Wednesday, August 27, 2008 Activist Investor: GeoEye's Seeing Things My Way

08/25/08 - 02:22 PM EDT
By Eric Jackson

My first Activist Investor column for in March featured GeoEye (GEOY - Cramer's Take - Stockpickr), a satellite company in which I had just started an activist campaign.

This investment is down more than 20% since the start of the year (despite a 50% run-up since mid-July); however, the company's management has been receptive to recent behind-the-scenes activist efforts. GeoEye looks ready to make significant gains in the remainder of this year and into next year after the launch next Thursday of its newest satellite (GeoEye-1).

GeoEye leads the market, in terms of revenue, in operating satellites that capture geospatial images used by government and businesses. Its images are used by such customers as Google Earth, the U.S. Department of Homeland Security as well as agriculture companies, city developers and planners, real estate developers, video-game makers and companies that develop location-based applications. GeoEye offers a whole set of tools and services for customers to package its images (including historical images from its library) and help them analyze and dissect the information.

What first attracted me to small-cap GeoEye was its low valuation. It had a trailing price-to-earnings ratio of 12 in February, despite projections of growing earnings by 20% each year for the next five years. Unfortunately, that figure kept dropping until it was below 6 in early July.
Up until the last couple of quarters, when the company started losing some orders to competitor DigitalGlobe, which currently operates the newest satellite in the sky, GeoEye was generating $200 million in revenue with operating margins in excess of 45%. If you assume a rapid return to these numbers (and likely higher) once GeoEye-1 launches next week, this company's shares can be bought for just above 4 times next year's earnings.

The company's stock price has slumped in the past six months for several reasons. Its planned launch of the GeoEye-1 satellite had been delayed several times and investors have worried it would be delayed again. The successful launch of the satellite is a gate for future earnings potential. Until the launch happens, however, customers will go to GeoEye's competitor, which currently has the best satellite in the sky.

Other uncertainty has weighed on the stock price. GeoEye announced earlier this year that it would need to restate a small part of its previous year's earnings based on advice of its accountants to ensure they had properly accounted for previous net operating loss carry-forwards.

One of GeoEye's greatest problems has been poor communication. Management has done a lousy job outlining its competitive advantages to investors. This poor communication only exacerbated investors' concerns about the GeoEye-1 launch delay and the earnings' restatement.

It got so bad that one analyst, during the first-quarter earnings call, excoriated GeoEye's CEO and CFO for their poor job of communicating. He directly blamed this failure for the company's low P/E ratio.

Positive Signs

But some things have gone on behind the scenes in the past six months that should please investors. First, GeoEye's No. 1 competitor, DigitalGlobe, filed to go public. This meant it had to open its books to the public in an S-1 filing with the Securities and Exchange Commission, a disclosure that revealed it was smaller than GeoEye. DigitalGlobe's decision to go public also allowed Matthew O'Connell and Henry Dubois, GeoEye's CEO and CFO respectively, to speak more freely about their business without fear of giving their private competitor an unfair advantage.

The second thing that has happened is that O'Connell and Dubois have listened to the criticism of shareholders and learned from it. The recent second-quarter earnings call was much improved over previous ones. On the most recent call, held earlier this month, they laid out all the details of the Sept. 4 satellite launch and cleared up what they had recently concluded about their recent restatement in a way that comforted investors. The stock has held its recent gains, instead of dropping precipitously as it did after the first-quarter call.

GeoEye has also been responsive to private criticisms I've directed to management, so I would like to give them public credit for this.

When I launched my activist campaign against GeoEye in the spring, I outlined in a letter to GeoEye's chairman and CEO three important but fixable problems I urged them to correct:

1) raising the company's price-earnings ratio through better investor relations and better communication in general,

2) clearing up the earnings delay immediately, and

3) ensuring management and the board had enough "skin in the game" and adding new board members to strengthen the overall team.

I have spoken to Matt O'Connell and Henry Dubois several times since I sent my first letter. In my view, communication with investors is much improved when it comes to discussing what the company is doing to achieve its immediate-term goal of a successful satellite launch, frequent pitching of the strong GeoEye story through investor meetings. Speeches at investment banking conferences have clearly laid out why GeoEye is significantly ahead of DigitalGlobe and why the market for geospatial images is expected to explode in the years ahead.

On its most recent call, GeoEye specifically mentioned how it's spending much more time talking to investors and telling its story. GeoEye is now covered by four analysts (all with buy ratings) compared to the one analyst it had last quarter. GeoEye has spelled out how its newest satellite will be the industry-leader for the next two years until DigitalGlobe launches its next satellite.

Also, last week, they hired their first chief technology officer, whose job it will be to better communicate the technical advantages of GeoEye's images and how they will play a part in the burgeoning location-based services market. This last point is still what has been missing in the recent GeoEye presentations and speeches.

The earnings restatement has now occurred, and it did not prove significant. Past years' lost earnings should be equaled out by a tax credit awarded later this quarter. There has been no cash impact on the company and the company still has a strong balance sheet to see it through the successful launch of GeoEye-1.

In terms of management and the board improving its makeup, there is still some work to do. O'Connell, Dubois and some others on the management team purchased some stock earlier this spring. I had encouraged them to do so as a sign of confidence in the company. Unfortunately, they only bought about $18,000 each. In my opinion, that's not enough -- especially given the generous executive pay they receive.

The CEO, O'Connell, deserves a pass on this issue, as he came from Wall Street to run GeoEye a number of years ago and had to make a big personal investment in the company. I know he understands the concept of "skin in the game." I wish he would encourage other officers and directors to follow his lead. Management needs to realize that stock options given to them as part of their compensation is "found money," compared to open market stock purchases.

On the issue of improving the board, there are already a number of strong individuals on this board, many with a government background (which makes sense as the government is GeoEye's largest customer and a co-investor in the new satellite). This board still could use some people with more of a commercial background, as that's a growing customer area for GeoEye.

However, when I spoke to O'Connell, I made it clear that I was much more interested in seeing the company tell its story effectively, clearing up any restatement uncertainty and encouraging insiders to buy some more stock than discussing the board composition issue. I believe they've prioritized the criticisms appropriately.

The bottom line is that GeoEye has listened to its critics and taken action to address many of the criticisms. Management needs to go further in some areas, but they deserve credit for what they've done to date. As an investor, I feel much more confident in this company's prospects based on my interactions with management and seeing them make some progress against these weak points.

GeoEye's biggest weak point remains communicating its powerful story to investors. It can't rely on its CTO to explain its competitive advantages to Wall Street. This is the job of the CEO and CFO, and they've only improved from a "C-" to a "C+" on their communication skills in the last three months.

All eyes are now on the Sept. 4 launch of GeoEye-1. The company needs to continue to actively communicate with investors on the day of and the day following the launch. The launch team has a 98% success rate over the last 150 launches. After launch, the company will perform tests to ensure everything is working correctly, and its largest customer, the National Geospatial-Intelligence Agency, will sign off that everything looks good at the end of October. That sign-off will allow the agency to agree to a new service-level agreement with GeoEye to buy images in the quarter ahead. Other customers will likely follow.

The launch should therefore have a large catalyst effect on the stock price. A more reasonable valuation for the stock would be 12 times next year's earnings, or triple its current price. It might take a few quarters to get there, but patience and activism are likely to be rewarded.

At the time of publication, Jackson was long GeoEye.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content

Thursday, August 21, 2008 Activist Investor: Yahoo! Mustn't Fumble Asian Assets

By Eric Jackson
08/21/08 - 12:19 PM EDT

What will Yahoo!(YHOO - Cramer's Take - Stockpickr) and its board do next to try to win back its shareholders' support?

It's highly likely they will seek to appease disgruntled shareholders by unlocking value in their collection of Asian assets, which currently make up 35% of the value in Yahoo!'s $20-a-share valuation. But Yahoo! shareholders need to be vigilant as to how this is done, especially with regard to the nonpublic entities and (the eBay (EBAY - Cramer's Take - Stockpickr) and PayPal of China, respectively).

It's been a difficult seven months for Yahoo! shareholders, who saw their shares increase in value to $30 from $19, only to drop back to pre-Microsoft (MSFT - Cramer's Take - Stockpickr) bid levels. At the shareholder meeting earlier this month, Yahoo!'s board strongly defended itself, saying it had done everything possible to achieve a deal with Microsoft. It also laid out the case for why its go-it-alone strategy would succeed and why Yahoo! still has an enviable array of assets that neither Microsoft nor anyone else can replicate anytime soon.

Yahoo! does have great assets -- that's why I first invested in the company two years ago. However, the company's board is weak, and it has exerted poor oversight while approving lavish pay to its executives and board members. Even with Carl Icahn and his colleagues Frank Biondi and Gary Chapple joining the board, this is still largely the board that former CEO Terry Semel assembled five years ago. A board that continues to be weak has the potential to continue to make poor decisions on behalf of its shareholders. That might happen sooner rather than later.

