Yahoo!'s Yang Out, Board Selection Trumps New CEO Selection

Yahoo!'s major shareholder Third Point LLC is reportedly stepping up the heat to unseat a large swath of directors at the struggling Internet giant.  As a result, it comes as no surprise that Yahoo! has reportedly launched an effort to seek new blood on its board, especially since investors panned its recent selection of a new CEO.

Yahoo! co-founder Jerry Yang announced Tuesday he has resigned effective immediately from Yahoo!'s board, but the company did not name an immediate replacement. Investors would be wise to pay attention to who gets nominated to serve in Yang's place, and on Yahoo!'s (Nasdaq: YHOO  ) board of directors when they all come up for re-election later this year, given that these individuals will have more influence on the company's future than its newly minted CEO, Scott Thompson.

What's at stake
"The board is elected by the shareholders and the directors can select or fire the CEO," said corporate governance expert Patrick McGurn of proxy advisory service Institutional Shareholder Services (ISS), regarding the role that all boards play in overseeing a company.

It's also the board of directors who determines whether a company should entertain or accept a buyout offer -- remember Microsoft's failed buyout bid to snatch up Yahoo! for $33 a share? It's also the board of directors who determines whether to sell a major asset, say like Yahoo!'s investment in the highly touted Alibaba Group. Yahoo also announced in Yang's resignation notice that he has immediately stepped down from the Alibaba Group board of directors and also that of Yahoo Japan Corp.

So, investors, when it's time to vote your proxy card on whom you want running Yahoo!, think wisely and hard.

Jockeying for position

Third Point, which in September threatened to run opposition candidates to unseat four of Yahoo!'s 10 directors, paid a trip to Silicon Valley recently to interview prospective dissident directors, according to a New York Times report.

This comes as Yahoo! has reportedly hired an executive recruiting firm to potentially identify several new board members to replace existing directors, including its embattled chairman Roy Bostock, according to a Wall Street Journal report. 

Third Point, in its September notice to the company, said it wanted to give the heave-ho to Bostock, Vyomesh Joshi, Susan James, and long-time director Art Kern.

One source previously told Motley Fool that Bostock and Kern were a problem for Yahoo!, because both men viewed Yahoo! as a technology company rather than a media company. Yahoo!'s revenues come from display and search advertising, and advertising is the bread and butter for media companies.

 Investors hold the reins

If Yahoo! ultimately nominates four new directors to its existing slate to run against Third Point's four dissidents in a proxy fight, investors should tune in to the reaction of Yahoo!'s stock, says one proxy solicitor, who also notes that how Wall Street reacts to the announcement of each slate will serve as a strong indicator of who would win in a proxy fight.

You can bet that Yahoo! and Third Point will be watching the stock's reaction to their respective announcements, should this fight go that far.

Third Point has until March 25 to file its slate of opposition director nominees, according to the New York Times report.

How do you spell T-R-U-C-E
"Over the last decade, the trend in proxy fights has been co-op or die," McGurn says. "And the things that resonate with investors is usually where the cooperation occurs."

Yahoo! is used to reaching settlements with major shareholder activists. Remember the deal it struck with billionaire investor Carl Icahn several years ago, after he threatened a proxy fight to unseat all of Yahoo!'s directors?

Icahn went through with his threat, naming a competing slate of directors to run against Yahoo!'s board, after the existing directors bungled the Microsoft $33-per-share buyout bid by turning it down,  saying it didn't appropriately value the company. In the end, however, Icahn settled for taking a Yahoo! board seat and appointing two directors to the Internet pioneer's board.

In addition to seeking new blood on the Yahoo! board, Third Point also wants greater transparency in the process Yahoo! has used to solicit interested buyers of the company or its assets. Third Point wants Yahoo! to sell the entire company, rather than just parts of its business.

In a December letter to Yahoo!, Third Point asked that redacted copies of the letters sent to prospective buyers be available for investors to review.

Writes Third Point:

In order to allay the concerns and uncertainty permeating the marketplace and provide much needed transparency on the supposed "process" that Yahoo! is undertaking, we ask that you immediately make public the letter(s) in which Yahoo! invited third parties to make proposals for the Company (the "Process Letters").  We assume that Yahoo!'s Process Letters did not place any artificial restrictions on the proposals that the Yahoo! board was willing to consider in its search for strategic alternatives, such as discouraging, or even prohibiting, bids to purchase Yahoo! in its entirety.

Foolish Take Away
As March 25 nears, investors should keep a keen eye out for Third Point's dissident directors being named; more of Yahoo!'s existing directors announcing they won't run again for another board seat; and a likely reaction in Yahoo!'s stock as the deck chairs on Yahoo's board move toward a rearrangement.

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Fool contributor Dawn Kawamoto does not own any shares in the companies listed. The Motley Fool owns shares of Microsoft and Yahoo. Motley Fool newsletter services have recommended buying shares of Yahoo and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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