Activist investor Starboard Value owns less than 2 percent of Yahoo’s shares but is poised to bring down the firm’s Board of Directors and has pushed the iconic Internet giant toward a sale. Is this the story of the mouse that roared?
No, it’s the story of a wily and aggressive mouse that’s rounding up a herd of elephants to help it stomp the Sunnyvale company into a new shape.
New York-based Starboard is building an increasingly high profile in Silicon Valley, investing in companies it sees as underperforming and forcing change. It’s benefiting from a shifting economy in which institutional investors — the elephants — own an increasing share of publicly traded companies, making it easier for activists to influence or take control of firms.
“It doesn’t look good for Yahoo,” UC Berkeley School of Law professor Steven Solomon said. “I’m pretty certain (Starboard Value) is going to win the fight.”
Starboard is used to winning. Two months after the hedge fund bought a 6.7 percent stake in Marvell Technology, a computer chipmaker whose operating headquarters is in Santa Clara, the company’s leaders were abruptly ousted. Pressure from Starboard helped push San Jose semiconductor company Micrel to a 2015 sale. This month, Starboard sent a letter to Newark pharmaceutical company Depomed, saying it wants to explore a potential sale.
Starboard declined to comment about its investments or strategy.
Yahoo and CEO Marissa Mayer started feeling rising heat this summer from the hedge fund, which, according to Nasdaq, held $2.4 billion in stock in 25 companies at the start of this year. Back in August, Starboard wrote Yahoo Chairman Maynard Webb, saying it found the “lack of urgency” over the company’s “consistently declining” financial results “enormously troubling.” After making continued complaints, Starboard notified Yahoo in March that it was launching an election contest, a proxy fight to replace the entire Yahoo board.
Under pressure from Starboard, Yahoo put itself up for sale. Monday, preliminary bids are due.
Joel Espelien, a senior analyst at The Diffusion Group, said that because Yahoo is engaged in a sale, he believes major investors “are going to let management see this process through.” But, Espelien said, “If this results in nothing, I’d say they’re done. Nobody’s going to say, ‘Oh, that’s fine — just go back to doing what you were doing.'”
Activist investors, also called shareholder activists, typically buy shares in companies they see as undervalued. Then they exert pressure, often via letters to executives and board members that point out deficiencies and opportunities. If a company resists change, the activist will often hit up shareholders to rally support — and to assess shareholders’ appetite for change should the dispute lead to a “proxy fight,” which is an attempt to take partial or total control of a company.
“The weight of the evidence is that shareholder activism leads to share price increases,” Stanford Law School professor Robert Daines said.
Those increases have often led institutional investors to support activist crusades.
“It’s a world where activists have wide power because they have the backing, in many cases, of institutional shareholders,” UC Berkeley’s Solomon said.
Founded in 2011, Starboard immediately began making a name for itself with aggressive action against company leaders. Among its first targets was San Jose’s Tessera Technologies, where it engineered installation of a new chief executive. Since then, Tessera’s stock has doubled in value.
Starboard’s full-board sweep of Darden Restaurants in 2014 — famously preceded by condemnation of Olive Garden’s unlimited breadsticks — showcased activist power and brought significant rewards to shareholders: Darden’s stock has risen nearly 50 percent since Starboard replaced its board, and the company’s market capitalization has grown by $2 billion.
Despite Starboard’s play against Darden, and its current approach to Yahoo, it’s rare for activists to seek replacement of an entire board, Solomon said. Activists typically nominate a “short slate” of new directors who gain a minority position on the board, Solomon said. “People in the market, shareholders, proxy advisory services, are loath to say, ‘Give the entire board over to the activist,’ because that really is a change of control of the company.”
Investor activism has skyrocketed since the financial crisis, with activist hedge funds managing more than $112 billion by 2014, up from $12 billion in 2003, according to J.P. Morgan’s 2015 “The Activist Revolution” report.
It has never been easier to take partial or complete board control through a proxy fight. It’s still a challenging process that often costs millions of dollars in filing fees and payments to financial advisers, lawyers, public relations people and board nominees. But changes in U.S. corporate ownership have given outsized power to activists. Frequently, a handful of institutions such as banks, insurance companies and hedge funds own a quarter to a half of a public company, said Stanford’s Daines.
“If grandmas and grandpas all around the world each owned some tiny fraction, it would be hard to get them together — that’s too expensive and too difficult,” Daines said. “The increase in institutional share ownership lowers the cost of shareholder activism.”
Yahoo’s top 10 institutional investors own 25 percent of the company’s shares, and institutions and mutual funds together own 71 percent, according to Yahoo Finance.
Yahoo’s top three institutional investors are The Vanguard Group investment company, with 5.35 percent of outstanding shares; Goldman Sachs, with 4.3 percent; and investment management firm State Street, with 3.48 percent. Other investors include BlackRock Institutional Trust, Bank of America, T. Rowe Price and Luxor Capital Group, according to Yahoo Finance.
Whether or not Yahoo’s investors want to give management time to make a deal, Starboard Value has revealed its deep distrust of the company’s leadership. The activist fund in a March letter to Yahoo shareholders described an anemic sale process that has “cast doubts for prospective buyers of the core business as to whether the process is genuine.” Analyst Espelien said Yahoo’s management has a “credibility issue,” particularly concerning transformational changes such as the current sale.
“They’ve never really pulled the trigger on any of these major deals or restructurings,” Espelien said. “It’s just been a lot of talk.”
Whether Starboard succeeds in forcing Yahoo’s sale or not, Silicon Valley will likely be hearing more from the fund. It has invested $14 million in San Jose digital storage company Quantum and recently bought $8.8 million in shares in health insurance company Cigna.
Contact Ethan Baron at 408-920-5011, or follow him at Twitter.com/ethanbaron.
