Yahoo said that its board’s strategic review is still underway, with a wide range of options under active consideration, in the wake of unconfirmed reports that some private equity firms and technology companies are planning to invest in the Internet company.
“News reports based on rumor and speculation are just that,” said Yahoo in a statement on Friday a few hours after a New York investment firm, Third Point demanded the resignation of co-founder Jerry Yang from Yahoo’s board in connection with reports of his negotiations with private equity firms.
“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,” Third Point’s CEO, Daniel Loeb, said in a letter to Yahoo’s board, that was also released to the public on Friday. More troubling are reports that Yang is engaging in one-off discussions with private equity firms, presumably because it is in his best personal interests to do so, the letter said.
The investment firm said that it manages investment funds that are, collectively, the second largest shareholder of Yahoo.
“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,” Third Point said.
In a leveraged recapitalization model, a company may buy back its shares from the market using debt instruments like bonds, thus enhancing the stake of promoters and buyers.
Yang must declare whether he is a buyer or a seller, and if he is effectively a buyer, corporate ethics require him to recuse himself from discussions on behalf of the company, and leave the board to join co-founder Filo in a solely operating capacity, the investment firm said. Filo is currently designated as Chief Yahoo at the company, a position that Yang also holds.
Yahoo replied that 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. The board and its Transactions and Strategic Planning Committee initiate, direct, and oversee any work Yang undertakes in relation to the strategic review process, it added.
Yahoo’s board ousted Carol Bartz as CEO in September, and appointed chief financial officer Timothy Morse as interim CEO. The company said it was on the lookout for a permanent CEO.
Private equity firms and technology firms including Microsoft are said to be interested in investing in Yahoo, according to various unconfirmed reports. Jack Ma, chairman and CEO of Alibaba Group, in which Yahoo has a stake, has stated his interest in acquiring Yahoo.
Yahoo turned down an offer by Microsoft to buy the company in 2008 for more than US$44 billion. The board and the strategic committee should not have permitted Yang to discuss with private equity investors this time, particularly given his ineptitude in dealing with the Microsoft negotiations to purchase the company in 2008, Third Point said.
The investment firm is demanding two seats on the board.