Why Activists Succeed – and Will Change Yahoo

Starboard Value last week sent a letter to Yahoo’s Board of Directors announcing its intention to ask shareholders to replace the entire Board.  That is why Starboard is called an “activist” fund. It is not shy about seeking action at the Board level to change the direction of a company – by changing the CEO, seeking downsizings and reogranizations, changing dividend policy, seeking share buybacks, recommending asset sales, or changing other resource allocations.  They are different than other large investors, such as pension funds or mutual funds, who purchase lots of a company’s equity but don’t seek to overtly change the direction, and management, of a company.

Activists have been around a long time.  And for years, they were despised.  Carl Icahn made  himself famous by buying company shares, then pressuring management into decisions which damaged the company long-term while he made money fast.  For example, he bought TWA shares then pushed the company to add huge additional debt and repurchase equity (including buying his position via something called “green mail”)  in order to short-term push up the earnings per share.  This made Icahn billions, but ended up killing the company.

Similarly, Mr. Icahn bought a big position in Motorola right after it successfully launched the RAZR phone.  He pushed the board to shut down expensive R&D and product development to improve short-term earnings.  Then borrow a lot of money to repurchase shares, improving earnings per share but making the company over-leveraged.  He then sold out and split with his cash.  But Motorola never launched another successful phone, the technology changed, and Motorola had to sell its cell phone business (that pioneered the industry) in order to pay off debt and avoid bankruptcy.  Motorola is now a fragment of its former self, and no longer relevant in the tech marketplace.

So now you understand why many people hate activists.  They are famous for

• cutting long-term investments on new products leaving future sales pipelines weakened,
• selling assets to increase cash while driving down margins as vendors take more,
• selling whole businesses to raise cash but leave the company smaller and less competitive,
• cutting headcount to improve short-term earnings but leaving management and employees decimated and overworked,
• increasing debt massively to repurchase shares, but leaving the company financially vulnerable to the slightest problem,
• doing pretty much anything to make the short-term look better with no concern for long-term viability.

Yet, they keep buying shares, and they have defenders among shareholders.  Many big investors say that activists are the only way shareholders can do anything about lousy management teams that fail to deliver, and Boards of Directors that let management be lazy and ineffective.

Starboard Value last week sent a letter to Yahoo’s Board of Directors announcing its intention to ask shareholders to replace the entire Board.  That is why Starboard is called an “activist” fund. It is not shy about seeking action at the Board level to change the direction of a company – by changing the CEO, seeking downsizings and reogranizations, changing dividend policy, seeking share buybacks, recommending asset sales, or changing other resource allocations.  They are different than other large investors, such as pension funds or mutual funds, who purchase lots of a company’s equity but don’t seek to overtly change the direction, and management, of a company.

Activists have been around a long time.  And for years, they were despised.  Carl Icahn made  himself famous by buying company shares, then pressuring management into decisions which damaged the company long-term while he made money fast.  For example, he bought TWA shares then pushed the company to add huge additional debt and repurchase equity (including buying his position via something called “green mail”)  in order to short-term push up the earnings per share.  This made Icahn billions, but ended up killing the company.

Similarly, Mr. Icahn bought a big position in Motorola right after it successfully launched the RAZR phone.  He pushed the board to shut down expensive R&D and product development to improve short-term earnings.  Then borrow a lot of money to repurchase shares, improving earnings per share but making the company over-leveraged.  He then sold out and split with his cash.  But Motorola never launched another successful phone, the technology changed, and Motorola had to sell its cell phone business (that pioneered the industry) in order to pay off debt and avoid bankruptcy.  Motorola is now a fragment of its former self, and no longer relevant in the tech marketplace.

So now you understand why many people hate activists.  They are famous for

• cutting long-term investments on new products leaving future sales pipelines weakened,
• selling assets to increase cash while driving down margins as vendors take more,
• selling whole businesses to raise cash but leave the company smaller and less competitive,
• cutting headcount to improve short-term earnings but leaving management and employees decimated and overworked,
• increasing debt massively to repurchase shares, but leaving the company financially vulnerable to the slightest problem,
• doing pretty much anything to make the short-term look better with no concern for long-term viability.

Yet, they keep buying shares, and they have defenders among shareholders.  Many big investors say that activists are the only way shareholders can do anything about lousy management teams that fail to deliver, and Boards of Directors that let management be lazy and ineffective.

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