The boardroom kabuki of Yahoo
Richard Hill knows a thing or two about activist investor Starboard Value, and he's not afraid to say it.
At least he wasn't afraid three years ago, when he was interim CEO of Tessera, a San Jose-based chip-equipment company. Back then, Starboard had just won a proxy battle that allowed it to appoint six of Tessera's 10 directors. After that, Hill penned an angry piece, titled “Don't Turn My Company into a Patent Troll!” that warned of Starboard's plans for Tessera's patent portfolio.
”Starboard is involved in similar coup d’état attempts at other intellectual property-rich firms, and once in charge, its modus operandi is to defund the company’s research and development for a quick gain at the cost of long-term performance - a practice I call cutting down the apple tree to harvest the apples.
“Starboard’s plan is not simply to cut costs. It proposes to eviscerate Tessera’s R&D and rely instead on hyper-aggressive patent troll-style litigation to build revenues.... I grew up on the South Side of Chicago and learned at an early age the importance of building things of lasting value rather than simply holding up others for whatever you can get.”
Hill is back in the news this month, again thanks to Starboard. Only now the executive who once decried Starboard's playbook of felling trees to harvest apples is one of the directors that Starboard wants to install at Yahoo. “Rick Hill is not on the slate. He is the slate,” Jim Cramer said on CNBC last week. “If they win, and Rick Hill becomes the interim CEO, you could have one of the great home runs.”
This is doubtful, unless by home run Cramer means the breaking up and selling off of Yahoo's businesses, which is by now generally thought to be the inevitable fate of the company. Yahoo, to switch back to Hill's chosen metaphor, is a tree that is yielding fewer and fewer apples each year. It is languishing in a drought of one.
As RBC analyst Mark Mahaney also pointed out on CNBC recently, “This year, Yahoo is going to do, per their guidance and per the Street numbers, about $800 million in free cash flow. That's lower than at any point in the last 10 years, and this is in a secular growth industry, so there's something dramatically wrong at Yahoo."
Hill's background is impressive, but it's in semiconductors, including a successful 20-year stint at Novellus. If Mayer – not to mention Carol Bartz, Jerry Yang, Terry Semel and others before her - couldn't turn Yahoo around, what makes anyone credibly think an industry outsider could? Turning Yahoo around means taking on Google, Facebook, and a generation of younger startups like Snapchat that are experimenting with new ad revenue models.
A career in semiconductors does not prepare a Yahoo CEO to take on Facebook. Nor do the backgrounds of most of the other board members, which includes people with solid time spent in unrelated industries like regional banking (Bankers Trust) and technology M&A (Deutsche Bank). One nominee, Eddy Hartenstein, is described as “a seasoned media executive,” only his seasons include several years leading the Los Angeles Times during a period of decline and a stint overseeing the bankruptcy of Tribune Co.
The relevance of most of Starboard's nominees to Yahoo is this: They know what it's like to see a company through the M&A process. And to be fair, the two nominees that Mayer added to Yahoo's board this month have experience not in digital media but in semiconductors (Broadcom) and M&A banking (Morgan Stanley).
This is all boardroom kabuki, and like many kabuki plots the last act is so predictable it might as well be a foregone conclusion. The drama lies instead in how the story gets to that ending. And here Yahoo isn't disappointing: The story is shaping up to be an entertaining one. If Yahoo is having trouble delivering on shareholder returns, it's worth purely as a spectacle is rising this spring.
The open letter that Starboard's Jeffrey Smith wrote last week to Yahoo shareholders was full of lamentations about Yahoo's “dismal” financial performance, “egregious” hiring practices, and the “onerous” terms demanded of prospective bidders. The board can't be trusted to oversee a breakup that would benefit investors, Smith argued, pointing to the two months of foot dragging since Yahoo said, in essence, it's up for sale.
That letter, and the alternate board it proposed for election in Yahoo's June shareholder meeting, seems to have worked. Yahoo is now reportedly setting an April 11 deadline for bids. That's about a week before Yahoo was expected to report its first-quarter earnings, an occasion that could – in the unlikely event Mayer can deliver evidence of a sudden, strong turnaround – strengthen the company's case to remain independent.
Analysts and observers say Starboard has a decent chance of winning the proxy fight with Yahoo, although it is rare that an activist investor can win all of the seats on a board. Starboard pulled this feat off in 2014 at the company that owns Olive Garden, while the majority of seats it won at Tessera was the result of a settlement with the company.
Whichever side wins the fight, Yahoo will likely be sold within a year. The battle seems to be over when, and on what terms. If Mayer is forced out, she'll get a $12 million severance package and forfeit another $24 million in equity awards that have yet to vest. She will likely have few problems finding another job. And who knows? Maybe a few years down the line Starboard will ask her to join the board of some company it's trying to chop down in its insatiable appetite for apples.