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Friday, 31 October 2014

Dumped

Dan Loeb's Yahoo exit hurts investors twice over

Dan 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.

Yahoo has certainly benefited from Loeb’s involvement. When he first bought shares in the fall of 2011, the company had a dysfunctional board with co-founder Jerry Yang acting as dictator for life. Nearly all the company’s value was trapped in Asian assets while the company steadily lost market share in search.

Loeb’s entrance led to a wholesale upending of the board. Only two directors who served in 2011 remain. Yang, who played a key role in torpedoing a $45 billion offer from Microsoft in 2008, is gone. The company raised $4.3 billion from selling a chunk of its Asian holdings and agreed to use $3.65 billion to buy back stock.

Loeb played a key part in firing Yahoo’s then-Chief Executive Scott Thompson and bringing in Marissa Mayer. At the very least, her abilities and presence have excited investors and Silicon Valley. Yahoo’s share price has roughly doubled since Loeb’s involvement.

And the deal Loeb has secured looks pretty sweet. Yahoo’s 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. Yahoo fell as much as 4 percent on the news.

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 Loeb’s role either as a restraint on 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 dealmaking 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.

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On July 22 Yahoo announced that it had agreed to repurchase 40 million shares held by Third Point at a price of $29.11 each. That is the closing price of the shares on July 19, the last day of trading prior to the announcement. Third Point will hold 20 million shares after the buyback.

Three directors nominated by the hedge fund - Daniel Loeb, Harry Wilson and Michael Wolf - will step down on July 31.

The repurchase will use up about $1.2 billion of the $1.9 billion Yahoo had remaining on its share buyback program.

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