A Collection of Dan Loeb (Third Point) Love Letters to the Board of Yahoo

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Dec 14, 2011
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The latest released today. Here is the entire letter series to (YHOO, Financial):


December 13, 2011


Board of Directors

Yahoo! Inc.

701 First Avenue

Sunnyvale, CA 94089

Attention: Mr. Roy Bostock, Chairman


Dear Directors:


Third Point LLC, as the beneficial owner of 5.2% of Yahoo! Inc.’s (“Yahoo”) outstanding shares, remains extremely troubled by news reports regarding the dysfunction and inequity being exhibited in the process of maximizing stockholder value that the Board is allegedly “managing”. We are disturbed but not surprised by this mismanagement given the history of strategic bungling by Yahoo Board Chairman Roy Bostock and Founder Jerry Yang, which has been chronicled in our previous letters and in numerous critical media and analyst reports. As significant shareholders with our own fiduciary duties to investors to uphold, we cannot stand by silently if such reports are accurate and Yahoo, a company in no need of cash, plans to engage in a sweetheart PIPE deal which will serve only to entrench Mr. Yang and the current board while massively disenfranchising public shareholders and permanently robbing us of the opportunity to obtain a control premium.


We are not alone in our concerns. Shareholders, analysts, and the media are questioning the integrity of the process currently underway. As stewards of our assets you are charged with a duty to place stockholder interests above personal gain or other motives. In order to allay the concerns and uncertainty permeating the marketplace and provide much needed transparency on the supposed “process” that Yahoo is undertaking, we ask that you immediately make public the letter(s) in which Yahoo invited third parties to make proposals for the Company (the “Process Letters”). We assume that Yahoo’s Process Letters did not place any artificial restrictions on the proposals that the Yahoo board was willing to consider in its search for strategic alternatives, such as discouraging, or even prohibiting, bids to purchase Yahoo in its entirety.


Of course, we appreciate the need for confidential negotiations, and therefore stockholders need not know at this stage who received the Process Letters. Rather, stockholders should simply be allowed to see if the Process Letters, which may be published in redacted form, are consistent with the Board’s paramount duty to maximize stockholder value. Additionally, Third Point does not seek and does not expect to receive material non-public information and thus requests that you file such letters publicly with the Securities and Exchange Commission via Form 8-K with all deliberate speed.


In light of the serious, timely concerns expressed by nearly all Yahoo stakeholders and interested parties, undertaking this action is the only fair and reasonable thing to do.


Very truly yours,


/s/ Daniel S. Loeb

Daniel S. Loeb

Chief Executive Officer

Third Point LLC

390 Park Avenue

New York, New York 10022



NEW YORK, NEW YORK, NOVEMBER 4, 2011 – Third Point Requests Two Yahoo Board Seats, Demands Yang’s Resignation from Board, and Opposes Reported Negotiations for “Sweetheart” Deal with Private Equity Firms


About Third Point LLC: Third Point is an investment firm headquartered in New York, managing $8.0 billion in assets, including a London Stock Exchange listed closed-end fund. Founded in 1995, Third Point follows an event-driven approach to investing globally.


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

390 Park Avenue

New York, New York 10022





Mr. Jerry Yang

Yahoo!

701 First Avenue

Sunnyvale, CA 94089


Dear Mr. Yang:


Thank you for taking the time to speak with us by telephone on Monday. We are only sorry that we were not able to finish our conversation as a result of Mr. Bostock’s abrupt unilateral termination of the call.


Mr. Bostock’s failure on the call to acknowledge his pivotal role in, and accept responsibility for, the decline of Yahoo! makes clear that he does not intend to voluntarily follow his recently terminated hand-picked executive, Ms. Bartz, out the door. It is our strongly held belief that not only has Mr. Bostock been a destroyer of value, but also so long as he serves as Chairman of the Board, the Company will not be able to attract the talent it needs and deserves, particularly at the CEO level. This opinion is based not only on our prematurely truncated conversation, but on numerous discussions with Silicon Valley cognoscenti and other people familiar with both Mr. Bostock and the Company.


As a Founder and major shareholder of the Company, the abysmal record of the current leadership must be heart-rending to you personally, as well as damaging to your net worth. We urge you to do the right thing for all Yahoo shareholders and push for desperately-needed leadership change. We are prepared to support you and present you with suggestions on candidates who could help bring Yahoo back to its rightful place among the world’s top digital media and technology companies.



