AOL strikes back at Starboard Value over proxy fight

AOL has been getting hit from all sides by activist investor Starboard Value. But in a letter to shareholders, the company is hitting back.

"Starboard, and in particular its principal, Mr. Jeffrey Smith, have rebuffed AOL's numerous efforts to avoid a destructive and expensive proxy fight," AOL wrote in a letter to shareholders that was released today and dated yesterday. "We believe that Starboard's misleading proxy campaign not only prevents stockholders from making an informed vote at the Annual Meeting, but has created a destructive atmosphere for AOL and the long-term interests of all of its stockholders."

Starboard Value came on the AOL scene last year, after buying up some of its shares. As of this writing, the hedge fund owns approximately 5.3 percent of AOL's outstanding shares. Immediately after starting to buy up shares, Starboard took aim at AOL's executive leadership and board, arguing that it wasn't acting in the best interests of investors. The investment firm also nominated three people to sit on AOL's board of directors -- an attempt on Starboard's part to gain power and influence at AOL.

AOL's letter is designed to implore investors to not elect those three would-be directors at the company's Annual Meeting of Stockholders on June 14. And to make its case, AOL pointed out that its stock price "has increased by more than 100 percent since Starboard first began to acquire its position." The company also took the chance to highlight Starboard's issues with AOL's recent patent sale to Microsoft for $1.1 billion.

"The self-interest of Starboard was on stark display in its reaction to the announcement on Monday, April 9 that AOL had reached a definitive agreement to sell a significant portion of its patent portfolio and license additional patents to Microsoft Corporation for nearly $1.1 billion in cash," the company wrote. "AOL publicly stated that upon the closing of the transaction it planned to return a significant portion of the patent sale proceeds to AOL's stockholders."

For its part, Starboard wasn't too pleased with the acquisition, saying that it did "little to address our serious concerns with the Company's poor operating performance and substantial losses in the Display business." Starboard has said consistently that AOL is undervalued, and there are ways to unlock its value on a grander scale that current management has overlooked.

"We strongly believe that AOL is deeply undervalued and that there are opportunities to substantially improve overall operating performance and valuation based on actions within the control of management and the Board," Starboard Managing Member Jeffrey C. Smith wrote to AOL recently. "AOL's stock price has underperformed over almost any time period and we believe it is time for the Board to take immediate action to address the significant concerns highlighted in this letter."

For now, though, the focus is on the proxy war -- one that Starboard might not actually want to fight. In fact, The Wall Street Journal reported last week that Starboard had been open to a compromise with AOL (subscription required), and that the companies held talks. However, Starboard wrote in a Securities and Exchange Commission filing that the parties "have not been able to reach an amicable resolution." Given the tenor of AOL's letter, that's abundantly clear.

CNET has contacted Starboard Value for comment. We will update this story when we hear back.