I attended Yahoo!'s most recent shareholder meeting and asked about several governance-related incidents over the last year that I felt weren't in shareholders' best interest. For example, Yahoo! decided last August to sell its $400 million-a-year Overture Japan business to Yahoo! Japan (which was essentially a sale to Softbank, the other owner of Yahoo! Japan) for $13 million. That's a far cry from the three to five times multiple of annual revenue Yahoo! typically has paid for venture capital-backed companies such as Zimbra, Rivals and Right Media.
Such a deal seems to have greatly benefited Softbank at the expense of Yahoo!'s shareholders. (And Yahoo! hasn't offered me a detailed explanation, if there is one.) Right or wrong, this appeared to be a sweetheart deal. If this is how Yahoo! operates, it's not unreasonable to believe the company could do the same thing with its Chinese partner

Chief Financial Officer Blake Jorgensen said during the shareholder meeting that Yahoo!'s collection of Asian assets (from its stake in Yahoo! Japan, Alibaba in China, and GmarketGMKT in Korea) are worth about $7 a share to Yahoo! shareholders at today's market prices. However, as Jorgensen noted, Yahoo! maintains significant ownership (through its Alibaba stake) in two significant private Chinese companies: and

Both Chinese companies have great potential. They already are the clear leaders in their verticals in China. (eBay just retreated from the Chinese market because of its inability to compete.) and also have chosen deliberately to grab market share in the past few years by not charging users' fees. As you can imagine, such pricing has helped their user base explode. The costs for both companies are very low and they both know they can turn the meter on at any time with a very large payback.

And so here's the governance issue: How should these assets be valued if Yahoo! wants to extract value from its stake in these private companies? If you valued them today, there is no revenue and the earnings are negative. But in two years, when each company turns its meters on and begins to generate hundreds of millions of dollars, the companies will be much more valuable.

There are two ways Yahoo! could extract value from and Agree to a management buyout with each company's management -- most likely the management of Alibaba -- or spin off these assets to Yahoo! shareholders with the stakes in the other Asian assets.

A management buyout would be another partner-friendly sweetheart deal that would greatly enrich Alibaba insiders at the expense of Yahoo! shareholders. Therefore, a spinoff is the right thing for Yahoo! shareholders. In a spinoff, even if the shares are valued low today relative to what they will be in a few years after the private entities start charging fees, Yahoo! shareholders can decide whether to hang on to their stakes.

The management buyout approach gives Alibaba full ownership of a growing asset at a significant discount to its true inherent value. Alibaba or the management teams would gain full control of these private assets at today's artificially low prices, knowing full well they are buying an asset that will be worth three to six times as much in a very short time. There's no market risk to them achieving a higher market valuation. All they have to do is flip the switch and start charging their loyal users a small fee. I would take on that kind of risk any day.

In the case of the Yahoo!-Overture Japan deal, shareholders found out about it after the fact. It was barely mentioned in an analyst call and buried in the back of a Securities and Exchange Commission filing. Yahoo! shareholders didn't have the good fortune of a large shareholder like Capital Research calling on the company to explain itself as they did earlier this month when Capital Research brought to light the significant underreporting of shareholder discontent with the current Yahoo! board. Therefore, all Yahoo! shareholders need to pay close attention now to how Yahoo! unlocks value with its Asian assets.

Softbank got a great deal for Overture Japan. Alibaba shouldn't get a great deal for and Yahoo! shareholders deserve to be treated fairly.

At the time of publication, Jackson was long YHOO.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content

Tuesday, August 12, 2008

RiskMetrics: Yahoo! Revised Vote Count Underscores Need for Reform of Proxy Voting Process

Submitted by: L. Reed Walton, Publications, and Ted Allen, Publications
August 12, 2008

Investors heard last week that votes against the re-election of Yahoo! board members were significantly higher than initially reported, due to an error.

Four directors -- Chairman Roy Bostock, CEO Jerry Yang, Ronald Burkle and Arthur Kern -- all received greater than 30 percent opposition at the company’s Aug. 1 annual meeting. The company had previously reported that no board member received more than 22 percent withhold votes. Another director, Gary Wilson, had just under 30 percent opposition, according to a company press release. The revised release, dated Aug. 5, notes that the error originated with Broadridge Financial Services, the firm that Yahoo uses to collect and tabulate shareholder votes.

No other directors received greater than 10 percent opposition. Incumbent director Robert Kotick is due to step down, as the board expands to accommodate billionaire investor Carl Icahn and two of his dissident nominees under an agreement that pulled the plug on Icahn’s bid to replace the entire board in a proxy contest. The three new Yahoo directors are likely to be appointed around Aug. 15, Dow Jones Newswires reported.

The company’s initial vote tally announcement, just after the meeting on Aug. 1, caught the attention of Yahoo critic Eric Jackson, founder of Ironfire Capital. Jackson leads a network of investors owning approximately 3.2 million Yahoo shares. He noted a discrepancy of about 200 million shares between the number of votes cast for directors last year and this year. After Jackson wrote about the error in his weblog, Capital Research Global Investors--which owns a 6.2 percent Yahoo stake--asked for a recount. According to the Associated Press, Capital opposed Yang and figured that he would have received more than the 14 percent opposition originally reported.

Broadridge said that a printing error was responsible for the incorrect results and re-issued the tallies, according to the AP. The revised results show that investors withheld 33.7 percent support from Yang, whereas opposition to his election was minimal last year. Bostock and Burkle had the most re-election opposition this year, with 39.6 and 37.9 percent withholds, respectively, versus dissent of 31.2 and 32.5 percent, respectively, in 2007.

The vote at Yahoo underscores the complexities of proxy voting in the U.S. market, where ownership is widely dispersed and about 85 percent of company shares are held in “street name” by brokers and other custodians. Edward Rock, a law professor at the University of Pennsylvania who co-wrote a 2007 paper, “The Hanging Chads of Corporate Voting,” said the proxy voting process is “crude, imprecise, and fragile.”

“Broadridge delivers more than 1 billion communications to investors per year. . . . It is an accident waiting to happen,” Rock said, according to MarketWatch.

“When it comes to the tabulation of proxy votes, most investors don't even know what they don't know,” said Pat McGurn, special counsel at RiskMetrics Group. “The tabulation process is as airtight as a sieve. It is as transparent as a brick wall. Simply put, the proxy voting infrastructure has failed to keep pace with the complexity of the investment process. It is only a matter of time until there is a complete meltdown at a significant meeting. Officials from the SEC, the stock exchanges, and Delaware must come together with key market players to fix the system.”

Sphere: Related Content

Friday, August 08, 2008

Yahoo!: Do The Right Thing for Your Shareholders with Taobao and AliPay

It's been a difficult 7 months for Yahoo! shareholders. Last week's shareholder meeting did little to quell concerns about the company's prospects moving forward.

Yahoo!'s board and management team essentially argued to shareholders in their presentation: trust us; we have a plan and we will execute against it.

I attended the meeting and asked about several governance-related incidents which have happened in the last year and have not been -- in my opinion -- in the interests of Yahoo! shareholders. The whole Vote-Gate announced earlier this week has been even more disconcerting.

It's sad to say, but I don't believe Yahoo!'s board or management team have done enough to deserve our respect and trust. Therefore, we need to continue to be vigilant and speak out for our own good.

I want to make Yahoo! shareholders aware of a potential scandal which has yet to occur. Hopefully, with enough pressure ahead of time, we can ensure it does not become a scandal. It relates to Yahoo!'s Asian assets, which have been much discussed in the last few months as a way of unlocking value for beleaguered Yahoo! shareholders.

As CFO Blake Jorgensen articulated during last week's shareholder meeting, Yahoo!'s collection of Asian assets (from its stake in Yahoo! Japan, to Alibaba in China, and Gmarket in Korea) are worth about $7 / share to Yahoo! shareholders at today's market prices. However, as Blake noted, Yahoo! maintains significant ownership (through its Alibaba stake) in two private Chinese companies: (China's eBay) and (China's PayPal).

Both have huge potential. They already are the leaders in their verticals in China. eBay just retreated from the Chinese market because of their inability to compete. They have also deliberately chosen to grab market-share in the past few years by not charging users fees. As you can imagine, these economics have helped their user-base explode. Neither company has minded doing this, because their costs are very low and they both know that they can turn the meter on at any time with a very large payback.

So, here's the governance issue: how should these assets be valued if Yahoo! wants to extract value from their stake in these private companies? If you valued them today, there are no revenues and negative earnings. If you valued them in a year or two when they each turn their meters on and generate hundreds of millions of dollars, you would have a much more valuable company.

There are two ways Yahoo! might extract value from and

(1) agree to a Management Buy-out with each company's management or with Alibaba or;

(2) spin-off these assets to Yahoo!'s shareholders.

The latter option is the right thing to do for Yahoo! shareholders. Even if these shares are valued low today relative to what they will be in a few years after they start charging fees, Yahoo! shareholders can decide whether to hang on to them or not.

The Management Buy-out approach could be exploited. Alibaba or the management teams could decide to buy back Yahoo!'s stake at today's artificially low prices -- knowing full well they are buying an asset that will be worth 3 - 6 times as much in a very short time. Who wouldn't want that type of sweet-heart deal?

I do not know what Yahoo! is contemplating with these assets, but I believe sunlight is the best disinfectant. Better to bring this issue to light now and remind them to not even go there, then scream bloody murder after the fact when it's a done deal.

