Yahoo! Paid Dan Loeb The Dan Loeb Premium For His Shares

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I suppose a way to think about Yahoo! is that its stock has a sum-of-the-parts value equal to:

Both of those sources of value are kinda nebulous? I mean, the first one, God knows, but the second is weird too; it's some combination of "Dan Loeb is smart and I am not so I should pay a bit more for things he likes" and "Dan Loeb is smart and Yahoo is not so he's adding value by keeping an eye on them," I dunno. Anyway not any more:

Yahoo! Inc. (NASDAQ: YHOO) today announced that it has entered into an agreement to repurchase 40 million shares of Yahoo! common stock beneficially owned by Third Point LLC ("Third Point"), at a purchase price of $29.11 per share. The purchase price equals the closing price of Yahoo! common stock on July 19, 2013.

Following the repurchase, Third Point will beneficially own approximately 20 million shares, representing less than 2 percent of Yahoo!'s outstanding common stock. In accordance with the Board's settlement agreement announced on May 13, 2012, each of the directors originally nominated by Third Point -- Daniel S. Loeb, Harry J. Wilson, and Michael J. Wolf -- have submitted their resignations from Yahoo!'s board of directors, effective July 31, 2013. The Board will then comprise seven members.

The simultaneous loss of smart-money ownership and adult supervision disappointed investors, with the stock down 4% today "amid concerns that Loeb’s move could ignite a bigger exodus of investors out of the stock." And people are really mad at Loeb for some reason. The complaint seems to be mostly that:

  • Yahoo's stock price included a roughly $1.25-per-share being-owned-by-Dan-Loeb premium,1
  • Yahoo paid Loeb that premium, but
  • now that Loeb is mostly out that premium should no longer exists, so
  • why should he get paid for it?

Well who should get paid for it? We've talkedbefore about how activists like to be able to accumulate their stakes in secret, because they tend to view the information that they like a company and want to change it as being proprietary to them. This is kind of the flip side to that: at the moment Loeb signed the sale agreement, he owned stock in Yahoo-with-Loeb. To get him out of that stock he wanted the Yahoo-with-Loeb price. That seems only fair, no? I mean, he was supplying the Loeb in that equation.

But y'know:

Daniel Loeb’s Yahoo exit hurts investors twice over. The Internet company is buying back two-thirds of the hedge fund mogul’s stake, owned by his firm, Third Point, for $1.2 billion. That sucks up most of the cash Yahoo reserved for repurchases. It also heralds the departure of three Third Point-approved directors, robbing Yahoo of some much-needed advisers.

Well, for one thing, the cash Yahoo reserved for repurchases came largely from Loeb, y'know, joining the board and pushing for asset sales and repurchases, as opposed to general bloat. Also I feel like if Yahoo wanted advice from 41-year-old retiree Harry Wilson and/or strategy and technology consultant Michael J. Wolf they could probably call and ask? Yahoo also said that it's "committed to revisiting the Board's size and composition" so it could just ask them to come back to the board? There is nothing stopping them. It's just that Loeb, after selling down his shares, can no longer force Yahoo to keep those guys on the board.2 If their advice is much-needed it can be obtained without much-trouble.

Of course there is some appearance of unfairness to the repurchase transaction itself. After all, if Yahoo had told Loeb to go sell in the market, it probably could have saved $50 million buying back his shares.3 This does look like rather a sweetheart deal for Loeb, and you could spin unpleasant theories about it if you like.4

But everything about activist investing looks a little unfair, if you focus only on the public's inability to share exactly in all of Loeb's profits. Like: he bought his stock at an average price of around $13.30. The day he announced his stake the stock closed up from $13.61 to $14.44, meaning that he clipped about a $1.14 hey-it's-Dan-Loeb premium on the way in. And another $1.25 on the way out, which suggests that the value of the Dan Loeb premium is fairly stable though if anything up over the last two years. Meanwhile the stock is now at $27.86, and while he's made around a billion dollars since buying into Yahoo, the public shareholders have made around $14 billion. Even if you attribute just a fraction of that gain to his doing, it seem a little petty to begrudge him his extra $50 million on the way out.

