn't want to sell the company to Microsoft. These were the actions of a board that was embarrassed by the fact that Yahoo! had reportedly passed on a $41/share offer from Microsoft in the spring of 2007. They didn't come to $41 after a careful analysis of what the company was worth today. They simply wanted to avoid the stigma of accepting anything less than what they previously may have passed up.
They thought they could play tough with the rich guy from Redmond. They can afford $41 a share, the thinking likely went, so why not hold out for it?
They played chicken with our (the shareholders') money and lost. When Microsoft walked, they were caught red-faced with no explanation that will pacify shareholders.
What was more galling for shareholders was to read a report in The New York Times that there were high-fives all around the Yahoo! executive offices in Sunnyvale on Saturday night. (Jerry Yang has said since that this didn't happen, although reporter Miguel Helft is a professional. It's hard to imagine he'd make that detail up.)
But what has stuck in the craw most of all for Yahoo!'s shareholders is Chaiman Roy Bostock's post-deal statement Saturday that "From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view."
Rather than react directly, I will simply repeat the comment from respected investor Gordon Crawford of Capital Research -- the largest holder of Yahoo! stock with 16% of the shares:
"I would love to know who these shareholders are. It's none of the ones that I talked to today. Everybody I talked to would have sold their stock at $34."
We're still waiting for one shareholder, any shareholder, to stand up and support Yahoo!'s actions.
Crawford went on to comment in The Wall Street Journal, in an highly unusual public dressing down for such a large investor in such a high-profile company:
"I'm extremely disappointed in Jerry Yang ... I think he overplayed a weak hand. And I'm even more disappointed in the independent directors who were not responsive to the needs of independent shareholders."
Back-Tracking, and Your Vote
The natives are restless -- and Yahoo! knows it. Late Monday, presumably after a non-stop barrage of phone calls from angry shareholders, Yang and Bostock back-tracked, telling Reuters: "If they [Microsoft] have anything new to say, we would be open. ... I [Jerry] am more than willing to listen."
This openness to a deal is what's supporting Yahoo!'s stock, which continues to strengthen today, up about 5% at $25.57 in recent trading Tuesday. Shareholders may believe a deal with Microsoft is imminent. We'll see.
One thing is clear: Shareholders can no longer trust that their interests will be protected by the current members of this board.
In my opinion, they all need to go. Sunday, I launched a "withhold" campaign aimed at Yahoo!'s board. I'm asking all Yahoo! shareholders, whether you're Gordy Crawford or Bill Miller or John Doe Investor, to mark the "against" box on the Yahoo! proxy, which you will receive in the coming weeks, ahead of the July 3 Yahoo! annual meeting.
At that meeting, all shareholder votes will be tallied to see who voted "for," who voted "against," and who voted "abstain" for each and every director. If any director receives 50%-plus votes marked "against," that director must tender his or her resignation, according to Yahoo!'s corporate by-laws. Yahoo! might choose not to accept the resignation, but that would likely further raise the ire of investors.
A "withhold" or "against" vote is a direct protest vote. It can make a difference, although we would still have no say over new directors Yahoo! might choose to replace them with.
Last year, I led a campaign to encourage Yahoo! shareholders to vote "against" seven or 10 directors. As reported by the Times last year, of "the 1.125 billion shares outstanding, 35 percent voted against, the reelection of Mr. Burkle, 35 percent against Mr. Kern, and 34 percent against Mr. Bostock." All the other directors received 6-8% of the votes cast against them. Six days after the annual meeting last year, Terry Semel resigned after saying to me that he still had the "fire in the belly" to continue on, during the Q&A at the meeting.
Based on the frustration and anger expressed in the last couple of days, a sharp uptick in "against" votes is highly likely two months from now. And no deal with Google (GOOG - Cramer's Take - Stockpickr), stock buyback, or dividend is going to stop it.
We could conceivably see every single Yahoo! director voted out on to the curb on July 3. Now that would make for some impressive Independence Day fireworks for Yahoo!'s long-suffering shareholders.
At the time of publication, Jackson was long Yahoo!.
Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
