Summary:

One result from all the talk that Jerry Yang wants to take Yahoo (NSDQ: YHOO) private: a truly ticked off key shareholder. Daniel Loeb, whos…

Jerry Yang
photo: Getty Images/ Alex Wong

One result from all the talk that Jerry Yang wants to take Yahoo (NSDQ: YHOO) private: a truly ticked off key shareholder. Daniel Loeb, whose Third Point fund has acquired just over 5 percent of Yahoo stock, fired off a strong letter (full text below) to the Yahoo board of directors Friday demanding that Yang recuse himself from any discussion on behalf of the company and leave the board.

“At a bare minimum, Mr. Yang must declare whether he is a buyer or a seller – he cannot be both,” Loeb writes. Loeb has no respect for Yang as a negotiator, “particularly given his ineptitude in dealing with the Microsoft (NSDQ: MSFT) negotiations in 2008.”

It’s a toss up as to which irks Loeb most: Yang, whom he calls “inept,” as a negotiator at all or Yang negotiating while he is a member of the board. Either way, Loeb is opposed to any private equity deal — and wants two seats of his own on the board.

Yahoo’s board insists it is working in shareholders best interests and that Yang is only part of a 9-person strategic review committee.

Loeb isn’t the first to acquire a stake in Yahoo and try to leverage it into results. Remember Carl Icahn? He left in 2009 after a proxy fight, saying Yahoo no longer needed an activist on the board. (Then again, he listed hiring Carol Bartz as an accomplishment that made him feel better about leaving.)

But Loeb wants the chance to be part of the board’s decision on the company’s future:

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.

Here’s the full letter:

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Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Members of the Board of Directors:

As you are aware, Third Point LLC (“Third Point”) manages investment funds that are, collectively, the second largest shareholder of Yahoo! Inc. (“Yahoo” or the “Company”).

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.

Sincerely,
/s/ Daniel S. Loeb
Daniel S. Loeb
Chief Executive Officer
Third Point LLC

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And Yahoo’s response:

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“Yahoo’s Board of Directors’ objective is, and always has been, to serve the best interests of all the company’s shareholders. The Board’s comprehensive strategic review is being properly managed for the benefit of all shareholders and is guided by outside counsel for the independent directors and investment bankers retained separately by the Board. The Board of Directors (eight independents and Mr. Yang) controls the strategic review process and has directed its Transactions and Strategic Planning Committee (comprised of four independent directors) to manage the process day-to-day and report regularly to the Board.

“News reports based on rumor and speculation are just that. The Board’s comprehensive strategic review process is still underway, with a wide range of options under active consideration. We can assure all Yahoo shareholders that whatever the outcome of the strategic review process may be, it will serve the best interests of all the company’s shareholders.

“Mr. Yang is one of 9 directors with the exact same fiduciary duties and motivation as all of his fellow directors — to serve the best interests of all the company’s shareholders. The Board and the Transactions and Strategic Planning Committee initiate, direct, and oversee any work Mr. Yang undertakes in relation to the strategic review process.”

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