AOL takes heavy fire from Starboard side

Starboard Value, a $1 billion hedge fund with a 5 percent stake in AOL, claims the media company is poorly managed and is preparing for a proxy fight to replace three members of AOL's board.

Starboard said today that it filed a copy of the presentation it plans to make at AOL's annual meeting in June. Starboard is backing a slate of nominees that would replace AOL directors Alberto Ibarguen, Patricia Mitchell, and James Stengel.

For months, Starboard has bashed AOL and CEO Tim Armstrong's leadership record. The hedge fund has grown impatient with AOL's effort to become a media company. Starboard offered plenty of criticism of AOL in a press release:

According to Starboard's analysis and confirmed by recent reports from Wall Street research analysts who cover AOL, the Display business lost more than $500 million last year alone.

This business has over $500 million in revenue and, Starboard believes, could be operated profitably if operated more efficiently.

From 2009 to 2011, AOL spent approximately $900 million on acquisitions and investments to grow its Display advertising business, yet enterprise value declined by 59% or $1.7 billion over this period.

AOL has responded to Starboard's criticism and attempts to restructure the board by noting that it suggested AOL and Starboard work together to nominate mutually acceptable board members but Starboard refused. The big criticism of some these challenges to corporate overseers by hedge funds in recent years that they are more about taking control than they are about creating value.

But Starboard offered a large amount of detail about where it believes AOL's leadership has fallen short. One area was the investment made in Patch, the hyper-local news service.

"Patch is not a viable business," Starboard wrote. "Even at AOL's target revenue model of selling 80 percent of ad slots to local advertisers near rate-card pricing, Starboard estimates that Patch would still lose approximately $20 million to $60 million per year."

According to The Wall Street Journal, Starboard wants AOL to either unload Patch, place it in a joint venture, or shut it down.

AOL's annual meeting is scheduled for June 14.