Yahoo! (YHOO) announced on Wednesday it had reached a settlement with Starboard Value LP's Jeff Smith to install a minority slate of four dissident directors onto its board, bringing an end to the largest proxy fight of 2016 so far. But the move puts additional pressure on Yahoo! to complete an ongoing sale process.
"This constructive resolution will allow management and the board to keep our focus on our extremely important objectives," said Yahoo! CEO Marissa Mayer in a statement.
Yahoo! shares were up initially on Wednesday on news of the settlement, but were trading down 0.98% to $36.74 by mid-morning.
The four dissident directors brings to an end an effort launched by Smith in March to install a change-of-control slate of nine dissident director candidates to the company's board. The proxy fight was a step up in Smith's year-long campaign to have Yahoo! replace its management -- including Mayer -- and quickly explore a sale of its business. In February, Yahoo launched a strategic review of its business, a process that wasn't likely to have gotten off the ground without Starboard at the gate.
A number of potential suitors have emerged, including Verizon Communications (VZ) - Get Report and ex-Yellow Pages publisher YP Holdings. However, Smith has expressed concern in recent months over whether Yahoo is serious about its auction process.
As part of the deal, two Yahoo directors are expected to step down, leaving the board with 11 directors including the four new dissident board members. In a key victory for Starboard, the fund's founder, Smith, will be included on the technology company's board as well as its strategic review committee. In addition, Yahoo will add former DirecTV CEO Eddy Hartenstein; Tor Braham, an ex-chief of Deutsche Bank Securities mergers & acquisitions chief; and Richard Hill, a director at Tessera Technologies (TSRA) since 2013.
Starboard's history of success with proxy contests and the fund's backing by a large number of institutional investors likely contributed to the settlement. Smith has launched more than 60 contests since 1994, according to FactSet, the vast majority of which have been settled, which makes it unsurprising that Yahoo! agreed to settle with Starboard.
"We look forward to getting started right away and working closely with management and our fellow board members with the common goal of maximizing value for all shareholders," said Smith in a statement.
An effort by Yahoo in March to fend off Starboard didn't appear to have had the desired impact. At the time, the company expanded its board from seven to nine seats and appointed former Morgan Stanley managing director Catherine Friedman and Eric Brandt, the ex-CFO of semiconductor company Broadcom Corp. before it was acquired by Avago Technologies Ltd. (AVGO) - Get Report in a $37 billion deal.
The inclusion of two new independent directors was intended to convince Yahoo's shareholder base that the technology company was bringing new perspectives to its board and didn't need to install directors nominated by Starboard. However, one of those directors, Friedman, sits on six boards, which caused some institutional investors to consider her "overboarded." Wednesday's settlement suggests that the director expansion move was not enough.
Under pressure from Starboard, Yahoo! announced in February it had retained Goldman Sachs & Co. Inc., JPMorgan Chase & Co. and PJT Partners Inc. to handle "outreach to and engagement with potentially interested strategic and financial parties."
Other activists have investments in Yahoo!. Activist investor Tom Sandell last Month launched his own activist campaign targeting the embattled technology company, expressing concerns with a provision in Mayer's compensation plan that entitles her to receive a payment of up to $158 million if she is fired after a change-of-control of the business. SpringOwl Asset Management managing director (and RealMoney columnist) Eric Jackson drafted a 99-page report on Yahoo! in December, seeking to restructure it and its leadership.
Already under pressure from shareholders, Mayer announced in December that the company would drop a planned spin-off of its 15% Alibaba (BABA) - Get Report stake because of tax concerns. A new notice issued by the Internal Revenue Service in September raised questions about whether the spinoff, already in the works at the time, would have been treated as tax-free, or generated as much as $10 billion in additional taxes.
Smith had opposed the Alibaba spin-off effort after the government changed the rules around the tax treatment and acknowledged that Yahoo! had made the right decision not to spin it off.