Yahoo! Announces Repurchase of 40 Million Shares Held By Third Point [Yahoo!]
Loeb Exits Yahoo; Investors, Analysts React [WSJ MoneyBeat]
Loeb Wins and Shareholders Lose Out at Yahoo [Breakingviews]

1.Just, like, the stock dropped $1.25 today, basically on this news.

2.Loeb, an employed person, may no longer have time for Yahoo. Also I have dropped the exclamation point on Yahoo! by now; a man can only tolerate it for so long.

3.The math is that, like:

  • Loeb exit is announced, stock drops the $1.25 it dropped today;
  • Loeb sells shares at a discount to market;
  • Yahoo buys shares at premium to market.

In lazy expectation the last two cancel and it's just, like, he sells and Yahoo buys at today's price. Alternately ignore the market altogether and have him sell directly to Yahoo but at the post-announcement price, which presumably would satisfy like Henry Blodget.

4.Unpleasant theories include but are not limited to:

  • Board is insufficiently solicitous of public shareholders, willing to do whatever board members self-interestedly ask for;
  • Board/management want to get rid of Loeb and his outside supervisors and get back to being undisciplined and shareholder-unfriendly, are willing to pay a premium to do so;
  • Board/management don't want to see Loeb sell in the market (in what might be an underwritten transaction, given the size and his control) because the questions that would be raised during the marketing have no good answers.

Related

News

Memo To Yahoo: Dan Loeb Will Personally Shake Out ALL The Skeletons In Your Closet If He Has To

