Starboard Value LP, the activist hedge fund managed by Jeffrey Smith has been a major shareholder of Yahoo! Inc. (NASDAQ:YHOO) dating back to the third quarter of 2014. Since then, Smith has pressured Yahoo! Inc. (NASDAQ:YHOO) to unlock the full shareholder value of the company by spinning off its Yahoo! Japan stake, committing to more share buybacks, and even by considering a merger with AOL, Inc. (NYSE:AOL), in whom Smith also opened a position during that same quarter. Previously, he successfully lobbied for the spinoff of the tech giant’s 15% stake in Alibaba Group Holding Ltd (NYSE:BABA), which was great news for investors when Yahoo announced its intentions to do so.
CNBC’s David Faber recently questioned Smith about why he keeps putting pressure on Yahoo! to commit to more share buybacks and other requests. Smith said that they are trying to help Yahoo! by giving them options to unlock the full value of the company.
“For us it is just about value and they can sure do the right thing for the company and the shareholders. So as it relates to Yahoo! if you add up the pieces, if you add up Alibaba and Yahoo! Japan and the cash that’s worth more than the market-cap of the company, plus you are still getting the operating business, which has $1 billion in EBIDTA. So, it’s not personal, it’s not picking on the company and I don’t think anybody else is picking on the company. It’s just about value and if we can help the company, if we can help the management and board unlock that value and figure out how they can make some changes that improve value for the company then that’s good for shareholders,” Smith said.
When Smith’s Starboard Value LP first opened a position in Yahoo! it insisted on Yahoo! merging with AOL, Inc. (NYSE:AOL), though that is no longer the case. Smith said that their initial consideration was that Yahoo! could merge its operating business with AOL and get full value for its Alibaba Group Holding Inc (NYSE:BABA) stake in a tax efficient manner through that. But Yahoo! found its own way to cash in on that lucrative stake in Alibaba in a tax efficient manner, by spinning the stake off into its own company. Smith feels that merging with AOL still has some strategic benefits and could work out, though he believes it doesn’t make as much as sense as it did before the Alibaba IPO.
Smith’s hedge fund has just a 0.83% stake in Yahoo!, which currently consists of 7.72 million shares valued at $390.16 million, however the position is important for Smith, representing nearly 9% of his entire equity portfolio, and he pointed out that Starboard has had a lot of good conversations with Yahoo despite his relatively small ownership position. He thinks the most important thing for Yahoo! at the moment is to improve its operations. He pointed out that Yahoo!’s revenues were pretty much flat for the last few years, but their EBIDTA has gone down by $600 million, mainly due to increased operating costs.
“[…] We want them to focus on improving the operations of the business. We want them to focus on also spinning off or doing something with Yahoo! Japan,” Smith said.
Smith’s fund was recently crowned activist investor of the year by the The Activist Investing Annual Review 2015, after a 2014 campaign that included a hugely successful proxy fight victory over Darden Restaurants, Inc. (NYSE:DRI). Smith was also successful this year in pushing Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NASDAQ:ODP) to merge, two companies in which he had positions, much as he tried to do with Yahoo and AOL.
Following activist funds like Starboard is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Starboard can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks 10 or so activist campaigns at any given time.