Starboard Value Seeks to Oust Yahoo’s Board


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The hedge fund has already called into question the leadership of Marissa Mayer, Yahoo’s chief executive.

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Ramin Rahimian for The New York Times

SAN FRANCISCO — Tensions between Yahoo and its most outspoken shareholder, the activist hedge fund Starboard Value, were already running high when the two sides agreed early this year on a face-to-face meeting in Manhattan.

But on the morning of that meeting on March 10, Yahoo surprised Starboard when it filled two vacancies on its board without consulting the hedge fund, in what many viewed as a poke in the eye.

For Starboard, the meeting was yet another bad omen. And on Thursday the hedge fund made good on its months-old threat to try to unseat the ailing web pioneer’s board.

In running nine candidates to try to oust all the incumbent directors, the hedge fund is seeking to claim its biggest corporate scalp yet. And Yahoo must defend itself while also trying to explore a potential sale of its core business.

The slate — which includes a former executive at NBCUniversal and a former technology banker at Deutsche Bank as well as Starboard’s chief executive, Jeffrey Smith — represents the strongest challenge to a board of a major American company in some time. Just 30 or so companies have experienced the ouster of their full boards as a result of activist campaigns, according to data from FactSet.

The most prominent victim in recent years was Darden Restaurants, the owner of Olive Garden, whose entire board was ousted by shareholders. Its tormentor: Starboard, which memorably accused the restaurant operator of insufficiently salting its pasta water and overserving breadsticks.

“As you know from reading our prior letters, we have been attempting to work with Yahoo for the past 18 months,” Mr. Smith wrote in a public letter to investors on Thursday. “Over this time frame, we have repeatedly requested an opportunity to work with the company, including offers to join the board and work constructively with the current directors. At every step of the way, management and the board have pushed us away.”

Yahoo said in a statement that it would review Starboard’s slate of director candidates. The board election will take place at Yahoo’s annual meeting, expected sometime in June or July.

Robert Peck, an analyst with SunTrust Robinson Humphrey, said that shareholder dissatisfaction with Yahoo was broad, and that Starboard “has a good chance of winning the proxy contest.”

Shares of Yahoo closed up slightly on Thursday, at $34.86.

It is unclear whether Starboard would ever have settled for less than majority control of Yahoo’s board. But people with knowledge of the hedge fund’s strategy, who spoke on the condition of anonymity, said that the firm had lost faith in Yahoo’s ability to find a turnaround strategy that would work and then doubted the company’s sincerity in exploring a sale of its mainstay web operations.

Eventually it came to the conclusion that wholesale change would be needed to ensure a sale.

Yahoo has argued that it is serious about potentially selling itself, pointing to the hiring of three investment banks and reaching out to a constellation of potential bidders, ranging from telecommunications giants like Verizon to media companies to private equity financiers.

But in its letter, Starboard, which owns a 1.7 percent stake in Yahoo, contends that there are reasons for shareholders to be “highly concerned” about the sale process. Some potential buyers have questioned whether the company is serious.

“Despite what appears to be strong interest from large strategic and financial buyers, as referenced in the media, nearly two months have gone by since Yahoo officially publicly announced its intention to pursue strategic alternatives for the core business, and it seems little progress has been made,” it said.

Since first emerging as an investor in the Internet company in late 2014, Starboard has repeatedly criticized Yahoo’s management, led by Marissa Mayer, the chief executive, as well as the company’s board.

The embattled technology company has struggled to find a successful new direction as it has been eclipsed by rivals of all stripes.

Starboard has not always succeeded in its efforts to push for change at Yahoo. The hedge fund twice has called for the company to merge with its fellow first-generation web company AOL, but failed to persuade either company to pursue such a deal.

Yahoo is no stranger to activist shareholders, who seek to change up a business’s strategy, often by waging noisy public battles. Nearly four years ago, the hedge fund titan Daniel S. Loeb took aim at the company and helped orchestrate the ouster of its chief executive, eventually claiming three seats on the board and pushing for the hiring of Ms. Mayer, a former top Google executive.

Yahoo executives have repeatedly expressed frustration over the pressure from the latest wave of activist investors attacking them. In an interview on the “Charlie Rose” program two weeks ago, Ms. Mayer argued that the company had served shareholders well by applying most of the proceeds of its previous sales of Alibaba stock toward buying back Yahoo shares.

Yahoo has also noted that its initial plan to spin off its 15 percent stake in Alibaba, announced in January 2015, was adopted in response to pressure from shareholders, including Starboard.

When the Internal Revenue Service declined last fall to affirm that the spinoff would be tax-free, many shareholders, including Starboard, urged the company to abandon the plan.

In December, Yahoo did just that and said it would instead seek to spin off its core operating businesses to minimize the tax bill.

But Yahoo has clearly been reluctant to pursue the top objective of Starboard and other activists: selling the company’s core business of search, websites and mobile apps. In the meantime, that business has continued to decline over the nearly four years since Ms. Mayer took over as chief executive.

Although the company formed a strategic review committee to consider possible offers a month ago, potential bidders have complained that the company has dragged its feet.

“The company seemed to halfheartedly embrace the concept of pursuing strategic alternatives,” said Scott Kessler, an analyst with Standard & Poor’s Global Market Intelligence.

Yahoo has always been reluctant to consider a sale of its core business, dating back to its wholesale rejection of Microsoft’s $45 billion offer for the company in February 2008, he noted.

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