NEW YORK, Nov. 19, 2015 /PRNewswire/ -- Starboard Value LP
(together with its affiliates, "Starboard"), a significant
shareholder of Yahoo! Inc. (NASDAQ: YHOO), today announced it has
delivered a letter to Chairman Maynard
Webb, CEO Marissa Mayer and
Yahoo's Board of Directors.
The full text of the letter follows:
November 19, 2015
Maynard J. Webb, Chairman
Marissa Mayer, Chief Executive
Officer
Yahoo! Inc.
701 First Avenue
Sunnyvale, California 94089
cc: Board of Directors
Kenneth A. Goldman, Chief Financial
Officer
Larry Sonsini,
Esq., Legal Counsel
Dear Maynard and Marissa,
We are writing to follow up on our recent discussions. We
have grown increasingly frustrated with your unwillingness to
accept our help and your dismissive approach to our serious
concerns about the current situation at Yahoo! Inc.
("Yahoo"). As you, the management team, and your advisors
requested from us over a year ago, we have attempted to work with
you privately and agreed not to pursue the nomination and election
of directors at last year's annual meeting. Despite our
numerous conversations and meetings, and notwithstanding your
willingness to provide us an audience, you have been reluctant to
respond or adapt to the realities of the current environment.
The current situation that Yahoo faces is so important that we now
feel it is necessary to communicate with management and the Board
of Directors ("Board") in a manner such that our message is not
only as explicit as possible for you, but also for our fellow Yahoo
shareholders. The proposed spin-off of Aabaco Holdings,
Inc. ("Aabaco Holdings") is not Yahoo's best alternative.
Instead, you should be exploring a sale of Yahoo's core Search and
Display advertising businesses ("Core Business") and leave Yahoo's
ownership stakes in Alibaba Group and Yahoo Japan in the existing
corporate entity.
Since the time that we originally made our investment in Yahoo,
we have been a vocal proponent of separating Yahoo's Core Business
from its non-core interests, including its stakes in Alibaba Group
and Yahoo Japan. As we have communicated to you over the past
year, we believe separating Yahoo's Alibaba Group and Yahoo Japan
stakes from its Core Business would unlock immediate value for
shareholders and allow Yahoo's Core Business to better recruit and
retain talent. Yahoo is the only Silicon Valley company we
know that currently has a stock price almost entirely driven by the
value of an entity outside of its control. Yahoo is at a
disadvantage in recruiting the best talent because its stock price
performance does not reflect the performance of Yahoo employees,
but rather the performance of Alibaba Group. Top talent wants
to be able to directly contribute to, and be rewarded by, its
company's stock price performance. Separating Yahoo's Core
Business would allow it to recruit more effectively and retain
talented employees whether the Core Business incentive equity is
public, private, or part of another merged operating
entity.
As you know, in our initial presentation to you we highlighted
several different scenarios that we felt could achieve this
goal. Our first choice was for Yahoo to spin-off Yahoo's Core
Business which would have resulted in the tax-free separation of
Yahoo's Core Business while leaving Yahoo's stake in Alibaba Group
and Yahoo Japan as part of the remaining public company. We
also presented several other options, including the one you chose –
a tax-free spin-off of a new entity, now known as Aabaco Holdings,
which would hold non-core business assets as well as Yahoo's shares
in Alibaba Group.
Despite our continued belief that the proposed spin-off of
Aabaco Holdings should be deemed tax free under current law, we
believe it is important to note the market's assessment of the
current strategy. Irrespective of the impending tax-free
spin-off, it is clear the market has a dim view of the Company's
current strategy. As shown on the table below, the market
either discounts the tax benefits of the proposed spin-off and/or,
worse, implies a significantly negative value for the Core Business
based on a justifiable fear that the current turnaround efforts
will fail and current management will continue to squander the
Company's resources. At best, the current stock price implies
a meager ~2x consensus 2015 EBITDA multiple on the Core
Business.
