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Activist Investor Charts Plan to Revitalize Yahoo

Daniel S. Loeb is getting back into the activist arena.

The exterior of Yahoo! corporate headquarters in Santa Clara, California.
Getty Images
The exterior of Yahoo! corporate headquarters in Santa Clara, California.

After spending years working behind the scenes to push for change, the hedge fund manager is once again openly admonishing management and battling a corporate board. The target: Yahoo.

His firm, Third Point , has amassed a 6 percent stake in the struggling Internet company, and he intends to propose a slate of four directors, including himself, at the company’s annual meeting. He has also sketched out a turnaround strategy for Yahoo that does not necessarily match management’s vision.

It’s his first real activist campaign in nearly five years.

“He acts in our interest,” said Robert L. Chapman Jr., the founder of Chapman Capital, which owns a 2 percent stake in Yahoo. “Because if the stock tanks, no one gets hurt more than Dan.”

Yahoois paying attention. In February, a month after being named chief executive, Scott Thompson called Mr. Loeb, according to people with knowledge of the matter. They have spoken several times since then, discussing Yahoo’s relationship with advertisers, the display advertising business and other strategic issues.

But tensions are rising. Despite the overtures, Yahoo is not ready to capitulate to Mr. Loeb’s demands. Directors have called Mr. Loeb’s candidates, but the interviews were interpreted as brief and perfunctory, according to people close to Mr. Loeb.

In early February, Yahoo named two new directors with no advertising experience. The hedge fund manager interpreted the action as a move away from Yahoo’s primary business. In a recent filing, he said it reflects the “dearth of essential expertise in media and entertainment at the board level.”

Mr. Loeb was also concerned about Yahoo’s recent threat of legal action against Facebook over patents, according to the people.

It’s familiar territory for Mr. Loeb, who now oversees $8.9 billion. A former Citigroup vice president, he founded Third Point in 1995, developing his own brand of activism. Known for his sharp pen and his acerbic wit, he agitated change at several companies, including Agribrands, the animal feed maker, and Massey Energy, the coal mining company. In a 2005 letter to Star Gas Partners, a fuel distributor, Mr. Loeb called its chief, Irik P. Sevin, “one of the most dangerous and incompetent executives in America.” Mr. Sevin resigned shortly after that letter.

As Third Point has grown, Mr. Loeb has toned down his rhetoric. Since the financial crisis, he has largely focused on reorganization opportunities, like Delphi Automotive, the auto parts maker, and chemicals giant LyondellBasell Industries, both of which have emerged from bankruptcy in recent years.

Then in the middle of 2011, he started to amass a large stake in Yahoo. At first, it was a pure valuation play. The stock was then trading at $11, roughly a third of the value of Microsoft’s ill-fated bid for Yahoo in 2008.

After a series of perceived missteps by the board — in particular the way the co-founder Jerry Yang courted private equity suitors — Mr. Loeb decided to take a more aggressive posture. He now owns more than $1 billion worth of Yahoo stock.

His campaign comes as his personal interest in technology grows. The hedge fund manager — a technology neophyte who bought his first iPhone last year — adopted up-and-coming mobile applications, like Instagram, the photo-sharing service.

Last summer, Mr. Loeb was surprised to discover that someone had adopted his persona on Twitter under the handle “danloeb” Disappointed that the fake Mr. Loeb’s postings were not witty, he reported the incident to Twitter, according to people close to him. The person switched the handle to “notdanloeb.”

Mr. Loeb has also made frequent trips to Silicon Valley. He sought advice from — and at times courted as board candidates — notable names, like Marc Andreessen, the head of the venture capital firm Andreessen Horowitz; Mary Meeker, the former Morgan Stanley star analyst who now works at Kleiner Perkins Caufield & Byers; and Daniel Rosensweig, the former chief operating officer of Yahoo and current head of Chegg.

Over the last few months, Mr. Loeb has been devising a strategy for Yahoo. He believes it should focus on its core media and advertising business, according to the people close to him.

The crux of Mr. Loeb’s frustrations, according to Third Point’s filings, is his lack of confidence in the board’s ability to grow Yahoo’s ad sales. While the Internet company remains one of the most popular portals on the Web, it is ceding market share to rivals Facebookand Google.

To help make up ground, Mr. Loeb is calling for Yahoo to focus on the search ad businesses and to develop a social community and a robust, video platform. In a presentation to Yahoo Mr. Loeb described his proposed candidates, highlighting one, Jeff Zucker, the former chief of NBCUniversal, for his role in building Hulu, which the hedge fund manager sees as a potentially attractive partner or target for Yahoo.

Similarly, Mr. Loeb said he picked another candidate, Michael J. Wolf, the founder of Activate, a media consulting firm, because of his media and technology contacts and his reputation as a “talent spotter.”

“Yahoo has some 700 million visitors per month,” said Sameet Sinha, an analyst at B. Riley & Company. “It’s a matter of figuring out how to properly monetize them.”

Mr. Loeb has also indicated that Yahoo needs to be aggressive in its cost-cutting, including reducing its payroll of 14,100.

The final board candidate, Harry Wilson, a turnaround specialist, was one of the architects of the restructuring plan for General Motors.

Mr. Loeb said the G.M. “process is directly relevant to Yahoo,” according to documents Third Point sent to Yahoo’s board.

Yahoo, which recently hired the Boston Consulting Group to review its operations, is in the process of culling its staff, two people with knowledge of the situation said.

In some ways, Mr. Loeb’s vision runs counter to the new chief, Mr. Thompson. The former president of Paypal, Mr. Thompson has expressed a desire to push Yahoo into new businesses, while Mr. Loeb wants to stay focused on its media business. “We need to innovate and disrupt, and not just in the areas where we’ve always been,” Mr. Thompson said in a recent conference call.

“Yahoo needs to decide: Does it want to be a media company with a digital front end or a technology company that has an advertising business?” said Jordan Rohan, a Stifel Nicolaus analyst. “In other words, are they competing against Google, Apple and Facebook, or media companies?”

With Yahoo management and Mr. Loeb at odds, a bitter proxy fight may be inevitable. But given the high rate of defections and complaints of low morale, some wonder whether another public brawl will do more damage than good — and hurt Mr. Loeb’s investment in the end.

“The worst thing for Yahoo is to have more fights,” said Martin Sorrell, the head of WPP, the giant advertising agency.

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