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Summary:

Dan Loeb, the activist investor and CEO of Third Point, is selling a substantial part of his Yahoo stock, making a profit of $655 million and leaving the board along with his two appointees. The question is why, and more importantly, why now?

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photo: Getty Images

Like most of my colleagues, I have been caught in the smog of quarterly financial releases — some good, some bad, many mostly indifferent. Still, all that busy-ness made me almost overlook at that activist investor Dan Loeb was leaving Yahoo’s board. He (through his investment fund) Third Point is walking away with a $655 million profit. The big question is why — and why now. Of course, one will not get any answers in the official statement from Yahoo.

Getty Images

Getty Images

First, let’s recap the news. According to the press release issued by the company, Yahoo  will buy 40 million shares at $29.11 a share. Third Point also owns another 20 million Yahoo shares. After this transaction, Loeb’s holding was down from about 5.8 percent to about 1.8 percent. That equity is still worth $564 million and makes Third Point the sixth largest holder of Yahoo stock. As part of the deal, Loeb and his two appointees, Harry Wilson and Michael Wolf, are leaving Yahoo’s board.

Loeb joined the Yahoo board in May 2012 and was the lightning rod behind the recruitment of Marissa Mayer as the CEO of Yahoo. Their bet was that a high profile executive like Mayer would allow the company to get on the right path. He wanted the company to unlock the value of its Asian assets — holdings in Yahoo Japan and Alibaba — and Mayer has done exactly that. In the year Mayer has been at its helm, Yahoo has gone on a startup-buying binge including grabbing Tumblr for a billion dollars. Yahoo stock has more than doubled since Mayer debuted as the chief executive.

So the question is why did Loeb have to sell such a big portion of his stake? The next question is why now? And most importantly, if he was a good board member, why leave? He and his fund had three out of ten board seats; wouldn’t he add value and maintain the much needed pressure on company’s management? Forbes’ Jeff Bercovici put it well when he wrote, “No one has played a bigger role in setting the direction at Yahoo in the past two years than Loeb.”

There are some who believe that it time for Loeb to go and fight a different battle — this time with Sony, where, too, he has amassed 70 million-plus shares. I am not one of them and have been skeptical of Yahoo’s ability to turn around as it is fighting changing internet behaviors while hanging on to business models of the first phase of the Internet.

But there isn’t really any sign of a turnaround, as my colleague Mathew Ingram noted earlier this month. Like me, he remains highly skeptical of Yahoo’s ability to do a turnaround. Any growth in the stock has been because of the growing value of its 23 percent ownership of Alibaba — the Chinese e-commerce giant that is expected to go public at a nosebleed valuation in excess of $100 billion.

Yet, Third Point sold and took the precious cash, which could theoretically be used to buy another few companies and try and reinvent. Robert Cyran was brutally honest when he wrote at Breakingviews:

..the deal Mr. Loeb has secured looks pretty sweet. Yahoo is buying his shares at July 19’s closing price, guaranteeing liquidity without forcing Third Point to pay a discount, as usually happens when an investor offloads a large chunk of stock.

The only ones missing out are regular shareholders. Their stock has been shunted to the back of the buyback line. Nor are there any obvious candidates on the board to take on Mr. Loeb’s role either as a restraint on Ms. Mayer’s ambitions or as an advocate for proper capital allocations.

That’s important because it’s still not clear Yahoo can turn its internet business around without lots of deal-making and spending — last week the company trimmed its 2013 sales outlook, for example. Without proper oversight, that could destroy some of the very value Loeb has just cashed in on.

Loeb’s actions, when combined with Yahoo missing its second quarter revenue targets, leads me to wonder if Loeb has lost faith and that there isn’t really any turnaround happening anytime soon. Loeb and his fund are locking in their profit, and getting out of Dodge. His actions are causing anxiety in the investment circles according to WSJ’s MoneyBeat blog. For me it is Yahoo’s inability to change its DNA that makes me skeptical of the turnaround.