Sincerely,


/s/ Daniel S. Loeb

Daniel S. Loeb

Board of Directors

Yahoo! Inc.

701 First Avenue

Sunnyvale, CA 94089





Attention: Mr. Roy Bostock, Chairman

Dear Ladies and Gentlemen:


Third Point LLC (“Third Point”) is a registered investment adviser with approximately $8 billion under management. We are writing to inform you that certain investment funds we manage have acquired a 5.1% interest in Yahoo! Inc. (the “Company” or “Yahoo”), bringing our holdings of common stock and currently-exercisable equity options to 65,000,000 of the outstanding shares, and positioning us as the Company’s third largest outside shareholder.


This letter details our principled demands for sweeping changes in both the Board of Directors (the “Board”) and Company leadership, and outlines the hidden value of Yahoo, which has been severely damaged – but not irreparably – by poor management and governance.


The Failures of Yahoo’s Board of Directors Necessitate a Significant Infusion of Fresh Board Talent


Yahoo’s current Board of Directors has made a number of decisions that have directly harmed the Company and resulted in a stock price far below the Company’s intrinsic value. While we are focused on the future for Yahoo under new management, it is instructive to understand how this Board’s many mistakes have created the current conditions at an asset and talent rich company. Among others:







1)


It is now widely accepted that the Board made a serious misjudgment in approving the hiring of Carol Bartz as Yahoo’s Chief Executive Officer, given her inexperience in the consumer-oriented internet space. Although we are pleased that the Board has terminated Ms. Bartz’s employment, we fail to understand why this decision was so long in coming given her abysmal performance over the last two and a half years. During this period, Ms. Bartz’s poor decision-making and communication skills publicly alienated the Company’s highly respected Asian partners, as well as its shareholders, sell-side analysts, bloggers, customers and employees.




While the decision to hire her alone is grounds for questioning the Board’s competence, its willingness to turn a blind eye to these serious problems and inexplicably remain supportive of Ms. Bartz notwithstanding the negative impact she was having on the Company is even more troubling. As recently as June 23, 2011, at the Company’s annual meeting, Chairman Bostock reportedly stated that the Board remained “very supportive of Carol and this management team” and that they were “confident that Yahoo [was] headed in the right direction." These comments demonstrate that this Board lacks the courage to urgently make the difficult decisions required by the situation today.





2)


It is also now widely recognized that the Board made a gross error in turning down the $31 per share Microsoft bid in 2008, which would have generated significant returns for Yahoo’s shareholders. This mistake is all the more frustrating given Yahoo’s current depressed stock price of $13.61 per share — far below the Company’s intrinsic value, which we currently place in excess of $20 per share, as detailed below.




From the failed Microsoft sale negotiations, to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections, and most recently the Alipay debacle, this Board’s failures have destroyed value for all Yahoo stakeholders. Ms. Bartz’s exit and Mr. Morse’s elevation to interim CEO makes him Yahoo’s fourth CEO in four years andfurther demonstrates the poor corporate governance Yahoo investors have been saddled with for too long. Even before Ms. Bartz’s hire, Yahoo’s shares materially underperformed the market and their peer group, as graphically evidenced in the Company’s most recent 10-K. Against this background, it is evident that merely replacing the Company’s CEO – yet again – will not be enough to alter the direction of the Company. Instead, a reconstituted Board with new Directors who will bring fresh eyes, relevant industry expertise and increased investor alignment to the table is immediately necessary.


Yahoo’s website states the Company’s values, among them: “We foster collaboration while maintaining individual accountability.” It is time that certain members of this Board were held accountable for its past failures and their individual roles. Accordingly, we insist that Mr. Bostock, who championed Ms. Bartz’s hiring and led the charge against the Microsoft deal, promptly resign from the Board. We also demand that fellow Directors Arthur Kern and Vyomesh Joshi, who have stood by silently during these last five years of woeful performance, join Mr. Bostock in resignation. Finally, we can only assume that Director Susan James, the President of Tri-Valley Animal Rescue, will also resign, given her close relationship with Ms. Bartz. If she does not do so voluntarily, the Board should request her resignation as well.


