Yahoo to face shareholder wrath at annual meeting

July 31, 2008 6:59:35 PM PDT
Yahoo Inc.'s recent truce with investor Carl Icahn didn't pacify many shareholders who remain on the war path heading into the Internet company's annual meeting Friday. The slings and arrows are expected to include a significant number of votes opposing the re-election of the company's current board of directors and a fusillade of criticism.

Yahoo Chief Executive Jerry Yang, in particular, will probably get an earful after spurning a $47.5 billion takeover bid from Microsoft Corp. in early May.

Since Microsoft withdrew that offer, Yahoo's stock price has plunged 30 percent to leave the company's market value nearly $20 billion below what shareholders would have been paid if Yang and the rest of the board had accepted the bid.

"The Microsoft negotiations were just the latest example of the negligence by this board," said Eric Jackson, a Yahoo shareholder who plans to confront Yang during Friday's meeting. "There is still a lot of anger and frustration among shareholders right now."

Jackson, who represents a group of stockholders with about 3.2 million shares, made an impression at Yahoo's meeting last year when he ripped the performance of then-CEO Terry Semel. Just six days after that skewering, Semel stepped down as CEO and surrendered the reins to Yang, Yahoo's co-founder.

Yahoo shareholders were agitated even before the breakdown in Microsoft talks because the company's profits and stock have been sinking for several years, despite an Internet advertising boom.

Since 2005, Yahoo has lost nearly half its market value. Meanwhile, the stock of rival Google Inc. has climbed 15 percent to create an additional $20 billion in shareholder wealth.

Yahoo shares fell 14 cents Thursday to $19.89, slightly above their price when Microsoft made its initial takeover bid six months ago.

Despite its struggles, Yahoo still has the support of many shareholders, including one of its largest, Legg Mason Capital Management Inc. The Baltimore-based investment firm, which owns a 4.4 percent stake in Yahoo, pledged its support for the current directors two weeks ago.

"We believe the board is independent and focused on value creation for long-term shareholders," Legg Mason Chairman Bill Miller said at the time.

If there's enough opposition Friday, Yahoo shareholder Mark Nelson thinks Yang may end his attempt to turn around the company that he and David Filo began 14 years ago.

"I haven't spoken to anyone who thinks, 'Hey, this is the right team to lead Yahoo,'" said Nelson, a partner at Mithras Capital, which owns 1.7 million Yahoo shares. "I hope there will be enough shareholder pressure at this meeting for the board to realize they need to bring in someone else to run the company."

Icahn, a blunt billionaire who will join Yahoo's board next week as part of his compromise with the company, already has said Yang, 39, should be cast aside for a more seasoned CEO. That idea may get more support when two Icahn allies join the Yahoo board by Aug. 15. (Shareholders won't be able to vote on the merits of Icahn and his allies until next year's meeting. Friday's vote will be confined to Yahoo's incumbent board.)

Before he decided to work with Yahoo, Icahn had been campaigning to replace all nine of the company's directors with a slate of his own candidates. But he changed his mind in July after concluding he didn't have enough shareholder support to prevail.

Icahn remains highly motivated to boost Yahoo's stock price because he paid about $25 per share to acquire a 5 percent stake in the company. But he doesn't plan to show up at the annual meeting. And now he seems willing to give Yang more time to prove he has the chops to be CEO - although his peace pact with the company now prevents him from publicly disparaging Yang or other Yahoo directors.

"While we still disagree on many points, I have great hope 'this will be the beginning of a beautiful friendship,'" Icahn wrote on his blog Thursday.

To round out its board, Yahoo must choose two Icahn-endorsed candidates from a list of nine. Two of the choices have been mentioned as possible successors to Yang - former AOL CEO Jonathan Miller and former Viacom Inc. CEO Frank Biondi Jr.

But Yang still seems to believe he is the best man for the job.

"I am as excited as I have ever been to lead this company," Yang told The Associated Press on July 22. "We have a sense of urgency to create value." In his defense Friday, Yang is expected to highlight an advertising partnership with Google that is supposed to boost Yahoo's annual revenue by $800 million. That alliance still could be blocked by antitrust regulators.

Yang also thinks Yahoo can get better at selling ads on its own.

Add it all up, and Yang believes Yahoo's net revenue will climb from a projected $5.6 billion this year to more than $9 billion in 2010. Industry analysts are highly skeptical: They predict Yahoo's 2010 revenue will be just slightly above $7 billion.

Yang won't be alone on the firing line Friday.

Roy Bostock, who became Yahoo's chairman on the same day Microsoft made its initial bid, oversaw the failed negotiations that followed. Bostock also sits on a compensation committee that approved an employee severance plan that threatens to substantially increase the costs of a takeover.

Two shareholder advisory firms - Glass, Lewis & Co. and Proxy Governance - have recommended voting against Bostock as well as the two other directors on the compensation committee, Ron Burkle and Arthur Kern. However, RiskMetrics ISS, the most influential shareholder advisory firm, supports re-electing the entire board.

Under Yahoo's bylaws, a director opposed by a majority of shareholders is required to submit a letter to resignation. But that rule won't apply in this year's election because the incumbents are technically still running against Icahn's slate. That means the current directors just need to win a plurality of the votes.

In an attempt to placate investors, Yahoo might announce a special dividend or some other extraordinary measure, such as a spinoff of its Asian assets. Microsoft proposed both ideas in July when the software maker teamed with Icahn in an attempt to buy Yahoo's search engine and break up the rest of the business.


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