On the same day that potential Yahoo buyers faced a deadline to sign confidentiality agreements, co-founder Jerry Yang came under a fresh attack from an activist shareholder who demanded his resignation. In a letter to Yahoo's board, Daniel Loeb, chief executive officer of hedge fund Third Point LLC, said he was “deeply concerned” Yahoo is looking at deals that will allow private equity firms to gain substantial equity positions in the company. “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,” added Loeb.

According to a Reuters report from early October, which cited multiple sources, Yang was exploring a deal with private equity firms to take Yahoo off the public markets in part because that would represent his best chance of remaining involved with the company. Loeb, who is seeking two board seats at Yahoo through either the resignation of Yang and chairman Roy Bostock or by the creation of new seats, said that Yang needs to clearly state whether he is a buyer or seller.

“He cannot be both,” Loeb wrote. “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.” Two of Yang's confidantes didn't disagree with Loeb. “We're all sitting here wondering how Jerry is able to do this, he's totally conflicted,” said a Yang confidante who asked not to be identified talking about his friend. “The board should be concerned about getting the best price not how Jerry can stay in control but instead it's the opposite.” A Yahoo representative said in a statement that the board's strategic review is being “properly managed for the benefit of all shareholders.” The statement went on to say that, “Mr. Yang is one of nine 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.”

Living on new terms...

Situation getting worse

Yahoo set a deadline of Friday for potential buyers to sign a confidentiality agreement to be allowed a close look at its finances, according to people familiar with the matter.After initially balking at its restrictive terms, several parties relented and signed the agreement by the deadline, which could be extended into next week to provide more time for other firms to sign on, these people said. Still, at least five of the private equity firms interested in Yahoo–Silver Lake Partners, Providence Equity Partners, Bain Capital, Hellman & Friedman and Blackstone –have not yet signed the agreement, several people said.

The private equity firms that did relent and sign an agreement have heavily negotiated its terms, the sources said, though it was not clear exactly what amendments had been made. Other private equity firms interested in Yahoo include KKR, TPG Capital and Carlyle Group. Sources would not confirm if any of them had signed the confidentiality agreement, though a person familiar with the situation said those three firms and Providence are “among the hottest firms” involved in the process.

The New York Times reported late on Thursday night that TPG had signed the agreement. Strategic parties including Alibaba, Microsoft Corp and Google, have also taken part in the still-developing discussions surrounding Yahoo, sources have said. Private equity firms have indicated a willingness to commit around $1 billion in equity as part of a transaction, according to several people familiar with the matter. The signed agreements could help spur a deal for Yahoo's assets. One such plan being explored calls for Yahoo to sell a 20 percent minority stake in the company, sources said. Under that structure, the purchaser of the stake, Yang and David Filo, Yahoo's other co-founder, would then increase their combined stake to around 40 percent to 45 percent through a large share buyback that would reduce the number of Yahoo shares outstanding, several people familiar with the matter have said.

Yahoo would finance the buyback through borrowing, and keep its 40 percent stake in Chinese e-commerce company Alibaba and its 35 percent stake in Yahoo Japan, a joint venture with Softbank, sources said previously. “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,” wrote Loeb, referring to the fact that Yahoo could sell a minority stake absent investor approval. Any deal for Yahoo would be complex due to Yahoo's stakes in Alibaba and Yahoo Japan. Yahoo also has a search advertising partnership with Microsoft that would figure heavily into any deal.

This is not the first time Loeb, whose firm owns roughly 5 percent of Yahoo, has blasted the company. In September, following the departure of Carol Bartz as Yahoo's CEO, he accused the board of letting the company stagnate, allowing its leadership position in online advertising to be siphoned away by Google Inc and Facebook. At the time, however, Loeb appealed to Yang for support instead of going against him. “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,” he wrote. “We are prepared to support you.”

Despite his change of heart toward Yang, Loeb, who claims that he manages funds that collectively make his firm Yahoo's second largest shareholder, does not have enough power on his own to compel the board to act on his demands. But, the louder he talks, the larger the possibility becomes that he can coalesce other Yahoo shareholders around his cause, said a second Yang confidante. Indeed, by way of example, in each of the last three years influential institutional investment firms Capital Research Global Investors and Capital World Investors voted against re-electing select Yahoo directors. “Jerry is losing influence but the board isn't going to take action against him unless it is forced to,” this person said. “They already pushed out the CEO without having a plan, which sent the company into a tailspin. If they push out Jerry without a plan, the company will just crash and burn.”


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