By Lauren Pollock
Activist investor Starboard Value LP said it has taken a
significant stake in Yahoo Inc. and pushed the Internet pioneer to
explore a possible combination with AOL Inc.
Starboard said a potential tie-up of Yahoo's core search and
display businesses with AOL could improve Yahoo's competitive
position and deliver cost synergies of up to $1 billion.
Representatives from Yahoo and AOL weren't immediately available
for comment. Starboard's exact position wasn't disclosed, but
taking a position of at least 5% would have forced the firm to make
a regulatory disclosure.
Yahoo and AOL have explored a possible deal in the past, The
Wall Street Journal has reported. Analysts have said a Yahoo-AOL
merger could create a strong competitor in the market for online
display ads, which include video, banner and interactive ads.
One potential obstacle to a deal was thought to be the
complexity of spinning off Yahoo's Asian assets.
But Starboard suggested Yahoo should unlock the substantial
value from its 15% stake in Alibaba Group Holding Inc. and its 36%
stake in Yahoo Japan.
"These two minority equity interests are worth approximately $11
billion, or $11 per share more than the current enterprise value
of" Yahoo, Starboard said in its letter.
Confidence in Yahoo has waned since Alibaba went public earlier
this month and the Internet company sold a big portion of its
stake. That sale exposed Yahoo and its Chief Executive Marissa
Mayer to more scrutiny about the eroding value of its core online
advertising business.
Starboard first gained wide public recognition for its bruising
2012 fight with AOL, which it alludes to briefly in its letter to
Yahoo when it calls AOL a "company we know well."
The activist investor lost a campaign to gain AOL board seats
after months of bitter public letters.
The shareholder vote followed AOL's decision to sell its patent
portfolio for $1.1 billion, a development welcomed by investors
that sent shares climbing. Starboard had been calling for such a
sale, amid other suggestions.
After the patent sale, Starboard kept calling for more changes,
including a shutdown of AOL's Patch local news websites. Other
shareholders, however, backed AOL's management for succeeding in
creating value.
Starboard started exiting its position soon after losing the
vote but walked away with a profit. Earlier this year, AOL sold
most of the Patch network to an investment firm specializing in
turnaround situations.
Jacqueline Reses, Yahoo's merger chief, ruled out the
possibility of an AOL acquisition in comments she made at a
technology conference in July. When asked if she thought AOL would
be acquired in the next two years, she said, "Not by us."
While Yahoo and AOL are considered Internet pioneers in the
U.S., both still remain quite popular. In August, Yahoo sites were
the second-most popular in unique visitors behind only Google Inc.,
according to data tracker comScore, while AOL was fourth, behind
third-place Facebook Inc.
For 2013, Yahoo posted $4.68 billion in revenue, while AOL
reported $2.32 billion.
Meanwhile, Starboard also criticized Yahoo's acquisition
strategy, saying it has led to $1.3 billion in capital spending
since the second quarter of 2012 when Ms. Mayer joined the company.
During that time, revenue has remained stagnant and adjusted
earnings have materially decreased, the investor said.
Ms. Mayer has encountered some criticism for spreading the
company's resources across a dizzying array of businesses in a bid
to refresh its engineering talent and add more users, as opposed to
focusing on one emerging area.
The deals during her tenure include three dozen small
acquisitions, ranging from an e-commerce analytics tool to a Web
browser to an image-recognition company. She hired celebrity
journalists and touted plans to produce two original comedy series
with star talent to fashion Yahoo into a next-generation media
company. And she has renewed an emphasis on search and talked up
efforts in mobile software.
For its part, Starboard is also in the middle of a drawn-out
proxy fight with Darden Restaurants Inc. and on Thursday won the
support of two influential proxy-advisory firms in its bid to
unseat the restaurant operator's 12-person board.
Write to Lauren Pollock at lauren.pollock@wsj.com
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