Yahoo!'s (Nasdaq: YHOO ) board can sum up its current situation pretty succinctly: Been there, done that. The threats from shareholder activist Daniel Loeb and his Third Point LLC firm to unseat current directors if they ignore his makeover proposals smacks of a bit of deja vu: Yahoo! encountered a similar problem with billionaire investor Carl Icahn several years ago.
Icahn went through with his threat, naming a competing slate of directors to run against Yahoo!'s board, after the existing directors bungled the buyout bid from Microsoft for $33 a share by turning it down, saying it didn't appropriately value the company. But in the end, Icahn settled for taking a Yahoo! board seat and appointing two directors to the struggling Internet pioneer's board.
But how much change can investors truly expect if they don't allow dissident shareholders to grab majority control of the board seats? In fact, some members of Icahn's camp strongly questioned the wisdom of hiring Carol Bartz as Yahoo! CEO, a well-respected tech-head CEO who had zero experience running a media company that relied on advertising revenues, according to people familiar with the situation. Last week, Bartz was ousted as CEO, having failed to grow revenues and turn the company around.
"Investors deserve what they get," a source said. "The problem is Jerry, Art, and Roy all believe Yahoo! is a technology company."
That would be Yahoo! co-founder Jerry Yang, Chairman Roy Bostock, and director Arthur Kern. Loeb is calling for four of the 10 directors to step down, including Bostock, Kern, Vyomesh Joshi, and Susan James. He is not, however, asking for Yang to leave. Bartz, meanwhile, resigned from the board, potentially giving Loeb a shot at half of the board seats should he move forward with a five-person slate.
Getting majority representation on a company board is a challenge for dissident shareholders, says John Laide, senior product manager of FactSet Research Systems, which runs shareholder-activist site SharkRepellent.net.
Institutional advisors and even retail investors who may like a fresh voice on a company's board are often reluctant to give dissident directors full control, Laide says. The hesitation stems from concerns that the dissident shareholders' agenda focuses on their own interests, rather than the broader interests of all shareholders, say proxy solicitation advisors.
Since 2005, Third Point has been successful in winning a board seat or obtaining one through a settlement with a company in six separate cases, according to FactSet data. Of these six companies, two continue to trade under the same ticker symbol and name. One is Ligand Pharmaceuticals (Nasdaq: LGND ) , which rose 37% just before Loeb announced his attack in September 2005 through the first year, which saw him obtain three board seats. The other is Nabi Biopharmaceuticals (Nasdaq: NABI ) , which has not fared as well, dropping 14% within the first year after Loeb fired off a letter in April 2006 and winning two board seats.
Loeb's activist actions also include scathing letters to portfolio companies over mergers. Earlier this year, Loeb voiced his opposition to RockTenn's (NYSE: RKT ) $3.5 billion buyout offer of Smurfit-Stone Container, saying it undervalued the company. Investors, however, ultimately approved the deal under its original terms.
Dissident directors make a difference
Although some may question Loeb's success in gaining board seats, a 2009 IRRC Institute and Proxy Governance report found that getting dissident directors on company boards usually leads to better performance and shareholder value.
The "Effectiveness of Hybrid Boards" study examined 120 hybrid boards over a three-year period beginning in 2005 for changes in corporate governance, strategy, and shareholder value. Those results were examined as standalone figures and compared with industry peers from the time a company became engaged in a contest with a shareholder activist leading through the one-year anniversary.
"On average, the study found that total shareholder returns at ongoing companies with hybrid boards were 19.1% -- 16.6 percentage points better than peers," according to the report. "More than half of these gains came during a three-month period leading up to the formation of the hybrid board, providing strong evidence for a sizeable contest effect increase in share prices, as the market priced in its expectations of changes a hybrid board might bring."
Should Loeb formally launch a proxy contest for board seats, it may pay to check the box on the proxy card. It appears his pressure has already yielded some indirect results, with the board ousting Bartz as he was amassing his 5.1% stake in Yahoo! through August and September.
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