I wouldn't be as skeptical that such a sweet-heart deal might occur if I hadn't witnessed Yahoo! selling its $395 million / year Overture Japan business to Yahoo! Japan (Softbank) for $13 million last August. I asked Jerry about this deal last Friday. He said that Investor Relations had answered my question last year when I first raised it. (They didn't; they merely repeated Blake Jorgensen's public comments during two analyst calls which were vague and provided no clear rationale.) Jerry also suggested to me in his comments that there were "tax reasons" for doing such a deal, without further explaining. (Jerry: If there were such reasons, can you elaborate for the benefit of shareholders?)

Softbank got a great deal for Overture Japan. Alibaba shouldn't get a great deal for and Yahoo! shareholders deserve to be treated fairly.

Sphere: Related Content

Thursday, August 07, 2008

National Post: Aurelian draws online storm

Investors vent on Kinross merger

Peter Koven, Financial Post

Published: Thursday, August 07, 2008

For the past couple of years, Aurelian Resources Inc. was the darling of retail investors.

But some of those same people are mobilizing online against the company's proposed $1.2-billion merger with Kinross Gold Corp., an effort that shows how the Internet has brought retail investors together and given them common cause as shareholders.

A message board on the Agoracom Web site has become the venting ground for furious Aurelian shareholders who are watching Kinross buy out their company at a considerably lower price than it was trading at earlier this year.

They have sent an angry letter to analysts and media decrying the deal, and both Aurelian and Kinross themselves have taken notice of the opposition.

The retail crowd cites a number of alleged problems with the Kinross arrangement, but the main argument involves the investment climate in Ecuador.

Aurelian shares were flying high until April, when the government put a temporary halt on its mining sector with the infamous "Mining Mandate." The stock almost immediately lost more than half its value.

Conditions in Ecuador have improved, and the investors argue Kinross is taking advantage of lingering political uncertainty to steal Aurelian and its world-class Fruta del Norte gold deposit at a bargain-basement price before Ecuador establishes its Mining Law. The fact that Kinross shares have dropped nearly 15% since the deal was announced (thus lowering the value of the share offer for Aurelian) supports that belief.

Patrick Anderson, Aurelian chief executive, said in an interview it is not so easy to dismiss the political risk that has weighed down his stock.

"I think a lot of people are thinking of our share price in terms of what it was six months ago or even a year ago. Or even before the election of the current administration in Ecuador, when we didn't have such a significant political risk discount," he said. He called the retail investor letter a "pretty skewed document."

Despite the protests of the retail community, the bid for Aurelian appears poised to succeed. The shares are trading below the Kinross offer price, and institutional investors have expressed support for the deal. (Retail investors are thought to own around 30% of the stock.)

As well, some analysts have not been nearly as bullish on Ecuador's prospects as the retail investors, and contend Kinross is paying a full price. And if the offer is as low as retail investors claim, a rival company could top it.

But the Aurelian backlash speaks to a more important issue: The Internet message boards are bringing the retail crowd together and giving them a louder voice.

"In the past, retail shareholders had no way to get together without it being extremely costly and onerous," said George Tsiolis, Agoracom president.

"But now you've got this viral thing where people are creating their own groups and figuring out a way to analyze if it's a good deal for the company, and figuring out how to vote. That's the way the stock market should work."

As evidence, he points to Eric Jackson, a private investor who used blog posts and YouTube videos to wage successful proxy fights against U. S. giants Yahoo! Inc. and Motorola Inc.

Canada experienced its first big piece of online shareholder activism this year when an Alberta investor used a Facebook page to rally fellow investors stuck with asset-backed commercial paper. They generated a powerful lobby and became major players in the talks to restructure the frozen market.

Sphere: Related Content

Wednesday, August 06, 2008

After Vote-Gate, Heads Must Roll on Yahoo’s Board

By Eric Jackson
Managing Member, Ironfire Capital LLC
August 6, 2008

To anyone who says that it’s inconsequential that Yahoo understated the level of shareholder dissatisfaction by more than half thanks to a “tabulation error” by its proxy counter, Broadridge–I say: You couldn’t be more wrong. This incident will have ramifications in the coming weeks for the composition of Yahoo’s board. But here’s the shocking thing: This latest batch of numbers might still underrepresent the level of disdain shareholders have for this board.

Any corporate election that doesn’t receive 95 to 98 percent support from shareholders for the incumbent management and board is an anomaly. Yahoo’s first press release from last Friday suggested that, despite all the hubbub of the failed merger talks with Microsoft and public criticism from Carl Icahn and others, Yahoo shareholders had let the incumbents off the hook. Chairman Roy Bostock and CEO Jerry Yang were re-elected with 79.5 percent and 84 percent support respectively. These relatively benign results (compared to last year’s), combined with the fact that there were not more pointed questions at the meeting last week, led some observers to conclude that this board had “faced down” its critics.

Not quite. Gordy Crawford of Capital Research Global did all Yahoo shareholders a favor by demanding a recount. Yahoo and Broadridge complied. And results of that recount were alarmingly different from the first set of numbers. We’ve all heard of +/- 4 percent in polling, but when was the last time you heard of +/- 50 percent?

The recount might set a modern-day record among S&P 500 companies for the most “withhold” votes for a board in a corporate election. Only V.J. Joshi, head of HP’s Printer group, got off without a serious warning from shareholders (a 7 percent “withhold” vote). The “withhold” vote for Bostock was 39.6 percent, not 20.5 percent as originally reported. And 33.7 percent of Yahoo shareholders withheld their support from Yang, not 14 percent. Other Yahoo directors who fared poorly in the election were Gary Wilson (27.7 percent of votes withheld) and Compensation Committee membersRon Burkle (37.9 percent withheld) and Art Kern (31.1 percent withheld).

What would we all be doing today if Gordy Crawford had never called for a recount? If a “tabulation error” happens and no one is there to hear it, did it happen at all? We will never know.

And there will likely be more shoes to drop in this tragedy of errors. This “tabulation error” was only one of two major question marks surrounding last Friday’s initial voting results. Yahoo easily made Broadridge the fall guy for this first error. The second error–how few eligible shares were counted in the final tally–isn’t so easily eluded. And for that, Yahoo will be the fall guy.

Only 75.8 percent of the eligible shares as of the June 3 record date were voted in this election. After such intense media scrutiny in the past few months, it seems odd that so few investors participated.

Last weekend, I dove into the numbers in detail and reviewed them against numbers from the last two Yahoo elections. On Sunday night, I wrote about the most recent Yahoo shareholder vote, and verified that there were 200 million fewer votes cast this year compared to the average over the last two years. I called on Yahoo to appoint an independent third party to review and certify the voting process.

Yesterday, as news of the voting irregularities circulated, I received a number of complaints from frustrated shareholders. Some claimed they had received multiple proxies from Yahoo over the last month, with several arriving Aug. 4–the Monday after the election. Some said they had had trouble voting by phone. Others, who had initially voted for Icahn’s slate, said when they tried to re-vote against the Yahoo board, they weren’t able to do so. How many other shareholders encountered similar difficulties? Without a full inquiry, we’ll never know.

These missing votes could have had an even more significant impact on the overall results. For example, Chairman Roy Bostock received “for” votes from fewer than half of the total shares eligible to vote (only 45.8 percent of the 1.4 billion shares eligible to vote). He truly lacks the approval of the majority of the shareholders he is supposed to represent. With a 47 percent vote, director Ron Burkle also lacks majority support. And while CEO Jerry Yang won majority support, he did so by the skin of his teeth, with just a 50.2 percent vote.

Governance Matters

At Friday’s meeting, I asked Jerry Yang, Yahoo President Sue Decker and Roy Bostock about three issues that suggest to me that Yahoo’s governance oversight has been lax.

(1) Why did Yahoo sell Overture Japan (a $396 million-per-year business) to Yahoo Japan for $13 million last August? Did Yang, who sits on Yahoo Japan’s board, recuse himself from the negotiations? Who negotiated on behalf of Yahoo and why did they agree to such a low price when Yahoo has a habit of paying three-to-five times revenues for companies like Zimbra, Blue Lithium, and Right Media?

(2) Sue Decker serves on three Fortune 500 boards (Intel, Costco, and Berkshire Hathaway). Her duties to those companies required her to attend at least 22 meetings last year, according to proxy filings. And each meeting required significant preparation. As a Yahoo shareholder, I fail to see how outside commitments like these benefit Yahoo. Are they really necessary? Shouldn’t Decker drop a few of them until Yahoo finds solid footing again?

(3) About a third–31-36 percent–of Yahoo shareholders voted against the re-election of Roy Bostock and fellow Compensation Committee members Ron Burkle and Art Kern last year. Yet all three continue to sit on this committee (or the Board). Why? And why did they agree to pay outside directors average total compensation of $500,000 last year? Google’s outside directors were paid $250,000, on average, for their services last year. Sue Decker received $2,700 for sitting on the Berkshire Hathaway board (and $110,000 per year for serving on the Intel and Costco boards). Why is Yahoo paying its directors so much?

I found the trio’s answers to these questions unconvincing. Particularly surprising were Bostock’s comments on Compensation Committee member tenure and compensation.

