Business

Dan Loeb Launches Yahoo! Inc (YHOO) Proxy War: Wants to be on Board

dan-loeb-photo
Via SEC Filling

Dan Loeb, CEO of Third Point Partners, threatened Yahoo Inc (NASDAQ:YHOO) last week to launch a proxy ‘within a week.’ Loeb is the largest Yahoo! Inc shareholder, and wanted to replace part of the current board, with four other nominees, including himself.

Loeb just filled a prelimanry 14A with the SEC, in which he explained his rationale for change. He also urged the Yahoo! shareholders to vote for his suggested nominees. One of the nominees is Dan Loeb himself, who owns 70 million shares of the company.

Below is a history of the entire saga from the viewpoint of Dan Loeb:

Third Point is a registered investment adviser headquartered in New York, managing approximately $9 billion in assets.  Founded in 1995, Third Point follows an event-driven approach to investing globally.

The Third Point Entities began building their current position in shares of Common Stock in August 2011 and currently own an aggregate of [70,500,400] shares, representing approximately [5.8%] of the Common Stock  outstanding.  We believe the Third Point Entities are, collectively, the largest outside shareholder of the Company.

On September 8, 2011, shortly after the Board removed Carol Bartz as CEO and installed Timothy Morse as interim CEO – making him the Company’s fourth chief executive in five years – Third Point sent to the Board a letter (the “September 8 Letter”) expressing the view that the Company was grossly undervalued and calling on the Company’s directors to recognize what Third Point believed were the Board’s misjudgments and failures, including, among others, the Board’s rejection of Microsoft Corporation’s $31 per share acquisition bid in 2008 and its hiring of Carol Bartz as CEO.  The September 8 Letter called for certain directors to resign their seats voluntarily and stated that Third Point had held discussion with respected executives who could add value to a reconstituted Board.  The September 8 Letter concluded by noting that the decision to undertake Board turnover initially rests with the individual directors and expressed the hope the Company’s directors would take Third Point’s views seriously and that a proxy contest would not be necessary in order to effectuate Board change.

