Short-termism has been and continues to be a worsening problem in the corporate arena. More often than not corporations submit to shareholder pressures acting impulsively to secure profits today, instead of rationally planning a stable, long-term growth and value strategy.[1] The existence of hedge fund activism seems to compound short-termism due to its structure of maximizing profits in the here and now.[2] When reading the Yahoo! case study it became apparent that this struggling corporation was propped up on toothpicks falling victim to hedge fund activism orchestrated by Third Point’s founder and CEO Daniel Loeb.[3]
Ever since Yahoo!’s fall from grace after the Dot-Com Bubble, when its share price fell from a record high of $118.75 down to an all-time low of just $8.11 in less than a year, the company struggled to rebuild itself.[4] Since the departure of co-founder Jerry Yang as CEO in 2009, Yahoo!’s executives didn’t understand what the company’s true corporate purpose was.[5] This was especially evident when Google alumni Marissa Mayer took control of the company with an initial reaction of, “What is Yahoo!?” polling its users garnering a response of, “their home on the Internet.”[6] It seems alarming that the entering CEO of a Fortune 500 company isn’t quite sure what its purpose or mission is.
Shifting focus back to before Mayer became CEO, the company was in a state of suspension in the years leading up to Third Point’s threatened proxy contest. They had botched the merger talks with Microsoft, which in hindsight seems like a missed golden opportunity.[7] Yahoo! continued to make small and less lucrative acquisitions than their main competitor Google.[8] Ultimately, the Board of Director’s continued failed attempts to reposition the company set the stage for Loeb’s investor activism.[9] The company was clearly weak and shareholders had low confidence in the Board’s management capabilities. Although it took over a year for Loeb’s threats of a proxy contest to prevail, he took control and made it seem as though his intention was restructuring and long-term growth.[10] Third Point even backed this position by presenting examples of several holdings that it has held for “many years at a time.”[11] Third Point’s hedge fund activism follows Lucian A. Bebchuk’s model in The Long-term Effects of Hedge Fund Activism, in that the intervention coincided with the underperformance of Yahoo! relative to its largest industry competitor—Google.[12]
When Daniel Loeb finally infiltrated the Board of Directors at Yahoo! initially the new management did improve the company’s share price.[13] Yahoo! just couldn’t see that this improvement was carefully orchestrated resulting in Third Point’s lucrative 2-year turnaround of $600 million in profit.[14] Not only did this bout with hedge fund activism leave the company short of talent on the Board of Directors, but it also communicated to investors a lack of confidence in the future of the company. The share buyback of 40 million of Third Point’s shares was a better strategy for Yahoo! and Loeb collectively than dumping the shares on the market, but still took its toll. The reason Yahoo! engaged in this share buyback was to instill confidence in the company. As an example of this strategy, Warren Buffet invests 99% of his net wealth in his own company, Berkshire Hathaway, instead of diversifying which helps bolster investor confidence in the company.[15] When an institutional investing giant jumps ship, others are sure to follow, leaving a depressed share price in their wake.[16]
Shareholder activists like Loeb care deeply about short-term profits.[17] In the end, as long as Third Point made a $600 million profit off the share buyback for the fund’s investors, Third Point had nothing but happy customers. Although Bebchuk argues that myopic-activist claims are unfounded, when using the Yahoo! case study as a narrowly focused lens it is difficult to agree with his position.[18] Bebchuk explains that performance during the five-year period following an activist intervention shows improvement.[19] Although Yahoo!’s stock price is up from pre-activist departure levels at roughly $45 per share, this does not provide concrete evidence for Bebchuk’s performance theory seeing as Verizon announced plans for a takeover in July of 2016, just five months after the company’s share prices had plummeted to $27.04 in February of 2016.[20] Yahoo! has failed to come close to the pre-dotcom performance levels consistently for over 15 years now, and just recently clung onto the Verizon life-preserver it so desperately needed.
In Part IV of Bebchuk’s analysis he examines whether or not shareholder activists jump ship before the negative returns result after the initial spike, thus leaving long-term investors in a worsening position.[21] Third Point followed this model like a well-directed play. The fund infiltrated the Board of Directors, investor confidence rose thus creating a spike in Yahoo!’s stock price, and before any negative stock returns could occur, Third Point and all of the initial Board nominees jumped ship with $600 million in profits.