Implied value for
Yahoo's Core Business
|
Current YHOO
Enterprise Value
|
$31,230
|
Less: Alibaba Group
stake at 38% discount
|
($18,622)
|
Less: Yahoo Japan
stake at 38% discount
|
($5,019)
|
Less: Net
cash
|
($5,572)
|
Implied value of
Core Business
|
$2,017
|
|
|
2015E
EBITDA
|
$926
|
Implied 2015E
EV/EBITDA multiple
|
2.2x
|
|
|
2016E
EBITDA
|
$838
|
Implied 2016E
EV/EBITDA multiple
|
2.4x
|
|
|
Source: Company
filings, Bloomberg, and Starboard Value estimates.
|
|
Note: As of
November 17, 2015.
|
|
Based on our evaluation of the risk-adjusted options currently
available to Yahoo, as well as the market's assessment of the
current strategy and risks thereof, we believe the Board needs to
be open to changing direction. If you stay on the current
path, we believe the potential penalty for being wrong is just too
great, and the potential reward for being right is not materially
better than the other alternative. When compared to a sale of
the Core Business, there is minimal reward in relation to the
massive potential risk that you could be taking. Therefore,
as we privately communicated to you recently on several occasions,
instead of continuing to go in the current direction with potential
significant risk, we believe Yahoo should hire a financial advisor
to sell the Core Business as a taxable asset sale. The sale
of the Core Business would leave Yahoo's ownership stakes in
Alibaba Group and Yahoo Japan and cash in the remaining
company. We believe the current net cash of Yahoo and the
cash generated from the Core Business sale can be returned to
shareholders in a tax efficient manner in some combination of share
buybacks, returns of capital, and dividends.
While we recognize that changing course is never easy, based on
the risk-adjusted value creation to shareholders, we believe that
selling the Core Business is by far the most prudent path. We
believe there would be considerable interest for Yahoo's Core
Business given the number of unique users, significant search
revenue and income, popularity of many of Yahoo's display
properties, and valuable real estate and intellectual property.
In one of our recent conversations, you argued that the Core
Business will become more valuable if management is able to turn it
around, and, as such, that selling it today would result in
potential lost value for shareholders. We discussed in detail
our thoughts on the deterioration of the Core Business in the
letter we sent to you on August 10,
2015
(starboardvalue.com/publications/Starboard_Value_LP_Letter_to_YHOO_08.10.15.pdf).
Thus far, there has been little evidence of a turnaround and, as
described above, recent results are actually moving decidedly in
the wrong direction. In addition, as we discussed with you
again during our most recent conversation, this past quarter and
the public guidance for next quarter actually show accelerated
degradation in the performance of the Core Business, making your
argument to wait for improvement appear to be grounded more in hope
than strategy. Nonetheless, even if we assume that – this
time – things are different, recent trends will be reversed, EBITDA
will actually grow, and shareholders will suddenly apply a higher
multiple to the Core Business, the difference in value created
between selling the Core Business now, versus after a hopeful
improvement in the fundamentals, is minimal compared to the
downside potential of continuing down the current path of spinning
off Aabaco Holdings.
Moreover, given recent results, we cannot imagine that any
prudent individual assigns a high probability that Yahoo is on a
path to substantially increase EBITDA in order to significantly
improve the current value of the Core Business. We actually
believe that without significant change to the culture at Yahoo,
the Core Business could just as likely (if not more likely) decline
in value going forward, thereby making a near-term sale of the Core
Business even more clearly the correct decision.
For over a year now, we have attempted to work privately and
constructively with you, management, and the Board.
Unfortunately, time is now of the essence and the momentum around
the proposed Aabaco Holdings spin-off is pulling our investment
down the wrong path. I have now offered four different times
over the last four months to join the Board to help you analyze
this situation given my successful board experience, our
perspective as an owner, and my particular knowledge of this
situation. Unfortunately, you have repeatedly refused our
respectful requests.
We believe you must make the right choice for Yahoo and its
shareholders. What was once complicated and opaque, has now
crystallized when analyzed through the lens of reward compared to
possible risk. Over the last several months, we have come to
realize the situation at Yahoo is one with potential asymmetric
outcomes, and therefore, we believe selling the Core Business now
is the best outcome for Yahoo shareholders. We urge you to
change direction and do the right thing for shareholders. As
we have expressed to you, we expect the shareholders' interest to
remain of paramount importance and will look to make significant
changes to the Board if you continue to make decisions that destroy
shareholder value.
Respectfully,
Jeffrey C. Smith
Managing Member
Starboard Value LP
About Starboard Value LP
Starboard Value LP is a
New York-based investment adviser
with a focused and fundamental approach to investing in publicly
traded U.S. companies. Starboard invests in deeply undervalued
companies and actively engages with management teams and boards of
directors to identify and execute on opportunities to unlock value
for the benefit of all shareholders.
Investor contacts:
Peter Feld, (212) 201-4878
Gavin Molinelli, (212) 201-4828
www.starboardvalue.com
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SOURCE Starboard Value LP