Friday, January 26, 2007

Web Warriors Taking on Yahoo!

Using media like wikis, blogs, and video, small investors join hedge funds in waging war on executives.
February 5, 2007 Print Issue
By Ken Schachter
On Sunday morning, January 7, management consultant Eric Jackson put on a dress shirt, sat in front of his webcam, and, after his third take, issued a call to arms to other Yahoo shareholders. That web-based campaign is believed to be the first of its kind by a lone investor, taking a quantum step beyond online message boards where investors congregate. Mr. Jackson wants Yahoo to make big changes, including ousting CEO Terry Semel.

Should his campaign gain traction, the implications could potentially be staggering. Connected by the web, small shareholders—until now the sheep of the investment community—could gain a voice loud enough to rattle the investing world.

In his video, Mr. Jackson says he is seeking to amass shareholders whose cumulative stake would total about 10 percent of Yahoo stock and, armed with that kind of clout, deliver to management his reform proposal called “Yahoo Plan B.” Plan B, posted at Mr. Jackson’s blog, , is currently under “wikiization” as he modifies it in response to shareholders’ suggestions.
In its early form, at least, Plan B’s goals are far from modest: institute a cash dividend, repeal anti-takeover measures, and replace current CEO Mr. Semel with CFO Susan Decker. Already, in December, Yahoo shuffled its executives and reorganized operations in response to investor concerns and an internal memo about excessive bureaucracy dubbed the “peanut butter manifesto.” But that’s not enough for Mr. Jackson.

The Naples, Florida, resident acknowledges that gaining control of 1.4 million shares worth about $4 billion won’t be easy, but he hopes that as Plan B gets fleshed out, institutional holders will get onboard as well.

“We’re shooting high, for sure,” says Mr. Jackson. “Ten percent would make us the largest investor in Yahoo.” Only five days after posting his talking-head video on YouTube, he says, Plan B had received informal commitments from holders of almost 2 million shares.

Until now, activist investors—typically hedge funds and institutions like the California Public Employees’ Retirement System (CalPERS), and rarely individual investors—have used more conventional weapons to battle management: costly proxy fights, media coverage, and U.S. Securities and Exchange Commission filings. By contrast, Mr. Jackson is relying on social media sites and blogs to amass a shareholder army. In his blog, Mr. Jackson calls on Yahoo shareholders to spread the word on the web, vote on and modify the elements of Plan B, and, in a bit of whimsy, contribute to a new Flickr group, making mash-up photos of the next ideal Yahoo CEO.

Yahoo executives are already feeling the heat from Mr. Jackson and others. Without commenting directly on Plan B, a company spokesperson cites the acquisitions of and MyBloglog, and partnerships with eBay, Vodafone, and a newspaper consortium as evidence that the company under Mr. Semel has a “clear strategy.”
Hedge Activists
Mr. Jackson is hoping his web-based strategy will deliver the kind of results hedge funds have gotten used to. In particular, certain hedge funds have become particularly adept at using so-called “13D” letters filed with the SEC as a way to confront executives. The letters are required to report a 5 percent or greater interest in a company, but hedge fund managers discovered that they could attach letters to the filings, providing a soapbox to harshly critique management.

For instance, in a 2003 letter to Misonix CEO Michael McManus Jr., hedge fund manager Robert Chapman Jr., a 13D pioneer, said his company had accumulated 6.4 percent of the ultrasonic medical device maker by “mopping up the relentless vomiting of shares” by other stockholders.

“As is plain to see, MSON’s 50 percent degradation under Mike ‘Mc-Minus’ McManus greatly underperformed both the Nasdaq Industrial Index (down only 10 percent) and the less-than-all-star S&P 500 Healthcare Equipment Index (up over 30 percent) during your resume-wrecking tenure,” Mr. Chapman wrote in the letter.

In a letter dated July 7, 2006, to John C. Lewis, chairman of Vitesse Semiconductor—which has been enmeshed in a stock options scandal— Mr. Chapman wrote: “One wonders how you possibly can be trusted to wean Vitesse executives away from sucking on its own stock options areola.”

He went on to say: “In conclusion, Chapman Capital, on behalf of what it believes is a majority of Vitesse’s owners, demands that the Company’s Agents consummate an auction of Vitesse Corporation immediately following its financial restatements. As for you, Mr. Lewis, to quote you personally, ‘You live by the sword and you die by the sword.’ We suggest that, figuratively speaking, you draw yours and fall upon it before Vitesse’s owners are forced to do so themselves.”

Despite such needling, Mr. Chapman bristles at the notion that he is bullying executives. He cites less confrontational investors like Warren Buffett who also use activist tactics, such as when Mr. Buffett forced the sale of scandal-ridden Salomon Brothers to Citigroup.

The prose of 13D letters may be irreverent and sometimes border on the profane, but Ken Squire, founder of 13D Monitor, which tracks activist filings, says increasing numbers of institutions are adopting 13D tactics for one simple reason: because it works. “It’s an investment strategy that’s currently very successful,” he says. “When you have a successful investment strategy, more people attempt to do it.”

Mr. Squire says that since 13D Monitor started in April 2006, his company has tracked about 200 13D filings. The average return on the stocks within 13D Monitor’s universe from the closing price of the day the initial 13D was filed was 24.5 percent, he says, more than double the 11.1 percent return from the S&P 500 for the same period. “These guys know how to enhance shareholder value,” he says.

Nell Minow, co-founder of The Corporate Library, a research firm tracking corporate governance, says shareholder activism provides a reality check on the prices of securities. “Overall, it’s a great phenomenon,” says Ms. Minow. “Anything that makes the market more efficient is peachy with me.”

While Mr. Jackson may be relying on a huge herd to affect change at Yahoo, even Mr. Chapman realizes that he can’t make a big impact alone. He’s currently hoping to hire a team of professional rabble-rousers to help in his crusade against top brass.

In a recent posting on Internet bulletin board, Mr. Chapman’s firm listed a range of jobs, including a few that require special talents. Take hedge fund private investigator: “Conduct both clandestine and covert intelligence operations to track movements of public company executives (e.g., Enron types) to gain deep intel of how their behavior and actions may be affecting the company’s Wall Street performance.”

In job postings at, Mr. Chapman stressed his company’s military culture: “Chapman Capital L.L.C., considered by Wall Street to be the elite force of aggressive combatants in the battle for corporate control, is building its team of former military leaders for its L.A.-based investment research and trading team. Candidates must have verifiable expertise in the fields of reconnaissance or intelligence gathering. Chapman Capital is the Navy Seals of Wall Street.”

For his part, Mr. Jackson says he has long been a fan of activist investors such as mutual fund manager Michael Price. His inspiration to use online tools, however, came from a politician: Ned Lamont, whose online vlog helped propel his run for the U.S. Senate in Connecticut. Mr. Lamont upset Joe Lieberman in the Democratic primary, but lost to the incumbent in the general election in November.

Professor Jonathan Ezor, director of the Institute for Business, Law & Technology at the Touro Law Center in Central Islip, New York, says that if Mr. Jackson succeeds in bringing together enough shareholders, he could be required to file as a major shareholder by the SEC. “At some point, if you’ve got a large enough group of shareholders acting in concert, there are formal requirements,” he says.

Mr. Jackson acknowledges that he is in uncharted territory. “It will be interesting to see if we qualify as an institutional holder or a loose confederation of shareholders of like mind,” he says. In any case, he’s ready to tackle the future.

“In the right circumstances,” Mr. Jackson says, “a small shareholder can have a big impact.”

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