December 11, 2015
The Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, California 94089
Attention: Maynard J. Webb, Chairman
cc: Marissa A. Mayer, President and Chief Executive Officer
Deprival Super-Reaction Syndrome And Investing. Part four of a short series on Charlie Munger’s Human Misjudgment Revisited. Charlie Munger On Avoiding Anchoring Bias Charlie Munger On The Power Of Prices The Munger Series - Learning . . . SORRY! This content is exclusively for paying members. SIGN UP HERE If you are subscribed and having an Read More
Kenneth A. Goldman, Chief Financial Officer
Ladies and Gentlemen:
[drizzle]
Canyon Capital Advisors LLC is an investment management firm that serves as investment adviser to funds and accounts having, on an aggregate basis, economic ownership of approximately 10 million shares in Yahoo! Inc. (the “Company”), representing approximately 1.1% of shares outstanding.
On December 3, 2015, we submitted a letter to the Company’s Board of Directors as they met to discuss whether to complete the spin-off of the Company’s holdings in Alibaba Holding Group Ltd. (“Alibaba”), or to change course and pursue a sale of the Company’s “core” business. Our primary reason for submitting our prior letter was our concern that the Board would fail to emerge from these meetings with a clear path forward for the Company. In particular, we expressed our strong view that time was of the essence, and an immediate sale of the entire company, as well as its individual assets, should be explored. This concern was heightened due to a lack of communication with shareholders and a general perception, as widely reported in the media, that the Board lacked real independence from the Company’s senior management.
In our prior letter, we specifically asked that the Board: (i) produce a decisive strategy to monetize the Company’s investments and core business as soon as possible, while protecting the cash currently on its balance sheet; (ii) demonstrate that this strategy was considered and separately recommended by a sub-set of truly independent directors based on the advice of qualified financial and legal advisors; and (iii) significantly increase its transparency, both to shareholders and to the market generally. We received no response from the Company or the Board to our letter (other than to confirm receipt).
Unfortunately, our concerns were well-founded. The Company’s recent announcement to abandon its plan to spin-off its holdings in Alibaba and to begin evaluating a spin-off of the core business, its substantial cash, and its Yahoo! Japan stake did not include any clear details in terms of analysis, process or timing. In fact, following the explanatory call hosted by the Company’s Chairman and Chief Executive Officer, shareholders were told to expect at least another year of exploring the uncertain spin, while management continues its unsuccessful quest to turn around the core business rather than taking decisive action to immediately unlock value. The market already assigns significant negative value to the Company’s mature core operating business and assets and, in our view, this delay will inevitably cause further decline in value. We do not understand the Board’s continued support of the Company’s senior management team, given its track record, its failure to increase value for shareholders and the recent spate of executive departures from the Company.
A Reverse-Spin Should Not Be the Only Option. The new reverse-spin would be, by the Company’s own admission, fraught with operational, tax and execution risks similar to those that ultimately caused it to abandon the Alibaba spin. Therefore, the Company must launch other plans simultaneously to maximize value for its owners. We believe there are a number of potential buyers for the various assets comprising the Company’s core business, its real estate, intellectual property and royalty streams, as well as its Yahoo! Japan stake. We also believe that a sale of the entire company should be considered.
The Company’s primary goal must be to close the discount on the Company’s non-core assets as much as possible and in a timely manner. Tightening the market discount on the Alibaba stake, the Yahoo! Japan stake, and the Company’s cash by 20% could immediately generate nearly $10 per share of value, or an approximately 30% return, on top of any value the core assets generate through a sale process. The modest scale of the core business relative to the total enterprise value of the Company today means that even material improvements in its valuation would be insignificant in comparison to tightening these discounts.
One Year is Too Long to Wait. The Company’s inaction to date has been startling. After contemplating a spin-off of Alibaba for nearly a year, and evaluating tax-efficient options for both its Alibaba and Yahoo! Japan stakes for nearly five years, the Company has not consummated (or even determined) a final plan. We find it difficult to comprehend that in the face of months of tax uncertainty regarding the spin-off there was apparently no “plan B”. Requiring shareholders to continue to wait for definitive action for another year or more – and extending the tenure of senior management – while the Company evaluates this reverse-spin is simply unacceptable. This plan should already have been well-vetted and evaluated, given that nearly five years of discussions about separating the investment stakes has already passed.
We are surprised the Company continues to claim it can use this time to improve the value of its aging core business. The midpoint of management’s recent guidance implies a full year 2015 revenue (ex-TAC) decline of 8.5% and an adjusted EBITDA decline of 32.7%. By comparison, in 2014, revenue (ex-TAC) declined 0.6% and adjusted EBITDA declined 12.9%. Furthermore, the $2.3 billion of acquisitions and other investments have failed to create shareholder value. We believe the current perceived market value of the Company’s core operations and assets is well below zero.
Immediate Action is Required. In light of the above, we believe the Company should prioritize a sale of its core business, a portion of its assets, or the entire company. We ask that the Board exercise its duty to act in the best interests of shareholders by quickly unlocking the value of the Company’s assets while protecting its current cash holdings. We believe the most responsible way to do so is not through the pursuit of another uncertain and protracted “spin” but rather through the immediate launch of a sale process.
Respectfully,
Canyon Capital Advisors LLC
[/drizzle]
