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Restless Shareholders Pelt Mayer With Yahoo Merger Proposals

By Erika Morphy
Oct 1, 2014 4:08 PM PT
yahoo-softbank-aol

Alternative Investment Management this weekend sent a letter to Yahoo CEO Marissa Mayer, urging her to consider merging with SoftBank, according to a Bloomberg report.

That request came a few days after Starboard Value sent Mayer a missive recommending that Yahoo acquire AOL.

Shareholders Want Action

The proposals are independent of one another, but the investors making them are following the same line of reasoning. Shareholders want to see results from the investments they have made and they are easily frustrated when companies don't take steps to monetize certain assets or follow certain strategies.

Alternative Investment Management, for instance, has its eyes on Yahoo's cash hoard -- an especially tempting target after Alibaba's initial public offering. Yahoo is due to receive a roughly US$8 billion windfall.

Alternative Investment Management thinks Yahoo would be far better off with SoftBank CEO Masayoshi Son at the helm -- and in charge of investing its cash hoard -- instead of Mayer, AIM Managing Director Albert Saporta reportedly wrote.

Starboard Value has a more tactical goal in mind. It wants to see Yahoo maximize its online ad revenue, and it believes a tie-up with AOL would accomplish that.

Such a move would "deliver cost synergies of up to $1 billion, and potentially facilitate the realization of value from Yahoo's non-core equity stakes with minimal tax leakage," Starboard wrote.

Yahoo's cash stockpile did not escape mention in Starboard Value's letter, though. The firm hopes to unlock "the substantial value from Yahoo's non-core minority equity stakes in Alibaba Group Holding and Yahoo Japan in a structure that delivers value directly to Yahoo shareholders in a tax-efficient manner."

Other items on its wish list include reducing losses in the display business by between $250 million and $500 million, and halting "Yahoo's aggressive acquisition strategy."

The Sum of Many Parts

The many moving parts that make up Yahoo are no doubt tempting to these shareholders, which didn't invest in the company for charitable purposes.

The U.S. Yahoo business, the Japanese element, the stake in Alibaba, and its cash position are worth more, taken separately, than the current valuation of Yahoo in total, said David Cadden, a professor of entrepreneurship and strategy at Quinnipiac University.

"Many investors have already expressed an interest in the sale of the remaining portion of Alibaba and having the money from the sale distributed in the form of dividends," he told the E-Commerce Times.

There is also a sense among many investors that the future growth potential for a revitalized Yahoo does not exist.

"In that case, parsing up Yahoo -- divesting its constituent elements -- might yield a higher return than Yahoo as it is currently structured," Cadden said.

A breakdown of Yahoo's stock suggests the shareholders might have a point, Daniel Beckerman, a portfolio manager on Covestor, told the E-Commerce Times.

"Yahoo's stock does not seem to fairly value the sum of its parts, when you consider the Alibaba stake, Yahoo Japan and Yahoo itself," he said.

"Without factoring in Yahoo Japan or Alibaba, Yahoo itself generates about $4.7 billion a year in revenue," Beckerman said. "It has over 800 million average monthly users, according to their annual report. That's about four times the revenue of Twitter with more monthly users."

Valuable Domain

The suggestions are being greeted with a degree of skepticism in some quarters.

Starboard has some ownership of AOL and likely would benefit from a buyout, which presents a conflict of interest with its proposal, noted Beckerman. Also, AOL has had its share of growth challenges.

"I think that Marissa Mayer has done a great job of acquiring some innovative companies, such as Tumblr," Beckerman said. "Yahoo is one of the most valuable places on the Internet, as the fourth-most-visited site on the Internet."

Still, Yahoo's valuation will continue to beckon, he noted. "I would not be surprised to see additional proposals coming out of the woodwork."


Erika Morphy has been writing about technology, finance and business issues for more than 20 years. She lives in Silver Spring, Md.


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