Following receipt by the Company of the September 8 Letter, the Company sought to arrange a conversation between Mr. Loeb and either Roy Bostock, Chairman of the Board, or Jerry Yang, a founder of the Company and member of the Board.  A telephone conversation was subsequently arranged for September 12, 2011 (the “September 12 Conversation”), between Mr. Loeb and Messrs. Bostock and Yang, in which others from Third Point and the Company participated.  The Company confirmed, prior to the September 12 Conversation, that it would not provide to Third Point any material non-public information about the Company.
At the outset of the September 12 Conversation, Messrs. Bostock and Yang discussed with Mr. Loeb recent developments in the Company’s business.  After Mr. Loeb questioned Mr. Bostock’s leadership and commitment to act in the best interests of shareholders, Mr. Loeb concluded from Mr. Bostock’s failure to acknowledge any responsibility for the Company’s problems that Mr. Bostock was unaware of what it takes to be an effective leader and that Mr. Bostock was not likely to resign from the Board.  Mr. Loeb informed Messrs. Bostock and Yang that Mr. Bostock was part of the Company’s problem and that Third Point intended to pursue whatever efforts were necessary to remove Mr. Bostock from the Board.  The September 12 Conversation ended abruptly when Mr. Bostock terminated the call.
On September 14, 2011, Third Point wrote to Mr. Yang expressing its disappointment that Mr. Bostock had prematurely terminated the September 12 Conversation and reiterating its view that Mr. Bostock was part of the Company’s problem.  The letter urged Mr. Yang to push for desperately-needed leadership change and stated that Third Point was prepared to present Mr. Yang with suggestions of candidates who could help bring the Company back to its rightful place among the world’s top digital media and technology companies.  Third Point received no reply to its letter from either Mr. Yang or the Company.
In early November 2011, The Wall Street Journal reported that the Company, in an effort apparently led by Mr. Yang, was considering among other alternatives a recapitalization transaction in which private equity firms would acquire up to a 20% stake in the Company and in which the Company would buy back shares from existing holders with the proceeds of the sale.  The report, which was sourced to “people familiar with the matter,” indicated that the stake proposed to be acquired by the private equity investors would be aligned with the approximately 10% stake of Company co-founders, Mr. Yang and David Filo, to form an ownership block that, following the stock buyback, could represent as much as 40% to 45% of the then-outstanding Common Stock.
Following this report, on November 4, 2011, Third Point wrote to the Board to express its deep concern, based on media reports, that Mr. Yang might be pursuing his personal interests in discussions with private equity funds and that the Board and its Transactions and Strategic Planning Committee might be permitting Mr. Yang to engage in these discussions.  Third Point stated in the letter that such a recapitalization transaction would make no sense for the Company and that the only purpose of such a transaction would be to put substantial equity stakes into friendly hands to entrench management and transfer effective control of the Company without the payment of a control premium or even, apparently, a shareholder vote.  In the letter, Third Point called on the Board to seek Mr. Yang’s resignation from the Board and demanded that two Third Point representatives be appointed to the Board seats to be vacated by Mr. Yang and Chairman Bostock or to two newly created Board seats.  Although the Company issued a press release on November 4, 2011, detailing in cursory fashion the Board’s strategic review process, Third Point received no direct reply to its letter.
In the following weeks, as media and analysts’ reports continued to discuss the Company’s process of considering strategic alternatives, Third Point became increasingly concerned about the management of that process and whether it was designed to maximize shareholder value.  In particular, Third Point was concerned that the Board was focusing principally on a recapitalization or “PIPE” transaction that would serve to entrench Mr. Yang, disenfranchise the Company’s public shareholders and eliminate the possibility that the Company’s public shareholders could receive a control premium for their shares.  Accordingly, on December 13, 2011, Third Point once again wrote to the Board and asked that the Board immediately make public, in a manner that would not prejudice legitimate efforts by the Board, the letter or letters in which the Company invited third parties to make proposals for a transaction with the Company.  The purpose of this request was to ascertain whether the Company had placed any artificial restrictions on the proposals that the Board was willing to consider in its search for strategic alternatives, such as discouraging, or even prohibiting, bids to purchase the Company in its entirety.  Third Point received no direct reply to its letter, although news accounts in January indicated that plans for a “PIPE” transaction had been shelved.
Effective January 17, 2012, Mr. Yang resigned from the Board and his other positions with the Company.  On February 7, 2012, the Company announced that Chairman Bostock and directors Vyomesh Joshi, Arthur H. Kern and Gary L. Wilson (collectively, the “Retiring Directors”) each had volunteered not to stand for re-election at the Annual Meeting.  The Board also announced that, effective immediately, it had appointed two new directors, Fred Amoroso and Maynard G. Webb Jr. (the “Newly-Appointed Directors”).
On February 14, 2012, the Third Point Entities filed with the SEC an amendment to the Schedule 13D, disclosing their intention to nominate the Third Point Nominees for election to the Board at the Annual Meeting.
On March 12, 2012, Third Point Entities that are record holders of Common Stock delivered to the Company, as required by the Company’s bylaws, formal notice of their intention to nominate the Third Point Nominees for election at the Annual Meeting.  These Third Point Entities also served on the Company a demand under the Delaware General Corporation Law for a list of the Company’s shareholders and other shareholder list materials.
