Third Point manager Dan Loeb told Yahoo (YHOO), in a letter addressed to CEO Scott Thompson, last Wednesday that he plans to file a challenge for board seats after his attempt to add himself and three other new members to the board was met with a chilly reception.
The four nominated men - Maeva Group CEO Harry Wilson, former MTV Networks President Michael Wolf, former NBC Universal CEO Jeff Zucker and Loeb - each received a single phone call from the Nominating and Corporate Governance Committee. None of the phone calls were considered an "interview" nor were any steps outlined regarding the nomination process. Loeb's hedge fund Third Point owns over 70.5 million shares in Yahoo, making it the company's largest outside shareholder. The position was valued at roughly $903.29 million at the end of the fourth quarter 2011, representing a roughly 6% stake in the company.
In the letter filed with the SEC, Loeb expressed his disappointment with the board's selection process and stated his hedge fund Third Point's intention to file a preliminary proxy statement soon. Loeb said in the letter that his intention is to "ensure Yahoo! maintains its place as a premier internet company by forcefully addressing the immediate strategic and operational challenges it faces," and he expressed that his goal in trying to get these board members elected is to develop "a powerful strategic planning committee (that) would promptly but thoughtfully map out a plan to take full advantage of the Company's valuable assets and stop its painful decay."
Dan Loeb has long been a critic of Yahoo's board, singling out Yahoo Board Chairman Roy Bostock and Founder Jerry Yang repeatedly since purchasing his large stake in the company, and even going so far as to demand their resignations. Loeb was successful in his campaigns - Yang resigned in January and Bostock is slated to resign after the company's annual shareholder meeting this year - but it appears some issues with the board remain.
Add to this Yahoo's patent lawsuit against Facebook for allegedly violating 10 of its patents (particularly those related to messaging, advertising and privacy) and the collapse of its talks with Alibaba to sell its Asian assets, and Yahoo's ability to maximize shareholder value, especially in the short-term, has to be brought under question. In protest against Yahoo's lawsuit against Facebook, Yammer CEO David Sacks is offering Yahoo employees who leave Yahoo to join Yammer a $25,000 signing bonus. "I'm trying to create some motivation for employees at Yahoo to reassess their situation," said Sacks. "We're sending the message that becoming a patent troll is not a viable turnaround strategy."
Yahoo used to be one of the heavyweights in Internet services, back in the day before there was Google (GOOG)'s Gmail and AOL (AOL) was so famous for the catchphrase, "You've Got Mail," that a movie of the same name was produced - but the company has fallen drastically since then. Yahoo still boasts a high volume of users - 310 million unique users to be exact (as of October 2011), but it is a far cry away from Google's Gmail, which has 350 million active users (as of January 2012) and Microsoft (MSFT)'s Hotmail, which also boasts roughly 350 million users (as of October 2011).
Yahoo is trying to reclaim some of its former glory. The company's new CEO Thompson is planning a massive restructuring of the company to try to boost areas in which the company has lagged recently. Thompson's restructuring plan is expected to lay off thousands of workers. The company's public relations, research, marginal businesses and regional efforts are also to be examined. The company also recently launched a marketing partnership with Microsoft and AOL, intended at rivaling Google and Facebook.
Yahoo has had some negative stock performance recently. It lost almost 4% in 2011. The company's sales and net income have also dropped. Plus, at 22.30%, its net profit trails its industry's, but we think Yahoo's strengths outweigh the negatives. We think that the company has good bones and may be able to turn things around, especially with Loeb leading the charge. Yahoo has a high gross profit margin at 81.30%, which increased from the same quarter last year. The company also saw some increases in net operating cash flow, advancing 7%. Yahoo is also very liquid. It has a quick ratio of 2.57, indicating that it can easily cover any short-term debt obligations that pop up. Yahoo is also priced low relative to its peers. At roughly $15 a share, it is boasting a forward price to earnings ratio of 15.72 versus its industry's average forward price to earnings ratio of 26.08.
Even with all its difficulties, Yahoo is positioned really well compared to many of its competitors. Take AOL for example. It recently traded for $18 a share. The company has a really solid financial position. AOL has a super low debt to equity ratio of 0.05, easily undercutting the average levels in its industry, so it has good debt management. The company also has a quick ratio of 1.40, which means that it should be able to handle shorter-term cash obligations without a hitch. The company also enjoyed a net operating cash flow increase of almost 12% compared to the same quarter last year. But, that's about it for positives.
AOL lost over 36% in 2011, yet it is trading at a premium to its peers. The company has a forward price to earnings ratio of 30.34 compared to its peers' average of 26.08. Also, its earnings per share plummeted last year. Barring some sort of industry changing advancement or addition to its product offering, I just don't see AOL coming around. In fact, I wouldn't be surprised if someone, maybe even Yahoo with its strong cash position, bought AOL after its price drops. The thing is that AOL has a fraction of the subscribers Yahoo does and it is largely dependent on revenues from its 3.5 million subscribers, which brought in $191 million in revenue during the fourth quarter 2011 (Yes. I said "Subscribers." Apparently, there are some people who pay for their AOL service, even though AOL has offered mail service for free since 2006).
AOL's situation is clearly not so good, but I think it serves to highlight where Yahoo really is and where it could go given its current standings. I think it is also easy to see why Dan Loeb is so frustrated. I would be too. Here is a company with great opportunity (Yahoo Finance is still one of the most highly referenced sites in the world) and it is doing virtually nothing with it. I think that Loeb will ultimately be successful in his proxy fight and imagine that investors can expect good things in the near future. That said, I think that Yahoo's price should fall a little as these proxy issues continue, so I encourage investors to hold off a little before buying Yahoo stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.