Yahoo's announcement Wednesday to spin off its core Internet business into a separate publicly traded company and keep its Alibaba Group Holding stake intact within its current company does more than deal a blow to CEO Marissa Mayer's turnaround strategy. It hands her reign as CEO a virtual death sentence.
The spinoff plan is expected to take more than a year, according to comments from Yahoo chairman Maynard Webb in a conference call. But activist shareholder Starboard Value LP, which most recently had been angling for Yahoo to sell its core Internet business, is not likely to wait. Starboard and other investors can launch a proxy challenge and nominate their own opposition directors as early as Feb. 25, according to a Securities and Exchange Commission (SEC) filing.
Yahoo apparently is sensitive to this fact. The Internet giant may already be considering ways to appease Starboard or any other large disgruntled shareholder. One way that this is typically done is to give the activist shareholder or its representatives a seat or seats on the board, before a proxy fight comes to a head, with shareholders voting at the annual meeting to replace the incumbent board members with the opposition slate.
As a result, it's interesting to note that amid the hubbub of announcing its spinoff plans, Yahoo also announced that Max Levchin would be immediately resigning from the board, rather than serve out the remainder of his term.
Levchin, who tendered his resignation on Friday, had no disagreements with Yahoo's operations, policies or practices, but rather stepped down because of concerns over the demands on his time and professional commitments to serve on the Yahoo board, according to an SEC filing. Yahoo noted that, with Levchin's resignation, the size of the board shrinks to eight members from nine.
At least for now.
It would not be surprising to see Yahoo bring it back up to nine by giving Starboard at least one seat on the board. It would also not be surprising to see the board expanded beyond nine, or other current Yahoo directors resigning to give their seat to a Starboard representative.
It's a company's board of directors that calls the shots on whether to fire a CEO and hire a new one. The number of potential allies that Mayer has on the board is at risk.
Currently, of the eight directors that remain, which includes Mayer, three of them were on board at the time Mayer was hired, and four arrived after she was named CEO. Executive recruiters have previously said that one way a CEO can help up the odds of his or her tenure is to bring on board members after they are hired.
Should Yahoo give Starboard a seat on the board, it's likely Mayer's tenure will be cut short.
In a letter sent last month to Yahoo's Mayer and its chairman Webb, Starboard's managing member Jeffrey Smith expressed his displeasure with the company's operations and the lack of responsiveness from the company to Starboard's suggestions to sell the company.
In one of our recent conversations, you argued that the Core Business will become more valuable if management is able to turn it around, and, as such, that selling it today would result in potential lost value for shareholders. We discussed in detail our thoughts on the deterioration of the Core Business in the letter we sent to you on August 10, 2015. Thus far, there has been little evidence of a turnaround and, as described above, recent results are actually moving decidedly in the wrong direction. In addition, as we discussed with you again during our most recent conversation, this past quarter and the public guidance for next quarter actually show accelerated degradation in the performance of the Core Business, making your argument to wait for improvement appear to be grounded more in hope than strategy.
Given that Starboard has little faith in a turnaround, which implies a lack of faith in Mayer to make it happen, it would not be surprising that the shareholder activist would push for the sale once on the board, which would mark the end of Mayer's reign. Short of accomplishing a sale of the company, Starboard may angle to replace Mayer as CEO.
In the November letter, Starboard's Smith makes it clear he desires a seat on Yahoo's board and that his firm last year held off waging a proxy fight to replace the directors in the hope that this year would have led to a greater payday for Yahoo investors.
I have now offered four different times over the last four months to join the Board to help you analyze this situation given my successful board experience, our perspective as an owner, and my particular knowledge of this situation. Unfortunately, you have repeatedly refused our respectful requests.
All eight of Yahoo's directors are re-elected every year. The company does not operate under a staggered board, where only a certain number of the directors come up for re-election. As a result, the process makes it easier for a shareholder activist to remove a substantial portion of the board if their proxy fight is successful.
It may be time for Mayer to consider looking for her next gig.
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