In the first place, Bostock said while 32 percent of shareholders voted against his reelection last year, 68 percent voted for him. And that’s not bad, he said. This glass-half-full logic explains why he has never bothered to explain to shareholders why he, Burkle and Kern have remained on the Compensation Committee and the Yahoo Board.

Second, Bostock disputed my assertion that Yahoo’s outside directors were paid an average of $500,000 last year. When I asked him if he was definitively stating that he did not receive compensation of about $500,000 last year, he said “yes.” Yet, according to Yahoo’s own proxy statement, Bostock earned total compensation of $499,264 last year. 2007 compensation for Yahoo’s other board members was as follows:
  • Ron Burkle: $482,046
  • Eric Hippeau: $496,674
  • Vyomesh Joshi: $519,520
  • Art Kern: $496,990
  • Bobby Kotick: $492,774
  • Ed Kozel: $516,202
  • Mary Agnes Wilderotter: $205,832 (for five months of service; annualized $493,997)
  • Gary Wilson: $482,046

The average compensation for each Yahoo outside director in 2007: $497,531.

Third, Bostock also claimed that this year’s vote would be a far better indication of shareholder support for Yahoo’s Compensation Committee than last year.With 39.6 percent of shareholders withholding support from Bostock and 37.9 percent withholding it from Burkle, isn’t it time for them to step aside?

Fool Me Once, Shame on You; Fool Me Twice, Shame on Me

Given all this, I am deeply concerned that my interests and those of all Yahoo shareholders are not being protected by the company’s board. We need to know why 200 million shares were missing from this year’s vote as compared to the last two years’. We need to know why so many proxies were mailed late to shareholders (on our dime). We need to know why so many shareholders are questioning whether their votes were counted. Yahoo will try to sweep all these concerns under the rug, but we shouldn’t allow it. The company should immediately appoint an independent third party to address these questions and assure shareholders that their votes were properly counted.

Immediate Changes to the Board

Also, Yahoo needs to immediately make some changes to the composition of its board. Roy Bostock and Ron Burkle should do the honorable thing and step down from this board.

In truth, this should have happened a year ago. One wonders what might have happened in the last 12 months with Microsoft negotiations had Yahoo acted swiftly, following the 2007 annual meeting, to remove them.

Eric Jackson is the Founder and Managing Member of Ironfire Capital LLC, an activist hedge fund. In 2007, he founded the "Yahoo! Plan B" group, a web-based group of 150 Yahoo shareholders who own more than 3.2 million shares in a campaign to change the company’s direction.

Sphere: Related Content

Yahoo! Tech Ticker: Jackson: Anger Level "High" as Shareholder Meeting Begins

Posted Aug 01, 2008 12:44pm EDT by Aaron Task in Investing, Internet, Media

Related: yhoo, msft

It's the calm before the storm. I'm sitting outside the Imperial Ballroom at the Fairmont Hotel in San Jose where reporters and shareholders await the start of Yahoo's annual meeting at 10 a.m. PT.

Ahead of the meeting, the big buzz is about an LA Times story reporting that former AOL chief Jon Miller will not be joining the newly configured Yahoo board, as was widely expected. Sources here are dismissing the story, which wasn't well sourced. But this is obviously a big development and I'll update the situation if/as developments warrant.

A short time ago, I caught up with Eric Jackson, founder of activist hedge fund Ironfire Capital, whose effort to oust the entire Yahoo board has garnered pledges totaling some 3.2 million shares.

Unlike many others, Jackson's main gripe with Bostock, Yang & Co. is not that Yahoo failed to get a deal with Microsoft. Rather, it's the struggles in the company's core business, which he notes has deteriorated in the year since Yahoo's last annual meeting.

Jackson is expecting an even higher level of outrage this year vs. 2007, when three directors received more than 30% "against" votes, precipitating the end of Terry Semel's reign as CEO.

Sphere: Related Content The Activist Investor: Yahoo! Vote Doesn't Add Up


By Eric Jackson


Yahoo!'s (YHOO - Cramer's Take - Stockpickr) shareholder vote last Friday had two scandals attached to it. The first you've likely heard about as it involved Yahoo! dramatically under-reporting (by more than 50% in some cases) how many of its shareholders voted "against" the re-election of several directors, including CEO Jerry Yang and Chairman Roy Bostock. However, you likely haven't heard of the second, which involves about 200 million shares (or 15% of the eligible shares) that appear to have never been counted in the latest voting results.

Yahoo! has been mired in controversy for nearly two years now, first with the release of the "Peanut Butter Memo" that aired a lot of internal dirty laundry, then Terry Semel's departure, and more recently the Microsoft (MSFT - Cramer's Take - Stockpickr) and Carl Icahn chapters. Many expected last Friday's shareholder meeting in San Jose to be a raucous affair. There were some pointed questions (including a few asked by me) but not the "fireworks" many in the press expected. With that in mind, coupled with the rather favorable voting results released after the meeting, many commentators gave Yahoo! a thumbs-up for having seemingly stared down its critics.

The press release Yahoo! issued last Friday following its annual meeting suggested that shareholders had more strongly supported Yahoo!'s board compared to 2007. Yet, as I dug into the results over the weekend, it became clear to me that 200 million Yahoo! shares (on average) were not counted in this year's election compared to the 2007 and 2006 votes.

2008 Results

As per Friday's press release from Yahoo!, only 1,046,095,584 out of 1,381,008,701 possible shareholder votes (or 75.8%) were counted in this year's election. As you go through the release, you quickly notice that each of the total votes cast for each director and proposal sum to exactly 1,046,095,584 (or just over a billion) votes.

So, for example, Roy Bostock received 632,023,657 "for" votes and 414,071,927 "withhold" or "against" votes for a total of 1,046,095,584. This means, according to the press release, he received 60.4% of votes "for" his re-election and 39.6% of votes "against" his re-election.

2007 Results

According to Yahoo!'s second-quarter 2007 10-Q, which was filed in August 2007, Roy Bostock received 828,803,221 shares voting "for" and 376,632,150 shares voting "against" out of a total 1,205,435,371. That means he received 68.8% of votes "for" his re-election and 31.2% of votes "against" his re-election.

However, it's notable that 159,339,787 fewer votes were cast this year compared to last year's vote on Roy Bostock.

It seems odd that fewer (13.2% fewer) shares would be voted this year compared to last, when there's been such additional scrutiny on the company in the wake of management's dealings with Microsoft and Carl Icahn. With the additional press, you would expect there would be more shares voted this year compared to last.

If you assume those 160 million shares were voted for Icahn and would have been voted against Bostock's re-election, he would have received 632,023,657 "for" votes and 573,411,714 "withhold" or "against" votes for a total of 1,205,435,371. This means that, this year, he would have received 52.4% of votes "for" his re-election and 47.6% of votes "against" his re-election -- just barely avoiding a vote of non-confidence.

2006 Results

If you go back to the second-quarter 10-Q from August 2006, you see that Roy Bostock received 1,261,316,357 shares voting "for" and 14,859,244 shares voting "withheld" out of a total 1,276,175,601 shares. That means, in that year, he received 98.8% of votes "for" his re-election and 1.2% of votes "against" his re-election.

But, again, there were 230,080,017 fewer votes (18% fewer) cast this year compared to this 2006 vote on Roy Bostock.

If you assume these missing shares would have been voted against Bostock's re-election, he would have received 632,023,657 "for" votes and 644,151,944 "withhold" or "against" votes for a total of 1,276,175,601 (and keep in mind that Friday's press release from Yahoo! said there were 1,381,008,701 shares outstanding as of the record date, June 3, 2008). This means that, this year, Bostock would have received 49.5% of votes "for" his re-election and 50.5% of votes "against" his re-election -- a flat rejection.

You could also make the argument that every possible vote that was going to be cast "for" Bostock's election was counted in Yahoo!'s number of 632,023,657 for this year. That means there were 748,985,044 shares (or 54.2%) out of the total 1,381,008,701 which did not vote "for" his re-election.

The other Yahoo! directors are missing similar numbers of votes compared to 2007 and 2006.
What this means is that we appear to have roughly 200 million Yahoo! shares (averaged between 2007 and 2006) that were not counted in the 2008 results Yahoo! reported last Friday afternoon and then with the new results yesterday.

Where are these missing shares? Were they intended to be counted against the re-election of Yahoo!'s board and not?

Yahoo! needs to account for such a large discrepancy between this year's numbers and the past two years'. It's quite possible that Yahoo! shareholders did vote in record numbers against the Yahoo! board at this year's election but these results are not being shared openly.

Yesterday, I started to receive emails from fellow Yahoo! shareholders complaining of voting irregularities. One shareholder told Kara Swisher:

"I hold 23,000 shares of YHOO. I had 17,000 on the date of record. I voted to 'withhold all' ... I think twice. Then I voted for all of Carl's team. Now I have learned that the Carl votes did not count and a day AFTER the annual meeting I received my new ballot. I wonder how many other people were disenfranchised??? Who can I complain to?? Is this how Jerry got his support??"

I call on Yahoo! to immediately appoint a third party to review and then report back to shareholders exactly how all of the 1.4 billion shares outstanding on the June 3 record date were voted during this election.

If the results truly indicate that this board was re-elected, shareholders can and will accept that. But Yahoo! shareholders expect and deserve to know exactly how their shares were voted with accurate numbers.

