Yahoo!'s $4.8 Billion Sale Brings to An End Years of Activism

The embattled web pioneer faced five high profile activist investors over the years, including Carl Icahn, Third Point's Dan Loeb and finally Starboard Value's Jeff Smith
By Ronald Orol ,

Yahoo!'s  (YHOO)  $4.8 billion sale to Verizon Communications (VZ) - Get Report Monday not only concludes one of the most anticipated sales of the year, it also brings to an end a seemingly never-ending string of activist campaigns launched over a decade at the once dominant web pioneer.

Yahoo agreed Monday to sell its operating business in a $4.8 billion all-cash deal to Verizon, which will combine the web pioneering company with its AOL unit. As expected, current Yahoo! investors will be left with investments in Alibaba Group Holdings (BABA) - Get Report , Yahoo Japan and some non-core patents, altogether valued at around $41 billion. The remaining assets will become a publicly-traded investment company. The acquisition must be approved by regulators and is expected to close early next year. 

The sale brings to conclusion a tumultuous period of time for the web portal, which had been targeted by at least five high-profile activist fund managers over the years for failing to make critical acquisitions at the right time (read: pre-IPO Google) and later for buying companies (read: Tumblr) that didn't help its prospects.

A series of activist campaigns by SpringOwl's Eric Jackson, billionaire Carl Icahn, Third Point's Dan Loeb, Tom Sandell and finally Starboard Value LP's Jeff Smith contributed to a high level of turnover at Yahoo! According to relationship mapping service BoardEx, a subsidiary of TheStreet, the number of directors that have served on the company's board was 47 since 1995. 

Most recently, in April, Yahoo settled what otherwise would have been the largest proxy fight of 2016 with Starboard and Smith by agreeing to include four of his dissident nominees to the Sunnyvale Calif.-based company's board. The move put additional pressure on CEO Marissa Mayer to complete an already ongoing sale process that some believed may never have concluded with a sale had Smith not been involved. The settlement also put Smith on Yahoo!'s strategic review committee so he could keep a close eye on all deal-related material.

Smith and other shareholders had originally pressured Yahoo! to spin off its 15% stake in Alibaba, as a means of exposing that the value of the core web business had collapsed and was hiding behind the stake's value. However, Smith changed tack after changes to the tax code and a new notice by the Internal Revenue Service raised questions about whether a spinoff would have been treated as tax-free or generate as much as $10 billion in additional taxes. Mayer also stopped an effort to spin off the stake and instead focused on selling off the company's core business. As of the end of March, Starboard owned about 12 million shares, or a 2% stake.

However, long before Smith launched his insurgency at Yahoo!, activist investor Eric Jackson, who now is a managing director at SpringOwl Asset Management, launched his own campaign. In 2007 Jackson's sought to mobilize investors into a voting group by issuing a YouTube video entitled "Plan B" at Yahoo!. Jackson first began providing details of his concerns with Yahoo!'s then-CEO Terry Semel on his blog, Breakout Performance. Later, he followed that up with a video—making his case over a slide show set to the music of Louis Armstrong's "What a Wonderful World"—that Semel had been paid $550 million in six years without severance and missed an unbelievable chance to buy Google pre-IPO for $3 billion.

Jackson employed polling data, more videos and a Wikipedia-type site where users could add their own thoughts, a predecessor to the flashy websites activists today set up for their campaigns. Altogether, he mobilized only 0.2% of Yahoo!'s shares in a group but used that as a stepping stone to launch a "just vote no" campaign against the company's compensation subcommittee. Three pay panel directors received between 31% and 33% negative votes while Semel received a 7% no vote. Despite the tepid opposition, Semel resigned a few days later leaving Yahoo!'s board and Jackson with his first major activist victory. Most recently in December, Jackson drafted a 99 page report on Yahoo, seeking to restructure it and pressure Mayer out.

TheStreet's Jim Cramer said under Mayer the company was a "cash management system" that failed under the "revolving door" of leadership. Cramer said she wasn't "inspirational" for the company.

"[She] did a lot of cerebral things, but she's not a leader," Cramer said.

In 2008 and 2012 respectively, the technology company faced proxy contests engineered by billionaire Carl Icahn and Third Point's Dan Loeb. Icahn joined Yahoo!'s board in 2008 and left in 2009 and Loeb joined it in 2012 and left in 2013. Loeb, whose fund reportedly earned $1 billion in its investment, helped drive out Yahoo! CEO Scott Thompson and bring in Mayer. Loeb held a position on the company's strategic review committee as part of an effort to ensure that any bids at the time would fully benefit outside shareholders and he was on the board as it set up a large change-of-control payment plan in the event of Mayer's termination if the company was sold.

That payment is set to be made shortly: According to Equilar, a compensation research firm, Mayer will receive a severance payment worth about $57 million, including one year base salary and bonus and options payment acceleration. Dan Marcec, director of content at Equilar, noted that Mayer's change of control payout is considerably larger than it would have been had she been terminated for any other reason before the sale. As part of the agreement, Marcec notes that Mayer is eligible to receive all unvested equity immediately, which is currently worth about $54 million.

The expected change of control payment later drew the ire a number of shareholders, including activist investor Tom Sandell, who argued in March at a governance conference in Delaware that Mayer's compensation package was "misaligned," partly because of concerns about companies it acquired under her oversight. 

In the end, it took a final push by Starboard Value to drive a sale of the business. Starboard's history of success with proxy contests—over 60 since 1994—and the fund's backing by a large number of institutional investors likely helped drive the sale, and an end to activism at Yahoo!.

Verizon received financial advice from LionTree Advisors LLC's Aryeh Bourkoff, Allen & Co. LLC's Nancy Peretsman, Bank of America Merrill Lynch's Chris Cormier and Guggenheim Securities LLC's Andrew Decker.

A Wachtell, Lipton, Rosen & Katz team of Martin Lipton, Daniel Neff, Steven Rosenblum, David Shapiro, Edward Lee, Andrea Wahlquist, Eric Rosof, Jodi Schwartz and Nelson Fittz offered legal counsel to Verizon. A Gibson, Dunn & Crutcher LLP team of Rashida La Lande and Daniel Angel; a Covington & Burling LLP team of Thomas Barnett, Miranda Cole and James O'Connell and a Winston & Strawn LLP team led by Scott Landau also offered legal advice to Verizon.

Verizon received in-house counsel from Craig Silliman, Michael Rosenblat, William Van Saders, Elizabeth Kellerman, Neer Gupta and Robert Griffen.

Goldman Sachs & Co.'s Gregg Lemkau, Ian Spaulding, Dan Dees and Dan Shefter; J.P. Morgan Securities LLC's Kurt Simon and Marco Caggiano and PJT Partners' Paul Taubman, Rob Friedsam and John Trousdale provided financial advice to the Yahoo board and its strategic review committee.

Yahoo received legal counsel from a Skadden, Arps, Slate, Meagher & Flom LLP team of Marc Packer, Michael Mies, Michael Hoffman, David Rievman and Joseph Yaffe; a Wilson Sonsini Goodrich & Rosati PC team led by Larry Sonsini and including Michael Ringler, Bradley Finkelstein, Douglas Schnell and John Aguirre; and Weil, Gotshal & Manges LLP's Karen Ballack. 

Yahoo's strategic review committee turned to Cravath, Swaine & Moore LLP's Faiza Saeed and Eric Schiele for legal advice.

Yahoo received in-house counsel from Ron Bell and Stephanie Splane.

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