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Daniel Loeb Wants Jerry Yang Off Yahoo! Board

NEW YORK (TheStreet) -- Daniel Loeb has been silent since announcing his $1 billion stake in Yahoo! (YHOO) two months ago. That changed this afternoon.

Loeb penned another letter to Yahoo!'s board and it's another doozy. This time, he has Jerry Yang firmly in his sites.

Loeb started buying Yahoo! in early August when the stock was at its 52-week lows around $11. Now trading above $15, Loeb is already significantly in the money on his fund's significant bet. However, he thinks Yahoo! is worth much more -- his analysis in his September letter pegged the value of Yahoo! between $20 and $30 depending on the value of the stake in Alibaba Group.

Since then, Yahoo! itself has said its stake in Alibaba Group is worth $14 billion -- at the very high end of Loeb's valuation. What's more, the Wall Street Journal has reported that Goldman Sachs (GS) has instructed Yahoo!'s board that it can dispose of its stakes in Yahoo! Japan and Alibaba Group using a "cash-rich split" for tax efficiency. And I first mentioned this approach in TheStreet back in early September.

So, all signs point to a Yahoo! that is worth $30. Yet, we constantly read reports in claiming "unnamed sources" telling them Yahoo! is only worth $16 to $18/share. How can this be?

It's not clear who's leaking this information to the press. It could be private equity or it could be Jerry Yang himself -- as he's been reported to be angling to side with several of the private equity bidders.

Loeb had enough and today -- the deadline for private equity bidders to return their signed confidentiality agreements to not have "cross-talk" between them as they do further due diligence on Yahoo! -- he decided to remind Yahoo!'s board what he wants.

The letter spells out that Loeb immediately wants two seats on the board and he wants Yang and Chairman Roy Bostock off the board:

We are deeply concerned by news reports that you are considering a leveraged recapitalization that will allow private equity firms to gain substantial equity positions that will, when combined with Jerry Yang's and David Filo's ownership, effectively establish a controlling position in Yahoo. More troubling are reports that Mr. Yang is engaging in one-off discussions with private equity firms, presumably because it is in his best personal interests to do so. The Board and the Strategic Committee should not have permitted Mr.

Yang to engage in these discussions, particularly given his ineptitude in dealing with the Microsoft negotiations to purchase the Company in 2008; it is now clear that he is simply not aligned with shareholders. At a bare minimum, Mr. Yang must declare whether he is a buyer or a seller - he cannot be both.

If we are correct and he is effectively a buyer, corporate ethics require him to recuse himself from any further discussions on behalf of the Company. He should also be requested by the Company to promptly leave the Board and join Mr. Filo in solely an operating capacity.

In our view, a leveraged recapitalization makes no sense and its only purpose would be to put substantial equity stakes into friendly hands to entrench management and transfer effective control without payment of a premium or even, it appears, a shareholder vote. Nothing can excuse such an action, and shareholders will not be bought off with a dividend of our own money while value is destroyed.

Moreover, such a transaction would undermine the basic tenets of free markets, including democratic voting, accountability and fairness. We do not blame our friends at the private equity firms rumored to be involved for trying to get the best deal possible for their investors; we have great respect for these firms and their leaders - Jim Coulter of Texas Pacific Group, Jonathan Nelson of Providence Equity Partners, Glenn Hutchins of Silver Lake, Henry Kravis of KKR and Stephen Schwarzman of Blackstone. However, we at Third Point are also in the value-maximizing business. We will not tolerate any transaction which appropriates for insiders opportunities that duly belong to current Yahoo shareholders. However, we would welcome the prospect of any of these firms' presence on a reconstituted Yahoo Board of Directors and work on a long-term strategy for the Company should it be necessary for us to pursue a proxy contest next year.

If you, as board members, undertake the current course of action, Third Point will hold you personally responsible for such a flagrant violation of your duty of loyalty. Any transaction with a third party who assists members of management and the board in protecting their jobs, and/or involves the effective sale or transfer of control without payment of a control premium, will likewise be subject to scrutiny.

Given the Board's inability - or perhaps unwillingness- to properly solicit true strategic alternative bids, let alone to negotiate them, Third Point demands that we be awarded two board seats - those created by the vacancies of Chairman Bostock and Mr. Yang, or two newly-created ones. We are prepared to assume these positions immediately.

The Yahoo! board has yet to respond.

At the time of publication, Eric Jackson was long YHOO.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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