One thing is clear at this point: Roy Bostock and Ron Burkle do not have the confidence of the Yahoo! shareholders. They should both immediately resign from the board so that Yahoo! can fill those positions. Doing it at the same time as bringing on the new Icahn nominees to the board before that Aug. 15 deadline would make a lot of sense.

Hopefully, the new Yahoo! board can turn the page on these difficult last four years and navigate through more prosperous times ahead.

Sphere: Related Content

Tuesday, August 05, 2008

Dow Jones: Weak Support For Yahoo Board Seen As Ammunition For Icahn

August 05, 2008: 09:01 PM EST

SAN FRANCISCO -(Dow Jones)- A recount showing shareholder support for Yahoo Inc.'s (YHOO) top officials was significantly less than first reported could provide ammunition for investor Carl Icahn to push for change when he joins the Internet company's board of directors later this month.

Yahoo on Tuesday acknowledged that errors by an independent intermediary in tabulating board-election votes last week resulted in an understatement of the number of votes withheld, an error that dramatically overestimated the degree of shareholder support for Chief Executive Jerry Yang and Chairman Roy Bostock.

Yahoo said that only 66% of votes were cast in support of Yang, down from the 85% it had previously announced. Bostock received a 60% favorable vote, down from 80%, while Yahoo director Ron Burkle saw his share of supportive votes fall from 81% of votes cast to 62%.

Yahoo did not respond to request for further comment.

The errors didn't change the results of the election, but the scale of the votes withheld is a significant blow for the board, which has been under fire ever since it rejected Microsoft Corp.'s (MSFT) $47.5 billion takeover bid in early May. The company is now under increasing pressure to show investors that it has a plan to grow its online advertising business and boost its slumping stock price.

"It provides ammunition for Microsoft and I think Carl Icahn will use this to his advantage," said Eric Jackson, president of Ironfire Capital, an investment firm that represents investors holding 3.2 million Yahoo shares. "I think he would be smart to push for Bostock's ouster."

Jackson, who criticized Yang and Bostock at the company's annual meeting on Friday, noted that Bostock received a smaller percentage of votes than then-CEO Terry Semel did last year. Semel resigned as Yahoo CEO six days later and eventually stepped down from the company's board in January.

Financial analysts, such as CanaccordAdams' Colin Gillis, also said the new results might give Icahn more clout in key decisions.

"The protest vote was pretty strong," agreed Clayton Moran, analyst at Stanford Group. "It sends clear message that shareholders are unhappy with current course."

Moran said the result suggested the company has two or three quarters to show meaningful progress.

Icahn launched a proxy fight to unseat the board, fire Yang and sell the company to Microsoft, but the billionaire investor and Yahoo struck a deal that granted him and two allies seats on an expanded board. They will be appointed sometime before Aug. 15.

Corporate elections in which candidates run unopposed typically produce extremely lopsided victories for incumbents. It is rare for corporate directors to see withheld vote totals beyond the single digits. Walt Disney Co. (DIS) Chairman and Chief Executive Michael Eisner was pressured to resign after about 45% of voters withheld support during a board election in 2004.

Capital Research Global Investors, which owns about 6% of Yahoo shares, demanded a recount Monday after it became convinced that its opposition to Yahoo's board wasn't accurately reflected in the results released last week.

A Capital Research spokesman declined to comment following the release of the new results.

Broadridge Financial Solutions, the firm responsible for processing shareholder votes, said Tuesday that it had made a mistake that caused it to understate the number of shares that Capital Research intended to cast against some of Yahoo's directors.

Capital Research fund manager Gordon Crawford sharply criticized co-founder Yang and Bostock in May for failing to secure a deal with Microsoft. Microsoft had sweetened its offer in May to $33 per share, but then withdrew it after Yang said he wouldn't sell Yahoo for less than $37 per share.

Yahoo shares have plummeted more than 30% since Microsoft walked away, cutting the Internet company's market value by about $20 billion.

On Tuesday, Yahoo's stock rose 44 cents to $19.82.

-By Scott Morrison; Dow Jones Newswires; 415-765-6118; scott.morrison@

-By Jay Miller, Dow Jones Newswires; 201-938-2331;

Sphere: Related Content

Associated Press: Revised Yahoo vote reveals more disdain for board

By MICHAEL LIEDTKE – 1 hour ago

SAN FRANCISCO (AP) — Yahoo Inc. has revised the results of a closely watched shareholder vote on its much-maligned board after discovering an error by a tabulation firm grossly exaggerated the number of ballots backing the directors.

The changes made Tuesday revealed that 200 million votes opposing the re-election of Yahoo Chief Executive Jerry Yang, Yahoo Chairman Roy Bostock and another director, Ron Burkle, were improperly registered as supportive at the company's annual meeting last week. The miscalculations also caused 100 million votes to be miscast in support of two other directors, Arthur Kern and Gary Wilson.

No mistakes were detected in the votes for Yahoo's four other incumbent directors — Eric Hippeau, Vyomesh Josh, Mary Agnes Wilderotter and Robert Kotick, who is about to give up his seat to make room for dissident investor Carl Icahn.

The recount didn't alter the outcome of last week's election, which retained Yahoo's directors despite shareholder anger about the board's handling of a now-withdrawn $47.5 billion takeover bid from Microsoft Corp.

But the change adds more punch to the protest against the Yahoo board.

"It's important for Yahoo's board to understand there is still pressure on them," said Eric Jackson, a hedge fund manager who represents a group of stockholders with about 3.2 million Yahoo shares. "I thought Yahoo's board was kind of let off the hook last week when they didn't really deserve to be."

Nearly 40 percent of Yahoo shareholders voted against Bostock under the revised results, an unusually harsh rebuke of a board chairman. The original results listed 20 percent of Yahoo's shareholders opposing Bostock.

Yahoo named Bostock chairman in January even though more than 30 percent of Yahoo shareholders wanted him off the board in a vote held last year.

Nearly 34 percent of Yahoo shareholders expressed their displeasure with Yang, according to the recount, up from 15 percent in the original results.

The dissent indicates more shareholders are likely to call upon Yahoo's board to replace Yang as CEO unless he can prove the Internet company he co-founded is worth more than Microsoft offered to pay three months ago. Yahoo's market value is nearly $20 billion below Microsoft's last offer, which translated into $33 per share.

Yahoo shares gained 44 cents to $19.82 Tuesday.

Icahn already has made it clear that he believes Yahoo needs a more experienced CEO than the 39-year-old Yang.

Burkle, who became a billionaire running supermarkets, proved to be nearly as unpopular as Bostock. He was opposed by nearly 38 percent of Yahoo's voting shareholders, up from 19 percent in last week's tabulation. Kern was opposed by nearly 32 percent, up from 22 percent under last week's tally.

Burkle, Kern and Bostock sit on a compensation committee that approved a wide-ranging employee severance plan in February shortly after Microsoft made its unsolicited takeover bid. The costs of the severance plan could hurt shareholders by making Yahoo less valuable to Microsoft or the potential acquirers.

The miscounted votes might not have been detected if not for an inquiry lodged Monday by Capital Research Global Investors, which owns a 6.2 percent stake in Yahoo.

Convinced that its opposition to Yahoo's board wasn't reflected in last week's vote, Capital Research demanded an audit from Broadridge Financial Solutions, the processing firm responsible for casting the ballots for a wide range of institutional investors.

Broadridge acknowledged Tuesday that a printing mix-up caused it to understate the number of shares that intended to vote against Yahoo directors. The firm didn't elaborate on how many shareholders besides Capital Research were affected.

Broadridge processes votes in about 14,000 annual meetings each year, but hasn't found any similar mistakes in a review covering the past 18 months, said Chuck Callan, the Lake Success, N.Y.-based company's senior vice president of regulatory affairs. "This was a unique, isolated incident," he said.

Capital Research spokesman Chuck Freadhoff declined comment Tuesday.

Capital Research's fund manager, Gordon Crawford, has ridiculed Yang and Bostock for their tactics in the Microsoft talks. Microsoft withdrew its takeover offer, valued at $33 per share, three months ago after Yang demanded $37 per share with Bostock's backing.

Yahoo's board is about to be expanded to 11 people to include Icahn and two of his allies. Icahn still hopes to revive talks with Microsoft.

Sphere: Related Content

Washington Post: Major Yahoo Shareholder Concerned Over Voting Irregularities

Joseph Weisenthal
Tuesday, August 5, 2008; 1:07 AM

A very bizarre twist in the ongoing Yahoo ( NSDQ: YHOO) saga, sure to to set off the tinfoil hat crowd? Major shareholder Capital Research Global is concerned about possible voting irregularities following last Friday's shareholder vote count. Kara Swisher first reported the news this afternoon that sources close to Capital Research thought there was something funny about the stated results. Now Reuters is reporting the same. The gist: Assuming that Capital Research voted most of its 15 percent stake against Yang and Roy Boystock, then virtually every single other share would've had to be voted in their favor. Yang, for example, was elected with over 85 percent of the votes cast. Bostock got a bit less than 80 percent. In a year where a lot of shareholders are clearly frustrated with management, this level of support would be pretty surprising. More broadly, it's surprising that Yang and Bostock both got more support than they did last year.

