Shares of tech giant Yahoo! Inc. (YHOO), a Zacks Rank #3 (Hold) stock, were up 3.4% to $50.23 per share following a new letter from activist investor Starboard Value LP to its chief executive, Marissa Mayer.
In the letter, Starboard once again urged Yahoo to consider a merger with AOL Inc. (AOL). The activist investor also urged Yahoo! to discontinue expenditure on acquisitions and streamline costs following media reports which indicated that the company was intent on large-scale acquisitions.
Starboard also insisted that Yahoo should focus on how to monetize its Asian assets, which include stakes in Alibaba and Yahoo Japan Corp, so that it can deliver value directly to the stockholders through a tax-efficient spin-off rather than in a cash-rich split-off.
Yahoo declined to comment on the letter but the rising share price showed that investors welcomed Starboard’s ideas.
Why the AOL merger?
Starboard had first urged Yahoo, to consider a potential merger with AOl in September. Per the letter sent by Starboard to CEO Marissa Mayer, Starboard believes that the possible merger of Yahoo!’s core search and display businesses with AOL could bolster Yahoo’s competitive position and could also deliver cost synergies of as much as $1 billion.
Analysts expect such a deal to create a strong contender in the market for online display ads, which include video, banner and interactive ads. A merger could also help the companies navigate the ongoing challenges such as growth of programmatic advertising and migration to mobile devices.
No More Acquisitions
Per the letter, the $1.3 billion Yahoo spent on acquisitions since the second quarter of 2012 have not been able to reap expected financial benefits as the acquired companies are not making enough profits. Some on the other hand are losing money.
The concerns emanated from market rumors about Yahoo contemplating acquisitions of large-scale cable TV channels such as Scripps Networks Interactive (SNI) and Time Warner's (TWX) CNN. Starboard believes that these reports may have some truth as already sixty days have passed since Alibaba launched its IPO. This makes Yahoo free to reveal its intentions regarding its shares of Alibaba.
Starboard has warned Yahoo not to consider any large acquisitions other than AOL. Yahoo is however yet to reveal its plans.
No Cash Rich Split-off
Starboard also expressed concern about rumors regarding Yahoo’s plans to go for a cash rich split-off, a tax-saving maneuver, for the company's stakes in Alibaba and Yahoo Japan.
Starboard claims that a cash rich split-off would not be the best way to realize the value of the investments. Instead Yahoo should focus on how to shed its Asian assets in the most tax-efficient way possible. A cash-rich split-off would create a separate entity consisting of an operating business and some cash that Yahoo would exchange for its Alibaba shares.
Starboard instead suggests spinning off its Alibaba investment. Yahoo currently has a 15%+ stake remaining in Alibaba after the latter’s IPO.
A cash rich split-off would save Yahoo from the taxes on its gains but the approach would still cost more than spinning off the assets.
Starboard’s Ownership in Yahoo
Starboard is a New York-based investment adviser. Per reports and FactSet data, it owns a 0.8% stake in Yahoo, which is 12% of its portfolio. Starboard revealed a 7.7 million share stake in Yahoo, worth more than $2 billion. This gives it the right to actively engage corporate executives and directors with its concerns and suggestions.
Starboard’s letter included a barely veiled threat to oust CEO Marissa Mayer, if she didn’t comply with its demands.
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