Major Yahoo shareholder calls out board on 'failures'

Investment adviser Third Point has acquired 5.1 percent ownership in Yahoo, and now firm CEO Daniel Loeb has decided to express his extreme displeasure with the Internet company's board of directors.

In a letter sent to Yahoo's board of directors and published today by the Securities and Exchange Commission, Loeb, a well-known hedge fund manager, announced that his firm used some of the $8 billion in cash it manages to acquire its interest in Yahoo. With 5.1 percent ownership, the firm is now the third-largest outside shareholder in Yahoo.

After announcing the holding, Loeb quickly took aim at what he called "the failures of Yahoo's board of directors." He outlined several ways in which he believes Yahoo's board has mismanaged the company, and in turn, negatively affected shareholder value.

"While we are focused on the future for Yahoo under new management, it is instructive to understand how this board's many mistakes have created the current conditions at an asset- and talent-rich company," Loeb wrote in its letter.

Related stories:
• Yahoo's Bartz out as chief executive
• Yahoo's trials and tribulations since 2008 (timeline)
• Yahoos in charge: Blame the board
• From ZDNet: Yahoo's board under fire as speculation heats up

Loeb first focused his attention on former Yahoo CEO Carol Bartz. He wrote that Yahoo's board "made a serious misjudgment" in bringing on Bartz, who was previously CEO of software firm Autodesk, due to "her inexperience in the consumer-oriented Internet space." He added that she offered "abysmal performance" during her tenure as CEO, and "publicly alienated the company's highly respected Asian partners, as well as its shareholders, sell-side analysts, bloggers, customers, and employees."

Yahoo's board announced the termination of Bartz earlier this week, replacing her with interim CEO Tim Morse. In a statement, Yahoo Board of Directors Chairman Roy Bostock said the decision was due mainly to the company's desire to explore "opportunities that will put Yahoo on a trajectory for growth and innovation and deliver value to shareholders."

Although Bostock and the board called attention to Bartz's failures, some critics have said that the company's directors are also to blame. Earlier this week, CBS News quoted one person "with deep ties to Yahoo," who said that Yahoo has "a terrible board." The Yahoo observer went on to say that the real issue at the company might actually be its chairman.

"It's Bostock," the person told CBS News. "He's the same guy who blew the Microsoft deal."

That Microsoft deal could have been a lifesaver for Yahoo. In 2008, when Microsoft offered to acquire Yahoo for $31 per share, representing a 62 percent premium on its stock price at the time, Yahoo's position in the online market was declining rapidly. And Microsoft, trying to gain a foothold on the Web, was willing to pay billions just to see if it could turn things around. But Yahoo, led by Bostock, balked at the deal, and hired Bartz instead. She then inked a search deal with Microsoft, preserving Yahoo's independence--and its troubles.

Loeb highlighted that sequence of events in today's letter, saying that he believed the board was to blame for not accepting the deal.

"It is also now widely recognized that the board made a gross error in turning down the $31 per share Microsoft bid in 2008, which would have generated significant returns for Yahoo's shareholders," Loeb wrote. "This mistake is all the more frustrating given Yahoo's current depressed stock price of $13.61 per share--far below the company's intrinsic value."

However, Yahoo's board reportedly believed that improving the company's stock price was the duty of Bartz, and Bartz alone.

Earlier today, The Wall Street Journal cited anonymous sources with insight into the board's decision to fire Bartz, who said that she simply did not do a good job of "reaching performance targets." According to those sources, one of her targets was the revitalization of Yahoo's stock price.

As of this writing, Yahoo's shares are trading at about $14.45, down a whopping 49 percent over the trailing five-year period.

Part of the issue, Loeb argues in his letter, is the board's inability to find capable CEOs. As Loeb pointed out, Morse is now "Yahoo's fourth CEO in four years." That, he says, only highlights the "poor corporate governance Yahoo investors have been saddled with for too long."

Third Point's solution
But Third Point has a solution: the outright dismissal of Yahoo's board of directors.

"From the failed Microsoft sale negotiations, to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections, and most recently the Alipay debacle, this board's failures have destroyed value for all Yahoo stakeholders," Loeb wrote. "Against this background, it is evident that merely replacing the company's CEO--yet again--will not be enough to alter the direction of the company. Instead, a reconstituted board with new Directors who will bring fresh eyes, relevant industry expertise, and increased investor alignment to the table is immediately necessary."

Third Point even has some board candidates in mind. Loeb said today that his firm has already held discussions with "many highly respected entrepreneurial executives active in technology, Internet, media, and consumer-related businesses" that he says, could be prime candidates for Yahoo's board.

But before all that happens, Third Point might be facing an unlikely competitor in its desire to overhaul Yahoo. Business Insider is reporting, citing an anonymous source, that Yahoo co-founder and former CEO Jerry Yang is trying to raise capital to acquire the company. However, the source claims, Bostock is trying to stop Yang from initiating his plan.

Yahoo did not immediately respond to CNET's request for comment on Loeb's comments or Business Insider's report.