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  1. Very well written Mr Malik. I could not agree more. It is very clear that Dan Loeb feels Yahoo has gone as far as it can for him and it would be in his best interest to cash out and put the capital to use elsewhere. In short he believes that his equity can earn a greater return invested elsewhere than it can in Yahoo. Even factoring in assymetric information, I believe that he is making an informed decision (being a member of the board) and this is something that we should all take note of. Is he saying that Yahoo has gone as far as it can go, and any future growth will not be significant? I think this is the clear signal that we should all take note of.

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  2. interesting, Loeb has lost faith in my opinion. Yes Yahoo have made some amazing purchases such as Alibaba and Tumblr but maybe the outlook for this year is not as strong as predicted.

    https://storageous.wordpress.com/

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  3. i don’t get the question. did i miss something or did this guy invest a large amount of money in the hopes of a massive payday, and did he not just accomplish that? should he have shot for a 4-billion profit? doesn’t really matter whether he is a romantic yahoo fan or a skeptic. most people would just take that cash and run.

    two sentences have typos: Yahoo stock has more than doubled since Mayer doubled.

    and

    There are some who believe that it time for Loeb to go

    Have a nice day!

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  4. Everyone is still missing the big picture of Yahoo’s future, perhaps even Loeb. That future is all about mobile content and nobody is as well equipped to be every person’s personalized portal to everything they want to browse on the web as Yahoo.

    All you have to do is spend some time on yahoos main page on your iPad and you will see exactly what I’m talking about. News Sports Finance TV Shows Email Lifestyle Weather and Gaming All in one place. Who else can do that without a major major overhaul of their UI? Not Google. Not Facebook. Not CNN.com.

    All in one place people. That’s the key and that’s what Yahoo already provides to users.

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    1. Will

      Thanks for the comments. I am not sure if I necessarily agree with you. I don’t think just because we have used a service in the past, we will continue to do so in the future because I believe new devices and new screens prompt different behaviors and as such are siphoning off users attention to different things.

      Yahoo gained heft in a world where there wasn’t as much competition. Since the new post-2000 web emerged the company has failed to launch a single sticky service. The mobile apps are even worse — and most importantly this is a company that knows money from only one thing: display advertising, a business that depends on cheaper and cheaper page views that are cheaper than falling prices of advertising.

      I could go on, or perhaps point you to my previous posts.

      So while I respect your opinions and I am grateful you shared them with us, I am not going to find a common ground with you this time :-)

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      1. Hi Om, thanks for providing the forum for discussion, let’s continue it a little bit further. I’m curious — could you shed more light on why you think Yahoo’s mobile apps are even worse? To wit, have you tried the weather app? Or the Sportacular (sports news/scores) app? Both of those are great — really intuitive and user friendly and incredibly powerful little apps for delivering exactly what you want when you want it. But most importantly, have you browsed Yahoo.com on your IPAD? If you do that, (and for due diligence, have someone else who isn’t as specialized in finance also browse it as well — say a mother or sister or someone who may appreciate the entertainment aspects of the curated content found there) I think you will have to admit it’s pretty cool — definitely better than anything Facebook or Google are capable of providing — and on par with the most sophisticated entertainment content websites.
        That’s a really big deal — because that’s really where the future of the web is going to be found. It’s not about search anymore, it’s about a portal to content. Great content.

        I do agree with you that Yahoo rose to prominence initially in realms where there wasn’t much competition, like search and advertising on all those click through page sites — but I feel that too many stock prognosticators are still using those same metrics to chart where they think the company is going. You say they have failed to launch a single sticky service, which is true, however I base my belief in their strong and vital future on the fact the web is clearly evolving in the direction that will play to their (perfectly positioned) strength — the ability to provide robust content (video) to every mobile device. The advertising dollars to be found there — with bonafide real commercials and sponsorships– will be much greater than the current click-through / banner ad rates provide, and it’s all leading towards an overall subscription based model once Yahoo has enough content and enough viewers to warrant such a move. Consider, for all its “unstickyness” Yahoo.com is still the 4th most trafficked website in the world, trailing only Google/Youtube, Facebook and (I believe) Amazon.

        As an avid user of both Facebook and Yahoo, I would be more inclined to pay an annual subscription fee for Yahoo. Right now they charge about $20/user annually for the service. As a comparative example, Apple charges $99/year to maintain a “@me.com” identity.

