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Overthrow the whole board? Yahoo activist has done it before

NEW YORK — Starboard Value's announcement Thursday that it wants to overthrow the entire board at  Yahoo Inc. may seem ambitious, but the hedge fund has done it before, including at Darden Restaurants, the owner of the Olive Garden chain of restaurants. 

NEW YORK — Starboard Value's announcement Thursday that it wants to overthrow the entire board at  Yahoo Inc. may seem ambitious, but the hedge fund has done it before, including at Darden Restaurants, the owner of the Olive Garden chain of restaurants. 

The activist hedge fund firm has also lost some board battles, most notably at AOL, Yahoo's direct competitor. And that loss, while by no means a template for Yahoo's success, suggests there may still be time for Yahoo CEO Marissa Mayer to turn the tide in her favor, especially if she can quickly return cash to shareholders. 

 

The year was 2012 and Starboard CEO Jeff Smith was criticizing AOL CEO Tim Armstrong’s plan to develop the Internet company into an online media giant by plowing money into websites such as the Huffington Post, which AOL bought for $315 million the year before. Smith also wanted AOL to sell assets such as Moviefone and MapQuest. 

If that sounds familiar, it's because Smith has been pushing Mayer to give up on her ambitious plans to compete with the likes of Facebook and Google and instead focus on cutting costs and selling or spinning off assets, which would result in more cash for shareholders.  

While Mayer and Yahoo's board have recently come around to some of those ideas, including plans for $400 million in cost cutting, the stock (YHOO) has only risen 4.6% this year. Meanwhile, it's down 21% over the last 12 months, suggesting shareholders are still worried about the company's future. 

One reason could be fears that Yahoo is dragging its feet on a sale. In its letter Thursday announcing its opposing slate of board candidates,  Smith raised questions about Yahoo's commitment to the sales process, saying it was a driving force in his decision to wage a proxy fight.  

"There are good reasons for shareholders to be highly concerned about the current strategic review process," Smith said.

Yahoo had no comment Thursday beyond a statement that its board will review Starboard's proposed nominees "and respond in due course."

At AOL, Armstrong turned the tide in his favor by returning a boat-load of cash to shareholders in a last-minute maneuver. 

After Starboard announced its proxy battle at AOL, the search and email provider announced it had sold its prized patent assets to Microsoft for a whopping $1.1 billion, a play Starboard had previously suggested. As if that weren't enough, Armstrong then announced — one month before the crucial shareholder vote — that AOL would give the entire $1.1 billion to shareholders, rather than spend it on the company.

AOL's stock (AOL), which was already higher on news of the patent sale, jumped 3.5% on the news. One month later, in June, Starboard lost its bid for board seats but made a pretty penny on its stake in AOL's stock. 

Mayer's options to return cash to shareholders may be more limited, however. Mayer has already agreed to a cost-cutting plan. The company has also been hard at work on another strategy to unlock value by spinning off its core assets, including Yahoo Mail and Yahoo Sports, from its $29 billion stake in Chinese e-commerce company Alibaba. 

"They rarely lose," Ken Squire, an activist tracker, said of Starboard's reputation.

"They only go for a majority of the board when absolutely necessary and have had more success than any other activist at winning majority board proxy fights," he said, citing both Darden and tech company Tessera Technologies, where Starboard ousted the board in 2013. 

Starboard could also learn a thing or two from its loss at AOL and agree to settle for a few seats if such a deal is offered, as it was at AOL. 

A settlement could also prove the best option for shareholders who don't have time to wait until the summer for a new board, if there is one, to explore a sale, said Mark Rogers, CEO of BoardProspects. "Time is not on the side of Yahoo's shareholders — the sale price of the company is going down, not up," Rogers warned.  

Follow USA TODAY reporter Kaja Whitehouse on Twitter @kajawhitehouse

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