On March 14, 2012, Mr. Loeb wrote a letter to Scott Thompson, who in early January 2012 had become the Company’s fifth chief executive in five years, in which he observed that a month had passed since Third Point had announced its slate of the Third Point Nominees.  Mr. Loeb wrote that he had hoped the Company would recognize the Third Point Nominees as impressive, independent thinkers with directly relevant experience and who, collectively, would enrich the Board’s dialogue at that critical time.  However, despite having been told that the Board would give serious consideration to the candidacy of the Third Point Nominees, the Company’s response had been dismissive, with the Third Point Nominees other than Mr. Loeb each receiving a single call from a separate member of the Nominating and Corporate Governance Committee, two of the three lasting no more than thirty minutes, and each lacking any concrete sense of process or “next steps.”  In light of this perfunctory outreach, Mr. Loeb stated that Third Point had been left no choice but to directly approach its fellow shareholders and solicit proxies in favor of the Third Point Nominees.  Mr. Loeb indicated, however, that it was not too late for Mr. Thompson to take decisive leadership action by inviting the Third Point Nominees onto the Board.  Mr. Loeb also noted that the Company would be without a chairman after Mr. Bostock’s term expires and that Third Point, in the spirit of continuity and compromise, would be amenable to Mr. Gary L. Wilson’s remaining on the Board as Chairman for a one-year transitional period.
On March 15, 2012, Third Point filed in the Delaware Court of Chancery an opposition to an application submitted by the Company to maintain the seal on certain documents that were part of the court record in a 2008 class action litigation arising out of Microsoft Corporation’s $31 per share cash bid for the Company.  Third Point is not a party to the litigation and believes that the Company has not satisfied its burden of establishing “good cause” for continued sealing of such documents.
REASONS FOR THIS SOLICITATION
Although we believe Mr. Yang’s resignation and the retirement of the Retiring Directors are in the best interests of the Company, we do not believe those changes alone will put the Company on the right track towards maximizing shareholder value.
We also believe that the Board’s appointment of the Newly-Appointed Directors was not in the best interests of the Company and its shareholders.  Installing the hand-picked choices of the current Board does nothing to allay concerns that the Company is poised to repeat the errors of its past.  In order to protect and instill confidence in the Company’s shareholders, we believe it is imperative to introduce new outside nominees with financial and business backgrounds that can assist the Board and the Company’s management as they seek to turn the Company around.  We further believe that outside shareholders with substantial holdings should also be included on the Board to better represent shareholder interests.
While the Newly-Appointed Directors possess certain specific technology credentials, we believe that key elements of a balanced strategy remain unaddressed at the Board level.  Press reports have indicated that the Board’s current strategic direction is to emphasize the technology aspects of the Company’s business at the expense of advertising and media, which accounts for the vast majority of the Company’s revenues.  We believe that this approach places the Company’s core revenue generating capability at substantial risk, fails to recognize the tremendous growth opportunity in video, and directly results from a dearth of essential expertise in media and entertainment at the Board level.
We further believe that the Board lacks an expert in the type of fundamental corporate restructuring that we believe the Company requires, along with an independent investor representative strongly aligned with the Company’s shareholder base through substantial stock ownership.  The failure of the Board to prioritize shareholder value to date – evidenced by years of deferring and delaying comprehensive strategic initiatives and apparently missing out on significant strategic opportunities (such as the reported possibility of the Company’s opportunity to purchase Facebook in 2006 and the rejection of Microsoft’s $31 per share offer in 2008) – should no longer be tolerated or endorsed by investors.  Particularly at a time when the Company is seeking to monetize its Asian interests and, upon a sale, would receive from them proceeds representing a majority of the Company’s current market capitalization, we believe it is absolutely essential for the Board to include directors with substantial capital allocation experience and who are strongly aligned with shareholder interests through substantial stock ownership.
The Third Point Nominees will, if elected, constitute only a minority of the Board and, even if they were to vote together unanimously, will not be able to adopt singlehandedly any measures (including any measures proposed by the Third Point Nominees) without the support of additional members of the Board.  We believe, however, that the Third Point Nominees, if elected to the Board, will collectively be in a position to influence the strategic direction of the Company and to bring to the Board deep experience in advertising and media, restructuring and capital allocation, and the perspectives of significant shareholders.  Each of the Third Point Nominees is committed to acting in the best interest of the Company’s shareholders.
The Third Point Nominees do not anticipate that they will have any conflicts of interest with respect to the Company and recognize that as members of the Board they will owe fiduciary duties to all shareholders.  None of the Third Point Nominees has any contract, arrangement or understanding with the Company, and no other direct financial interest concerning the Company, other than through the beneficial ownership of Common Stock by the Third Point Entities and the Third Party Nominees disclosed in this Proxy Statement.
The full filling can be found here.