        To me, it’s really about viewing Yahoo with the correct lens. It’s like 1996 again, and they are a portal. But to a new age of robust video content demand rather than merely a stale, outclassed search / email / repository. A portal that puts everything you want, need and like on the web right there in a handy UI on your mobile device.
        If you see them in that frame, you are seeing Marissa Meyer’s vision for the company’s future.

        But if you care to shed a different perspective on anything I’ve touched upon here, I’m eager to hear it.

        Thanks Om

        Will

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  5. ashfaq munshi Wednesday, July 24, 2013

    Loeb is a hedge fund guy. Their hurdle rate is 50% IRR. He clearly made that. Now, if he sits on this investment at Y! can he clear the same rate or higher? or, is he better off taking that money and putting it to use elsewhere. The chances that Y! is a $45 stock in a year or so is vanishingly small. Therefore, Loeb needs to put the money elsewhere. Remember folks Loeb is a Hedge Fund guy. He is not a long investor. He has no business falling in love and he didnt. In my opinion, this was a great move on his part. The fact that Y! locked in his value at $29+ is even better for him. All of this does not imply anything about the underlying asset.

    As has already been pointed out by many others, the current value of Y! is more a function of Alibaba than anything else. The core business is still very much stuck and will likely take a while to turn around. Ms. Mayer is doing a great job keeping Y! in everyone’s eyes – both the internal and external marketing have been brilliant. Additionally, changing the internal culture with acqui-hires is also smart. You now have a large enough population that say “I can” versus “I cant”. This is a major shift. However, it takes time to get them to deliver real product and then turn those into revenue sources. And, here is the real crux: even if the product pipeline is robust how will it be monetized? that is the key question IMHO.

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    1. Thanks for the comment Ashfaq.

      Just because Mayer is keeping the company front-and-center from an attention standpoint doesn’t mean it is turning around.

      From all the research reports I read — no one has any belief in the underlying asset and everyone believes Yahoo is all about Alibaba and other Asian assets. I am sure Loeb was able to look at the business is even more closely.

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  6. Great post. Thank you. I agree that Loeb is cashing out because the writing is on the wall for Yahoo. The amount of time and effort (not to mention luck) needed to turn Yahoo around right now makes it a far less appealing investment to hang on to — cash out. Quit will you’ve still got your shirt on.

    Personally, I agree with Om. Melissa has done a great job at instilling faith in her abilities, competencies and maybe even her vision for Yahoo, but that’s a trillion light years away from having a consistent revenue model that is sustainable in these uncertain times. What is shown to the media is rarely the whole truth. One gets the feeling that Yahoo’s ship has sailed (at least in the areas they are trying to dominate and make headway in). Maybe Mr. Loeb came to the same conclusion.

    Cheers,

    Charlie Oliver

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  7. Om, thanks for one of the best gigaom posts in a while. That Loeb is an institutional investor versus a value investor shouldn’t be discounted. If he thinks he’s reached a sell trigger then it’s to be expected he won’t hold a position, and Y!’s long term relevance isn’t indicative wrt that. Mayer is indeed doing a tremendous job in putting Y! front and center again in the industry’s eyes if not the consumer’s.

    What’s needed (imvho) for Y!’s longer term interests to be auspicious are product improvements backed by transformational technology. That takes time. David Karp ideally would take a significant role in Y!’s product direction (if that’s what he wants), with the caveat that Tumblr represents the tail end of a generation of startups that made good via desktop/laptop web rather than mobile. Flickr’s 1TB free storage cap is a positive indicator Y! believe they can deliver on core technology (put another way – I’d like to see the spreadsheet that said 1TB was the oversubscription sweetspot for cloud storage). The question is will the market give Mayer the time she needs for product/technology along with a willingness to be misunderstood – but I hope it does.

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    1. @dehora

      Great comment. I admire Marissa for signing up for a herculean task but I am in the camp of “doubters” and feel that despite Tumblr, the company might have trouble transitioning to the new future of mobile and new demographic of users.

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