Kara also notes another voting anomaly, which is that lest votes were cast this year than last. Given the hubbub leading up to the vote that's a bit of a surprise, though as she notes it could be because in an uncontested election, shares aren't automatically cast.

However this turns out?and the issue is not with Yahoo itself, but with the outside vote tabulators?it's unlikely to have a major effect on the actual outcome. But while 85 percent looks like a clear mandate, 70 percent support (or potentially 65 percent in the case of Bostock) starts to look a lot more like a no confidence vote.

Update: Activist investor Eric Jackson?who actually bothered showing up at the meeting to voice his displeasure with the board?wrote about the seemingly funny math on his blog last night. He walks through the numbers from this year, 2007 and 2006 to show why things look weird. However this turns out, it looks like the Tech Journalists Full Employment Act Of 2008 is getting some kind of extension.

Sphere: Related Content

Reuters: Big holder Capital Research wants Yahoo vote probe

Anupreeta Das and Eric Auchard , Reuters
Published: Monday, August 04, 2008

SAN FRANCISCO (Reuters) - One of Yahoo Inc's largest and most critical shareholders, Capital Research Global Investors, said on Monday it asked for a probe of last week's shareholder vote, a move that calls into question the strong showing for Chief Executive Jerry Yang.

Yang has been under pressure for months over failed negotiations to sell the company to Microsoft Corp and regarding questions about his leadership, but Friday's shareholder vote suggested the tide was turning in his favor.

News of questions over the vote was first reported by the D: All Things Digital blog. AllThingsD cited unnamed sources saying two major Capital Research and Management funds holding about 16 percent of Yahoo shares had recommended withholding their votes in favor of Yang in protest over his performance.

Capital Research Global Investors, the fund group led by portfolio manager Gordon Crawford, was more strongly opposed to Yang than its sister fund, Capital World Investors, which was less critical, according to sources quoted by AllThingsD.

Yang received 85.4 percent support in the results announced on Friday, with the remaining votes withheld in protest.

"I guess Jerry Yang didn't come out of the meeting as unscathed as it seemed," Canaccord Adams analyst Colin Gillis said of the uncertainty raised by calls for a recount.

Investors holding nearly 76 percent of Yahoo's 1.38 billion shares gave solid support for all nine board directors, with the lowest level of support for long-time member Arthur Kern, who drew 77.9 percent.

Sanford C. Bernstein analyst Jeffrey Lindsay said informal polling his firm had done among major investors showed widespread dissatisfaction with Yahoo's handling of talks with Microsoft, which the broker expected to translate into a more substantial number of withheld votes for directors.

"We were surprised at the very high vote counts that were pro Jerry Yang," Lindsay said. "Certainly the final results seemed very different from the exit polls."

Eric Jackson, a small shareholder and vocal critic of Yahoo management, said in a blog post-dated Monday that there appeared to be a major discrepancy in the total number of votes cast in the 2008 election compared with 2007 or 2006.

For example, around 167 million fewer votes were cast this year in voting on whether to re-elect Yang than were cast last year.

"It seems odd that fewer shares would be voted this year compared to last, when there's been such additional scrutiny on the company in the wake of the dealings with Microsoft and Carl Icahn," wrote Jackson, who runs the investment firm Ironfire Capital and owns 250 Yahoo shares, but who leads a grassroots group of dissident shareholders that collectively own 3.2 million shares of the company.

Yahoo said in a statement it was not party to any errors that may have been made in the voting process.

"The independent inspector of elections certified the results of the election and Yahoo accurately announced those results," the company said in an e-mailed statement.

But Yahoo left open the possibility that some intermediary may have made a mistake.

"Yahoo did not participate in the execution of the votes and was not a party to any errors which may have been made either by a voting institution or a proxy processing intermediary acting on behalf of banks, brokers and institutions," it said.

Crawford, whose Capital Research Global Investors owned 6.2 percent of Yahoo as of early June, said in May he was "extremely angry" at Yang over the breakdown of talks with Microsoft. Capital World Investors held 9.8 percent of Yahoo shares, according to recent regulatory filings.

A Capital Group spokesman said the Crawford-run fund had inquired with Broadridge Financial Solutions Inc, a financial services intermediary that handles proxy processing services for it.

"Capital Research Global Investors asked Broadridge Financial to double-check the votes it transmitted to Yahoo on its behalf," said Chuck Freadhoff, a spokesman for the Capital Group and its affiliates. The spokesman declined to comment on how Capital-affiliated funds had cast their votes.

Broadridge declined to comment.

Gillis at Canaccord Adams said a somewhat lower vote was unlikely to materially weaken Yang's position, which looks secure unless Yahoo's third-quarter results fall short amid a worsening economy or if the stock remains stuck around $20 in the months to come.

"I think Jerry (Yang) is still firmly in place until some deviation happens from the plan Yahoo has set forth," he said.

(Additional reporting by Muralikumar Anantharaman in Boston; Editing by Toni Reinhold, Braden Reddall & Ian Geoghegan)

Sphere: Related Content

Monday, August 04, 2008

eWeek: Why Microsoft Will Try Again for Yahoo in 2009

By Chris Preimesberger

Insider Eric Jackson believes that it's only "the second inning" in the revival of Yahoo. He expects Microsoft to return with yet another merger proposition for Yahoo next year because Microsoft still needs big help in online services.

Now that the annual shareholders meeting is over, the attendees have been "Yanged" and headed back home, and the corporate propaganda machine is taking a vacation, what's next for Yahoo and its embattled leadership?

CEO and co-founder Jerry Yang--who is adept at calming investor nerves and charming analysts and media types alike, thus the "Yanged" observation--will tell you that things are looking up big time, because the company "offers a total Web platform that is unmatched anywhere."

Chairman of the Board Roy Bostock's answer will be in typical executive-speak: "We now look forward to executing on our strategy and continuing to build our great company. Yahoo has made significant strides in executing on its strategy [in the last year], performing particularly well in light of the challenging circumstances of the past six months."

But ask Eric Jackson, president of one of the company's biggest investors, Ironfire Capital--which owns about 3.2 million shares--and you get a very different take.

"The company needs to make some fundamental changes if it's going to improve its performance and stock price. Yahoo is too bloated right now; they need to reduce head count, focus on core businesses and divest some of their holdings that aren't making any money," Jackson told me after the meeting. "But it's only about the second inning [of the company comeback], although it's been the second inning for a long time. There have been a lot of pitches and foul balls."

Jackson said people should go back and read the November 2006 "peanut butter memo" written by Brad Garlinghouse, Yahoo senior vice president of communications, communities and front doors, and published in the Wall Street Journal. Here's an excerpt:

"I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do, and thus we focus on nothing in particular. ... I hate peanut butter. We all should."

"That came out almost two years ago, but it's as fresh today as it was back then," Jackson said. "They've been doing stuff, but obviously most of those criticisms are still valid today. It's going to take a lot of work [to get back on track] and new leadership--and preferably from the outside."

Jackson, Garlinghouse and billionaire investor Carl Icahn--the key promoter of the failed Microsoft takeover--aren't alone in thinking that big changes have to come for Yahoo to regain the glory it had in the pre-bubble days, when its stock was in the $80 to $100 range. But they were unable to rally the support of enough additional shareholders to make any changes on the board and at the CEO position this year.

Icahn will be replacing resigning board member Bobby Kotick in a few weeks, and two other positions on the board will be decided upon within that same time frame.

Over the next year, the new 11-person board will need to re-examine the company's overall focus, take a close look at head count, and decide how to refine or dispose of some products so that they don't compete with each other in the open market.

Another Microsoft Takeover Attempt in the Works?

They also may have to deal with another overture from Microsoft, if one believes Jackson.

"We overplayed our hand with Microsoft. Yes, it would have been a great deal for the shareholders and for the company," he said. "We should have taken the deal [at $31 per share, or about $47 billion in cash]. Obviously, they [the board] disagree with what I think, but this doesn't surprise me. They think a poison pill is a good idea. ... But I don't think it's completely dead. I believe … [Microsoft] will come back around next year and try again."


"I believe it is simply due to Microsoft's weakness in its Online Services Division. You look at their last quarter's numbers for that group, and it's clear that they are falling further behind. Their desktop business also showed deceleration. Yahoo helps with both problems," Jackson said.

Microsoft has been trying the go-it-alone-and-hire-more-engineers approach for 12 years, Jackson said. "It's not working and will not catch Google."

He added an anecdotal reason why he believes this.

"I had never used Microsoft search before a couple of weeks ago. I sat down to try it and then realized I had no idea what to type in. I tried, but the only search bar was to help me search MSFT internal directories. I then remembered seeing some advertisement for 'Live Search,' so I tried It was some spam site. Finally, I tried, and the results were no good. I will never use it again. When I want to Google or find Yahoo, I know what to punch in. Simple as that," Jackson said.

Keeping It Simple Works Wonders

On the Internet, simplicity cannot be overstated. Yahoo and Google both have mastered the ostensibly "simple" act of searching the Web. Thus, they continue to run away from the competition.

Yahoo purports that at any given time on the Internet, about 12 percent of all Web surfers are on a Yahoo-owned page. How anyone can possibly figure that out is beyond my comprehension, but that's what its salespeople tell potential advertisers.

