The hot news out of Yahoo’s (YHOO) board meeting is that the company will reject the $31/share takeover offer by Microsoft (NASDAQ:MSFT) on the grounds it “massively undervalues” the company. Further, Yahoo apparently will refuse to consider offers below $40/share.
I hardly ever spend time talking about the corporate governance of the companies I write about, because it’s kind of like air: not really noteworthy until it’s hugely lacking. This is one of those times where the exception wins out, however…
After doing a short review of Yahoo, I can find a very limited number of times where the board’s actions have increased shareholder value, and a very large number of times where the board’s stance seems to run opposite that of shareholders.
They’ve made some good overseas investments – see Alibaba.com and Yahoo Japan. I’ve seen estimates that say if Yahoo was to distribute those stakes to shareholders, they would be worth around $12/share – or more than half of YHOO’s price before the Microsoft bid. Telling? It should be, because…
Pretty much everything else. Yahoo has sacrificed its once-dominant position in search, missed the memo on online advertising becoming a big deal, and essentially floundered in the face of Google’s (NASDAQ:GOOG) innovations.
More particularly, I find the board’s actions – or inactions, call it what you will – in the face of all this to suggest a staggering degree of hubris. Here is one bothersome example:
In the last proxy statement filed April 2007, one shareholder proposal called for “Pay-for-Superior-Performance,” which would link incentive bonuses to Yahoo’s financial and stock outperformance of a peer group. What did Yahoo’s board think of this? They strongly opposed it, of course. But the truly galling part here was to use the “nominal” base salary for then-CEO Terry Semel as support of their prudent compensation policies, which apparently didn’t need to be modified… except for the fact that Semel received $2.9 million in stock and $36.7 million in options grants, all while having the company he was supposedly overseeing get their lunch taken and eaten by Google.
Maybe handing out $15 million in stock and $60 million in options grants to executives was part of the strategy to get that feel of an ownership stake. They certainly weren’t going to get it by taking a stake with their own actual money. Let’s review the transactions by board members and insiders over the last year to get some idea of how they handle their own buying and selling when it comes to the Yahoo stock they so nicely get granted each year, good performance or not.
Michael Callahan, Executive VP/General Counsel: Sold 12,678 shares at $28.38 on 2-1-08
Eric Hippeau, Board Member Since 1996: Sold 165,714 shares at $30.60 on 10-25-07
David Filo, Co-founder: Sold 167,000 shares at $24.75 on 7-25-07
Susan Decker, President: Sold 22,875 shares at $28.70 on 5-31-07*
Farzad Nazem, CTO: Sold 107,513 shares at $28.38 on 5-30-07
*Susan Decker has since made repurchases bringing a net positive balance, see below
Arthur Kern, Board Member Since 1996: Purchased 18,000 shares at $24.17 on 8-14-07
Susan Decker, President: Purchased 52,242 shares at $23.40 from 8-7-07 to 8-13-07
Ed Kozel, Board Member Since 2000: Purchased 20,000 shares at $29.70 on 2-9-07
Vyomesh Joshi, Board Member Since 2005: Purchased 4,000 shares at $25.73 on 6-21-06
Arthur Kern, Board Member: Purchased 12,000 shares at $26.58 on 7-25-06
In the past, Yahoo insiders haven’t had much of a problem with getting rid of their stock for under $30/share. Now that Microsoft comes knocking and their personal fiefdom is threatened, the extortion game is suddenly on.
But how much is really at stake? In a review of the stock holdings of Yahoo’s Board, only Arthur Kern had significantly more than $1 million in YHOO stock, with Ed Kozel just under the $1 million mark. Most of the remaining directors hold under $500,000 in YHOO stock – not peanuts, but less than a year’s pay given what they earn as board members. In other words, I believe they generally have much more to gain from keeping Yahoo as their personal plaything than in cashing out their minimal equity holdings.
Tom Lyons just re-did the inputs to get the implied expectations for YHOO being a $40 stock, and I hardly believe they are realistic. Yahoo is a company struggling to produce consistent double-digit growth, and their self-valuation seems a bit too self-congratulatory for my tastes. Ok, the last five years during the explosion of web-based advertising, Yahoo could put up 28% annual growth. Now, front year growth estimates are flat-to-negative, and here comes Yahoo – a company that has delivered on nearly nothing in… longer than I can remember – saying that they are going to being re-accelerating growth? I’m not buying it, especially from a bunch of people who aren’t buying it themselves if their wallets are any indication of their true feelings.
Maybe because litigation runs in the blood, I see a series of massive shareholder lawsuits taking place against Yahoo if the company doesn’t get taken out because of the board’s charades. And, if I was a Microsoft shareholder, I would be absolutely livid if they fell for this move and raised their already-adequate bid, which is just 10% off YHOO’s highest price in the last two years. If Microsoft raised the bid and then had to take a goodwill writedown in the future… I’d almost want to slap the Time Warner-AOL tag on this the second I get the impression anyone seriously believes Yahoo is worth $65 billion.
I think the simplest way out of this mess would be for Yahoo’s board to take the company private at some price in excess of Microsoft’s bid - but with their track record of being something less than 100% behind Yahoo as revealed by their personal stakes, I wouldn’t hold my breath.