Home >companies >news >Starboard pushes Yahoo CEO Mayer to discuss deal with AOL to unlock value

San Francisco/New York: Activist investor Starboard Value LP, which has acquired a stake in Yahoo! Inc., said it wants the web portal to explore a combination with AOL Inc. to “unlock value."

In a letter on Friday to Yahoo chief executive officer (CEO) Marissa Mayer, the New York-based shareholder said the web company should also cut losses in its display-ad business by $250 million to $500 million, stop acquiring other companies and instead discuss a deal with AOL. A combination with AOL could deliver cost cuts of as much as $1 billion, said Starboard in the letter signed CEO Jeffrey Smith.

“Clearly Yahoo is deeply undervalued relative to the sum of its parts," Smith wrote in the letter, adding that the fund now has a “significant" stake in Yahoo. “We believe it is incumbent upon management and the board to take immediate steps in committing to remedy this valuation discrepancy."

Sarah Meron, spokeswoman for Sunnyvale, California-based Yahoo, didn’t immediately respond to a call for comment. Eoin Ryan, an AOL spokesman, wasn’t immediately available for comment, said a woman who answered the phone at his office. Starboard representatives didn’t immediately respond to requests for additional comment.

Yahoo shares rose 3.9% to $40.45 as of 12:43 pm in New York after Starboard released the letter. The stock had declined 3.6% this year through Thursday.

Mayer’s Turnaround

Mayer has been working to turn around Yahoo since she joined the web portal in 2012. The pressure for results has increased since the initial public offering last week of Alibaba Group Holding Ltd., in which Yahoo owns a stake and which had driven much of the Silicon Valley company’s value.

As investors took gains on Yahoo after Alibaba’s IPO, the true worth of the web portal’s core online-advertising business was laid bare. Yahoo was worth less than the value of its Asian assets, which also include a stake in Yahoo Japan, following Alibaba’s IPO. Yahoo’s market capitalization is $40 billion, little changed from the beginning of the year.

Mayer has tried to shore up Yahoo’s business by acquiring start-ups and investing in content and services to woo more Internet users and attract advertisers.

So far, her efforts have failed to narrow the company’s widening gap in online advertising with Google Inc. and Facebook Inc. Second-quarter sales, excluding revenue shared with partner websites, fell to a less-than-projected $1.04 billion. Analysts on average estimate sales this year will slip to $4.35 billion, the lowest level since 2005, according to data compiled by Bloomberg.

Other Encounters

This isn’t Yahoo’s first encounter with an activist investor. Daniel Loeb’s Third Point LLC took a stake in Yahoo in 2011, when the fund bought a 5.2% stake and urged the board to resign. Loeb forced the ouster of former Yahoo CEO Scott Thompson and took a seat on the board, and later sold the stake back to the company.

In Starboard’s letter, Smith said Yahoo’s Asian assets are worth about $11 billion, or “$11 per share more than the current enterprise value of the company." That is the gap that needs to be closed, he said.

Yahoo should also stop acquisitions, which have already resulted in $1.3 billion of spending since the second quarter of 2012.

“Focusing on acquisitions has not worked," he wrote.

A combination with AOL would create “synergies," he added.

Starboard’s Strategy

Founded in March 2011, Starboard typically focuses on a small-cap activist strategy developed by Smith and Mark Mitchell since 2002 and Peter Feld since 2005—buying stakes in companies they call undervalued and pushing executives and directors for changes such as unit spin-offs and asset sales.

Starboard recently targeted Darden Restaurants Inc., the owner of the Olive Garden chain, Aaron’s Inc., a furnishing and appliance supplier, and Emulex Corp., which sells chips that help computer servers and storage networks transfer data.

Starboard knows AOL after previously pushing for change at the New York-based Internet company.

Activist investors tend to buy at least 5% of a company’s stock and flag their intention to actively engage corporate executives and directors by disclosing their holding in a 13D filing with the US Securities and Exchange Commission. Bloomberg

Niamh Ring in New York also contributed to this story.

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