As you may have heard, Third Point Management is currently waging a proxy battle against Yahoo, of which it owns 5.81 percent. Last September, the hedge fund and its founder, Dan Loeb, wrote a letter to the company's board of directors entitled "The Failures of Yahoo’s Board of Directors Necessitate a Significant Infusion of Fresh Board Talent," in November it demanded two board seats in order to rest the ship from a bunch of bumbling incompetents, and in February, it said actually, make that four seats. Unfortunately, Yahoo resisted. Which is why yesterday, Loeb and Third Point were forced to enter into the record some damning evidence showing current YHOO CEO Scott Thompson to be a dangerous, dangerous liar, the likes of which the search engine would be wise to sever ties. Specifically, Third Point revealed that contrary to statements made on SEC filings, Thompson? Did not graduate from Stonehill College with degrees in both computer science and accounting but only the latter. The reason Third Point knew this to be true was because it Googled Stonehill College and found that the school did not even start offering computer science degrees until 1983, well after the time Thompson graduated. So, a liar and a liar who can't even be bothered to cover his tracks to boot. Oh, but the résumé chicanery did not stop there. Yahoo director Patti Hart, Third Point, went on to reveal, also had her own little C.V. "error" to speak of. Whereas Ms. Hart claimed to have graduated from Illinois State University with degrees in marketing and economics, in fact, merely earned a bachelors in business administration and specialized in marketing and econ. Yahoo, which yesterday confirmed the résumé duplicity, clearly needed no further substantiation that these two were academic frauds. Third Point and Loeb knew this much to be true. AND YET. As of 2PM today, a whopping twenty-four hours after their lies caught up to them, they remain employed by the company. So now this is happening because apparently some people need to be put on a deadline: Dear Board of Directors: Yahoo!’s initial response yesterday to Third Point’s identification of material inaccuracies in both CEO Scott Thompson’s and Director Patti Hart’s educational record was insulting to shareholders. We assume that these initial statements were attributable to Mr. Thompson and were not made with the Board’s approval. While we appreciate the Board’s statement late last night that it would conduct an investigation, unfortunately, for this Board and this Company, it is too little and months too late. To assert that years of inaccurate SEC filings, website biographies and, most likely, D&O questionnaires and curriculum vitae (including, presumably, the CV provided to Yahoo! when Mr. Thompson reached out for the job) were “inadvertent” is, in our view, the height of arrogance. Mr. Thompson and the Board should make no mistake: this is a big deal. CEO’s have been terminated for less at other companies. The Company’s Preliminary Proxy Statement filed on April 27, 2012 (at page 22) states that the “minimum qualification for service as a director of the Company are that a nominee possess...an impeccable reputation of integrity and competence in his or her personal and professional activities.” Furthermore, Yahoo!’s response “confirming” that Ms. Hart “specialized” in Marketing and Economics, rather than having earned her degree in such subjects (as Ms. Hart has asserted in filings for years) is a similar canard. A “specialty” is not a major. It is not a “minor”. We don’t know what it is, but we do know that like Mr. Thompson, Ms. Hart has been misrepresenting her actual degree to the investing public for years. Again, we hope that the Board does not accept this feeble attempt at “spin” as a justification for Ms. Hart’s misrepresentations. Irreparable damage to Yahoo!’s culture will continue every day that the Board allows Mr. Thompson and Ms. Hart to remain at the helm of the Company after having clearly demonstrated that they lack even the “minimum qualifications for service as a director of the Company.” Mr. Thompson, in particular, cannot possibly have any credibility remaining with the all-important Yahoo! engineers, many of which earned real – not invented – degrees in computer science. Moreover, permitting Mr. Thompson and Ms. Hart to stay with the Company after apparently violating the Code of Ethics sends a message to all Yahoo! employees that a different set of rules applies at the top. Third Point, Yahoo!’s largest outside shareholder with over $1 billion invested, called yesterday for an immediate investigation if our assertions were true. The Board appears to have acceded to this demand. Its response must be swift and decisive. In that regard, Third Point will consider it grounds for further action if the Board does not take the following steps by Noon EDT on Monday, May 7th: 1) Publicly reveal the process by which it vetted Mr. Thompson as a potential CEO candidate. This disclosure should include the release of all minutes of any meeting at which Mr. Thompson’s candidacy was discussed and any reports or other materials upon which directors relied to evaluate Mr. Thompson’s candidacy. 2) Disclose whether any Board member, including Maynard Webb, who has long-standing ties to Mr. Thompson, and Ms. Hart, who headed the Search Committee, was aware of Mr. Thompson’s deception prior to receipt of Third Point’s letter yesterday. 3) Provide shareholders with all information regarding the director nomination process, including the so-called “skills matrix” referred to in the Company’s preliminary proxy statement, which the Board purportedly used to determine the qualifications of various candidates, including Third Point’s nominees. 4) Terminate Mr. Thompson for cause immediately given his demonstrable unsuitability to remain Chief Executive Officer and a director of Yahoo! and accept the resignation of Ms. Hart for similar reasons. Finally, we urge the Board to stop wasting valuable company resources and drop its resistance to placing the Third Point nominees on the Board. We are prepared to join immediately. Once on the Board, our first tasks will be to work with the remaining Board members to find Yahoo! a new leader with the qualifications and integrity to lead the Company and install best practices of corporate governance. The Company can ill afford to continue this misguided fight with its largest outside shareholder while it has so many other fires to put out. There has been enough damage already. Sincerely, Daniel S. Loeb Chief Executive Officer Third Point LLC So, take the weekend to mull it over and while you're at it, consider gathering documentation of other potentially false claims such as: 1. His first-place finish in his 3rd grade spelling bee (do you really think a future Stonehill grad would know how to spell 'abhinaya'?) 2. That he bought Apple stock at $76/share (RIGHT) 3. That he can bench 285 (sure) 4. That he graduated high school (just don't know) 5. His circumcision (do you want to get to the bottom of this guy or not? If he lied about comp sci, who knows what else he'd lie about) Third Point Demands Yahoo C.E.O. Be Fired by Monday [Dealbook] Loeb Asks Yahoo To Fire CEO By Monday [MarketWatch]