There's no question that the company still is a media giant with which to be reckoned. However, by all accounts, 2009 looks to be a crucial year for Yang, Bostock, President Sue Decker & Co. as they forge ahead with improving products, services, profits and stock prices.

Can they do it? Certainly. Will they do it? That's anybody's guess.

If the company doesn't perform, Jackson, Icahn and the other dissidents will have another year's worth of ammo in their weapons when they come gunning for the top executives again next August. You can bet they won't stand to being "Yanged" once again.

Sphere: Related Content

BoomTown: Kara Swisher Video from Yahoo! Annual Meeting

I had the pleasure of chatting with Kara Swisher after last week's Yahoo! Annual Meeting in San Jose:

Sphere: Related Content

Missing: 200 Million Yahoo! Shares from Last Friday's Annual Meeting

The press release following last Friday's Yahoo! Annual Meeting suggested that shareholders had more strongly supported Yahoo!'s board compared to 2007. However, there appear to be 200 million Yahoo! shares (on average) which were not counted in this year's election compared to the 2007 and 2006 votes. If those 200 million shares had been voted for Icahn's proxy (before he called a truce with Yahoo!), they would have been thrown out. If you assume those votes would have gone "against" most or all of the incumbent Yahoo! board, Friday's results might have been just as or more negative this year compared to last.

2008 Results

As per Friday's press release from Yahoo!, only 1,046,095,584 out of 1,381,008,701 possible share votes (or 75.8%) were counted in this year's election. As you go through the release, you quickly notice that each of the total votes cast for each director and proposal sum to exactly 1,046,095,584 (or just over a billion) votes.

So, for example, Roy Bostock received 832,023,657 "for" votes and 214,071,927 "withhold" or "against" votes for a total of 1,046,095,584. This means, according to the press release, he received 79.5% of votes "for" his re-election and 20.5% of votes "against" his re-election.

2007 Results

According to Yahoo!'s Q207 10-Q, which came out in August 2007, Roy Bostock received 828,803,221 shares voting "for", 376,632,150 shares voting "against" out of a total 1,205,435,371. That means he received 68.8% of votes "for" his re-election and 31.2% of votes "against" his re-election.

However, it's notable that 159,339,787 fewer votes were cast this year compared to last year's vote on Roy Bostock.

It seems odd that fewer (13.2% fewer) shares would be voted this year compared to last, when there's been such additional scrutiny on the company in the wake of the dealings with Microsoft and Carl Icahn. With the additional press, you would expect there to be more shares voted this year compared to last.

If you assume those 160 million shares were voted for Icahn and would have been voted against Bostock's re-election, he would have received 832,023,657 "for" votes and 373,411,714 "withhold" or "against" votes for a total of 1,205,435,371. This means that, this year, he would have received 69.0% of votes "for" his re-election and 31.0% of votes "against" his re-election -- almost exactly the same "protest" vote as last year.

2006 Results

If you go back to the Q206 10-Q from August 2006, you see that Roy Bostock received 1,261,316,357 shares voting "for" and 14,859,244 shares voting "withheld" out of a total 1,276,175,601 shares. That means, in that year, he received 98.8% of votes "for" his re-election and 1.2% of votes "against" his re-election.

But, again, there were 230,080,017 fewer votes (18.0% fewer) cast this year compared to this 2006 vote on Roy Bostock.

If you assume these missing shares would have been voted against Bostock's re-election, he would have received 832,023,657 "for" votes and 444,151,944 "withhold" or "against" votes for a total of 1,276,175,601 (and keep in mind that Friday's press release from Yahoo! said there were 1,381,008,701 shares outstanding as of the record date, June 3, 2008). This means that, this year, Bostock would have received 65.2% of votes "for" his re-election and 34.8% of votes "against" his re-election -- a higher "protest" vote than last year.

You could also make the argument that every possible vote that was going to be cast "for" Mr. Bostock's election was counted in Yahoo!'s number of 832,023,657 for this year. That means there were 548,985,044 shares (or 39.75%) out of the total 1,381,008,701 which did not vote "for" his re-election. That is very close to the 42% of votes which were cast against Michael Eisner's re-election at Disney the year he fought Roy Disney.

The other Yahoo! directors are missing similar numbers of votes compared to 2007 and 2006.

What this means is that we have roughly 200 million Yahoo! shares (averaged between 2007 and 2006) which were not counted in the 2008 results which Yahoo! reported last Friday afternoon.

Where are these missing shares? Were they intended to be counted against the re-election of Yahoo!'s board and not?

Yahoo! needs to account for such a large discrepency between this year's numbers and the past two years'. It's quite possible that Yahoo! shareholders did vote in record numbers against the Yahoo! board at this year's election but these results are not being shared openly.

I call on Yahoo! to immediately appoint a third-party to review and then report back to shareholders exactly how all the 1.4 billion shares outstanding on the June 3rd record date were voted during this election.

If the results truly indicate that this board was re-elected, shareholders can and will accept that. But Yahoo! shareholders expect and deserve to know exactly how their shares were voted with accurate numbers.

Sphere: Related Content

Sunday, August 03, 2008

What Do Yahoo!s Think? What's Right and What's Wrong at Yahoo!?

Throughout these past weeks of the Yahoo! proxy fight, we've heard a lot of opinions about Yahoo! from lots of stakeholders except one group: current Yahoo!s.

We've heard Roy Bostock and the board defend themselves for the handling of the Microsoft deal. We've also heard Microsoft's side of the story.

We've heard from Carl Icahn, through his colorful letters, and other shareholders including me. We've also heard from Jerry and Sue Decker.

We've even heard from the stock analysts and industry analysts -- even though they have no skin in the game (although neither do some members of Yahoo!'s board -- but Mr. Bostock and Mike Callahan assured us on Friday that those board members now follow a rule that they have 3 years in which to get some skin in the game).

But, we have never really heard from the Yahoo! employees through these haggard last few weeks. Some might argue, they have the most skin in the game of any Yahoo! stakeholder.

For investors, we have diversified portfolios. Yahoo! is but one position in many we hold. For employees, Yahoo! is their livelihood. They have the most to gain if the company turns itself around; and the most to lose if it doesn't.

The press always wants to hear from this group to round out the varied points of view they display in their stories. But employees decline, for fear of their jobs.

Occasionally, you see a comment from a Yahoo! employee leaked to Kara Swisher, TechCrunch, or Valleywag. However, there is no place where a community of Yahoo! employee voices can converge to speak (anonymously) in a way which allows thoughtful exchanges of points of view.

For example, Jerry says that Yahoo! has a plan and is executing against it. I have heard from several Yahoo! employees that execution is (and has historically been) a major problem. Who's right? Maybe I spoke to a few people with axes to grind. Maybe the vast majority of the 14,000 Yahoo!s agree with Jerry - or maybe they don't.

As a shareholder, I sure would value reading their opinions in their full text, unedited. Because, here's the thing: pointing out a problem doesn't make it worse, it helps fix it. If there's a problem, shine a light on it. Sunlight is the best disinfectant.

Therefore, I would like to offer this blog "Breakout Performance" for such a purpose -- pointing out what's right and what's wrong with Yahoo! To do so, feel free to comment anonymously to this post. Or, if you prefer, send me an email and I will post several comments (without email addresses) in future posts to this site.

If you like this idea but prefer to share your thoughts on a different site or in a different way, let us know below the means you think would be most effective. I don't really care where the comments go.

Let me strongly state that I think it's important that they be in one spot. When different voices of employees get scattered across Valleywag, Swisher, TechCrunch, Silicon Alley, and other outlets, they lose their power, because most will read only one here or there, not all of them together.

Let's hear from the employees who are the heart and soul of Yahoo! What's right and what's wrong with your company? Feel free to complain if you think it's deserved, but let's also be constructive. What needs to change and how could it change? What specifically should happen to make this company great again?

You tell us. Don't let us tell you.

Sphere: Related Content

NY Times: Yahoo Is Still Searching for, Well, Yahoo

Published: August 3, 2008

JERRY YANG, the soft-spoken chief executive of Yahoo, rarely becomes animated, at least in public. But ask him about his company’s lackluster performance over the past year, and he will begin to pound the table — albeit ever so lightly — punctuating his answer with a dose of impatience.

“We have a plan,” Mr. Yang said in an interview last week at Yahoo’s headquarters here. “We want to grow the business over a three- to five-year period. We are executing against that plan. And we are still doing that despite all the stuff that’s happened to us.”

All the stuff that’s happened, of course, refers to the turbulence that has engulfed Yahoo since Jan. 31, when Microsoft made an unsolicited takeover bid. At the time, conventional wisdom was that Microsoft and its hard-charging C.E.O., Steven A. Ballmer, would quickly swallow the company.

But Mr. Yang has emerged as an unlikely survivor — at least for now. He beat back Mr. Ballmer, whose offers to buy all or part of Yahoo were considered inadequate by Mr. Yang and his board. And he rebuffed Carl C. Icahn, the activist shareholder, who tried to seize control of Yahoo but settled for three seats on an expanded board.

Even so, the question remains whether Mr. Yang is the right man for the job.