As the Company sets out to recruit a new CEO and evaluate strategic alternatives, we are adamant that reconstituting the Board is crucial to provide any serious CEO candidate or strategic counterparty with a stable and responsive governance structure. There is much work to be done and time is of the essence. Even after the Company announced Ms. Bartz’s dismissal and the pursuit of strategic alternatives, Yahoo shares rose only 5%. We believe the muted market reaction to Ms. Bartz’s dismissal represents a recognition that this management change is a necessary, but not sufficient, step towards unlocking Yahoo’s actual value. Investors’ reluctance to embrace the stock and their lack of confidence in this Board’s ability to lead the franchise is understandable given the current Board’s track record.


Third Point has held discussions with many highly respected entrepreneurial executives active in technology, internet, media and consumer-related businesses. From these discussions we have distilled an All-Star team of potential Director candidates, who would be indispensable in working with the reconstituted Board to pursue the three paths outlined in the recent company announcement: CEO search, business review and strategic options. We look forward to sharing our candidates with you shortly.


The Obscured Value in an Iconic American Technology Asset


We firmly believe that there is much to be gained from a successful and rapid transition in management, as we are convinced that Yahoo is grossly undervalued. We have followed Yahoo for many years, and our analysis suggests that at a share price of $13.61, with $2.49 per share in tax adjusted net cash, $3.10 per share and $5.24 per share of after-tax values for the Yahoo! Japan and Alibaba Group stakes respectively, core Yahoo is left at an implied value of $2.78 per share or 2.2x 2012 EBITDA. With more effective and focused management, one could realistically envision a re-rating to at least 7.0x 2012 EBITDA, driving a target of over $19.00 per share. When coupled with tax efficient outcomes for its Asian assets, an additional $3.00-4.00 per share stands to be realized. Continued share count reduction via buybacks and other potential capital structure optimization alternatives would further bolster the Company’s stock price. In addition, based on our discussions with industry experts and entrepreneurs, we believe that with new management, there is significant further value in leveraging Yahoo’s globally trusted franchise and platform for a range of new products and innovations.


Focusing specifically on the Alibaba Group, the mid-term value potential for this stake alone could represent another $5.00 per share of upside. The e-commerce interests housed under the Alibaba Group umbrella hold the dominant positions in the “B2B” (63% of 2010 market share according to Marbridge Consulting), “C2C” (85% share) and “B2C” (51% share) Chinese e-commerce markets. Alibaba Group’s Taobao business is essentially Ebay and Amazon on steroids in terms of market share and revenue growth. According to Goldman Sachs, the Chinese e-commerce market was $75 billion in 2010, with a 3 year forward compound annual growth rate of 43% compared to the $193 billion U.S. market with compound annual growth of 14% over the same period. We currently estimate a pre-tax value for Alibaba Group of $25 billion. Given Alibaba Group’s growth potential and market share, it is entirely conceivable that Yahoo’s 40% fully diluted stake in Alibaba Group could double in value over the next 2-3 years, highlighting its tremendous value.


Looking deeper into core Yahoo, it is clear that the Company possesses unique scale and scope as the Internet’s premier digital media company. The near completion of significant platform transitions and increasing ad format creativity and client engagement translate to exciting prospects for 2012. These compelling Yahoo initiatives were sadly lost in the chaos surrounding Ms. Bartz’s tenure as CEO. Hidden by Yahoo’s senior management drama is a franchise benefitting daily from tremendous investment in resources and new platforms successfully built by Yahoo’s corps of talented, committed engineers, product development team and salespeople.


Finally, the Company’s leadership needs to rebuild relationships with its valued Asian partners in Yahoo Japan, Softbank and the Alibaba Group. These are important sources of value for Yahoo, and the Company needs to enter a new, constructive era with these critical allies and friends of the Company.


In conclusion, we are eager to present to the Board our candidates and thoughts on the Company’s future. We hope that the Board will take our proposals seriously and move towards the leadership overhaul that we are championing. While the decision to undertake Board turnover initially rests with individual directors, ultimately, shareholders like Third Point have other means to effect changes necessary to protect their investment. We are prepared to propose a slate of directors at the Company’s annual meeting next year should it become necessary. Such proxy disputes are burdensome, and we sincerely hope that one will not be necessary here. Shareholders have already suffered enough.


It is time for new leadership at Yahoo. Yahoo’s investors, employees, clients and users deserve it. We look forward to having what is great about Yahoo make headlines, encouraged and communicated by new CEO and Board leaders.



Sincerely,


/s/ Daniel S. Loeb

Daniel S. Loeb

Chief Executive Officer

Third Point LLC
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