Many shareholders are furious with him. With the stock trading at about $20, far below the $33 a share Microsoft offered in May, the failed merger negotiations have cost Yahoo investors nearly $20 billion. “I think they had an opportunity to get something done in the palm of their hand, and they bungled it,” said Eric Jackson following the company’s annual shareholder meeting on Friday.

Mr. Jackson is part of an individual shareholder group that collectively holds about 3.2 million Yahoo shares. On Friday, investors controlling about 15 percent of the shares represented at the meeting voted against Mr. Yang’s re-election to the board — signifying lingering concerns about his leadership.

Mr. Yang says he understands shareholders’ frustrations. But he says Yahoo was willing to sell itself at the right price and blames Microsoft for the breakdown in talks.

For now, he says he’s looking forward to giving his full attention to Yahoo and transforming it into the most popular “starting point” for Internet users. The company says it’s also developing a powerful new advertising system that can place ads on Yahoo and other sites across the Internet.

“I am more determined and more excited than ever to see those changes through,” he said.
For many shareholders, the idea that Mr. Yang and his team are changing Yahoo for the better is little more than an illusion.

“These guys are just drinking their own Kool-Aid,” said Mark Nelson, a co-founder of Mithras Capital, which owns about 1.7 million Yahoo shares. “They don’t get it. They don’t understand the realities of their business.”

MR. NELSON’S comments echo the views of many shareholders and analysts who say that under Mr. Yang, a co-founder of Yahoo in 1994, the company has done little to restore its competitive position with respect to Google. They say Yahoo has been indecisive, resulting in incremental changes.

Yahoo’s results have continued to disappoint. Revenue grew 6 percent in the most recent quarter versus the same period last year, far slower than Google’s 39 percent. And Yahoo’s stock has continued a steady slide that began in January 2006 under Terry S. Semel, then the chief executive. The shares are down about 27 percent, near a four-year low, since Mr. Yang took over 13 months ago. In the same period, the Nasdaq has lost 11 percent.

It is not clear that Mr. Yang will get the time he needs to carry out his plan. Microsoft could bid anew for Yahoo or, more likely, its search business. If it does, shareholder pressure on Yahoo to do a deal is certain to be intense. And Yahoo counts Mr. Icahn, and soon, two of his allies, on its 11-member board.

Mr. Icahn did not return calls seeking comment. Writing on his blog on Thursday, he said he hoped to work with Mr. Yang to enhance value. But before he cut a deal on July 21 to join the Yahoo board, he favored both selling Yahoo’s search business to Microsoft and removing Mr. Yang.

Yahoo’s chairman, Roy Bostock, however, said the board has no plans to replace its C.E.O. “I have absolute confidence in Jerry and the management,” he said in an interview last week.
At last year’s annual meeting, Mr. Semel vowed to remain in place, with the board’s backing. He stepped down a week later.

Mr. Yang’s appointment as chief executive brought hope to Yahoo employees and shareholders. Under Mr. Semel, the company had become slow and bureaucratic. It had failed to jump on Internet trends like online video and social networking. Most important, it was falling further behind Google in the lucrative online search business.

As a founder, Mr. Yang, a polite and consummate “nice guy,” was well liked inside Yahoo. An engineer with a keen vision of where the Internet was heading, he was seen upon becoming C.E.O. as having a shot at reviving a company that by many measures remains one of the most successful businesses on the Internet. With some 500 million users worldwide, Yahoo is one of the Web’s most visited sites, as well as the top Web e-mail service, and runs top-ranked news, sports and finance sites.

It remains No. 2 in search and is the largest seller of banners and other graphical ads online.
Even last year, some questioned Mr. Yang’s lack of operational experience. Unlike Bill Gates, Steve Jobs and other successful tech entrepreneurs who remained at the helm of the companies they founded, Mr. Yang and the co-founder David Filo recognized early on that they didn’t have the skills to run Yahoo. They took the titles of “chief Yahoos” and hired others — Tim Koogle first, and Mr. Semel later — to run the company. Mr. Yang acted as a strategic adviser, while Mr. Filo worked on technology.

After 13 years in the wings, Mr. Yang, 39, said last year that he finally felt prepared to run Yahoo.

But critics say he has been slow to make tough and necessary choices. For instance, Yahoo pursued an advertising partnership with Google, which many investors had long recommended, only after Microsoft made its bid. And they say Mr. Yang and his team have been more focused on plotting new strategies than on carrying them out.

Shortly after taking over, Mr. Yang began a 100-day strategic review of Yahoo’s business. He promised investors that there would be “no sacred cows,” raising expectations that he would finally narrow the focus of a company that was trying to be all things to all people on the Web.
He appeared to back the imperative to trim some of Yahoo’s products and services. To emphasize the point, he invited Mr. Jobs, the chief executive of Apple, to give a talk to Yahoo’s approximately 300 vice presidents last September.

Looking back at his 1996 return to Apple, Mr. Jobs spoke of his recipe for reviving it. That recipe included painful cuts — from 16 product lines to 4 — to restore financial health. Mr. Jobs also advised Yahoo executives to keep a reserve of “dry powder” to be able to seize new opportunities, as Apple eventually did with the iPod.

Many current and former Yahoo executives, who agreed to speak only on condition that they remain anonymous for fear of compromising their jobs or relationships, said Mr. Jobs’s talk was inspirational. But those executives said Mr. Yang did not follow Mr. Jobs’s prescription. The Yahoo chief charged a group of executives with identifying projects that could be cut. But when the group made its recommendations, including closing a long list of properties like and television and education sites, Mr. Yang stalled, according to the current and former executives.

Then, in late January, he stunned Wall Street, saying that 2008 profits would be lower as Yahoo planned to invest heavily in a new display advertising system and a project to rewire the company’s technological underpinnings. Investors did not think that Yahoo had the dry powder to fire.

“They kind of shot themselves in the foot,” said Mark Mahaney, an analyst at Citigroup. “They surprised Wall Street with this major investment initiative. If they had announced it coming out of the 100-day review it would have been more tolerated.”

Mr. Yang’s announcement sent Yahoo shares down nearly 10 percent, giving Microsoft an opening. The next day, he received an urgent call. It was Mr. Ballmer, to alert him that the next morning, Microsoft would make public its bid for Yahoo.

Failing to anticipate Wall Street’s reaction was “naïve” and “left Yahoo exposed to Microsoft,” a Yahoo executive said.

MR. YANG dismissed the criticism, saying that he had no control over the timing of Microsoft’s actions and that the investments are necessary.

His cachet with some of his top lieutenants, meanwhile, was eroding. A series of corporate reorganizations engineered by Susan L. Decker, Yahoo’s president, created instability, leading to a long list of departures of senior staff members. Ms. Decker and Mr. Yang defend the reorganizations as necessary to make Yahoo more responsive.

Some executives still with the company say they are dismayed that two new projects, called Aikido and Judo, amount to yet another round of strategy meetings aimed at re-evaluating Yahoo’s investments in its consumer and advertising businesses.

“It kind of implies a lack of confidence in the plan that’s out there,” one senior executive said.
With the fights with Mr. Icahn and Microsoft over, at least for now, some Yahoo employees say Mr. Yang has appeared more upbeat and confident.

He laughed at that observation, saying it probably says more about the mood of Yahoo than about any change in himself. Employees are more upbeat because Yahoo hit its financial projections for two quarters, despite the turmoil and a slow economy, Mr. Yang said. And Yahoo has delivered a long list of projects, he said, like improvements to its search offerings and an early version of its new advertising system.

For investors, a vital question is whether Mr. Yang’s plan to expand Yahoo can ever deliver the kind of value that Microsoft offered. Many of Yahoo’s largest shareholders wanted to sell the company to Microsoft. But they are divided over whether Yahoo or Microsoft should be blamed for the failed negotiations.

A turning point came on May 3 at a meeting in Seattle. Mr. Ballmer had just raised Microsoft’s offer to $33 a share, or $47.5 billion. Mr. Yang said the board wanted $37 a share.

The Yahoo team expected that the meeting would be the beginning of serious talks. But Mr. Ballmer said Yahoo’s counteroffer was a sign it was not interested in a deal. An hour after Mr. Yang returned to California, Mr. Ballmer called to say he was withdrawing Microsoft’s offer.
Yahoo has since said it would consider a sale at around $33 a share. Microsoft has insisted it’s no longer interested. Instead, it has tried to buy Yahoo’s search business. Yahoo has said those offers were not in shareholders’ best interest.

The companies blame each other for the failure. “Right from the beginning we were open to doing a deal,” said Mr. Bostock, the Yahoo chairman. “It was simply a matter of getting the right price and getting the deal terms negotiated. They started backing off early on in the process.”
Microsoft sees it differently. “Microsoft diligently pursued a proposed acquisition from the day we made our offer on Jan. 31 to the day we withdrew it on May 3,” Bradford L. Smith, Microsoft’s general counsel, said by e-mail. But Yahoo’s management and board failed to engage in meaningful negotiations for weeks, Mr. Smith added. Some shareholders are predicting — or perhaps merely hoping — that one way or another, Mr. Yang will take the fall for the failed deal.

“My belief is that if within a month or two there isn’t something transforming in the works, the major shareholders will put enough pressure on the company that he will be forced out,” said Mr. Nelson at Mithras Capital.

Sphere: Related Content