I would further question Bebchuk’s position that it is the activist intervention that provides improved performance in the following five-year period.[22] Although Daniel Loeb was partially responsible for bringing Marissa Mayer onboard at Yahoo! can it really be said that Third Point’s intervention is now responsible for its improved stock price? Shouldn’t some if not all of that credit be given to Mayer who has stuck by Yahoo! in its recent rollercoaster ride? Some of that rise is certainly attributable to Mayer’s 2014 sale of large portions of Yahoo!’s shares in Alibaba, which caused the November 2014 spike in share price.[23] More likely, the recent rise in performance should be attributed to Verizon’s takeover announcement in July of 2016 that is still being negotiated.[24] For the foregoing reasons, the Yahoo! case study provides weak support for Bebchuk’s anti myopic-activist theory.
[1] Bill George, Are Companies Succumbing to Shareholder Pressures?, The Huffington Post (Sept. 22, 2015, 1:00 PM), http://www.huffingtonpost.com/bill-george/are-companies-succumbing_b_8177976.html.
[2] Justin Kuepper, Activist Hedge Funds: Follow the Trail to Profit, Investopedia. http://www.investopedia.com/articles/mutualfund/06/activisthedgefund.asp.
[3] History of Yahoo!, Wikipedia, https://en.wikipedia.org/wiki/History_of_Yahoo!.
[4] Id.
[5] Matt McAlister, Yahoo’s Problem? It Lacks Purpose, The Guardian (Dec. 10, 2015, 11:30 AM), https://www.theguardian.com/media-network/2015/dec/10/marissa-mayer-yahoo-purpose-sale.
[6] History of Yahoo!, supra note 3.
[7] DEALBOOK, Icahn Says Yahoo ‘Completely Botched’ Microsoft Talks, N. Y. Times (May 15, 2008, 9:52 AM), https://dealbook.nytimes.com/2008/05/15/icahn-says-yahoo-completely-botched-microsoft-talks/.
[8] History of Yahoo!, supra note 3.
[9] Joe Weisenthal, Classic Dan Loeb: Read His Scathing Letter to the Yahoo Board, CNBC (Sept. 8, 2011, 1:31 PM), http://www.cnbc.com/id/44441183.
[10] Third Point LLC, Third Point LLC Letter to Yahoo! CEO Scott Thompson Regarding Negotiations Over Yahoo! Board Members, PRNewswire (Mar. 28, 2012, 1:38 PM), http://www.prnewswire.com/news-releases/third-point-llc-letter-to-yahoo-ceo-scott-thompson-regarding-negotiations-over-yahoo-board-members-144668285.html.
[11] Id.
[12] Lucian A. Bebchuk, 115 Colum. L. Rev. 1985-1156 (2015).
[13] History of Yahoo!, supra note 3.
[14] Callie Bost, Yahoo Buys Back Third Point Shares as Loeb Exits Board, Bloomberg (July 22, 2013, 4:09 PM), https://www.bloomberg.com/news/articles/2013-07-22/yahoo-buys-back-third-point-shares-as-loeb-exits-board.
[15] GuruFocus, What Warren Buffet Owns in His Personal Portfolio, Forbes (June 1, 2016, 6:25PM), https://www.forbes.com/sites/gurufocus/2016/06/01/what-warren-buffett-owns-in-his-personal-portfolio/#1f39727064ba.
[16] Bost, supra note 14.
[17] Justin Kuepper, Activist Hedge Funds: Follow the Trail to Profit, Investopedia. http://www.investopedia.com/articles/mutualfund/06/activisthedgefund.asp.
[18] Lucian A. Bebchuk, 115 Colum. L. Rev. 1085-1156, 1089 (2015).
[19] Id. at 1090.
[20] Yahoo! Inc., Yahoo! Finance (Mar. 30, 2017), https://finance.yahoo.com/quote/YHOO? ltr=1
[21] Lucian A. Bebchuk, 115 Colum. L. Rev. 1085-1156, 1121 (2015).
[22] Id. at 1090.
[23] Benjamin Snyder, Yahoo Earned a $9.4 Billion Windfall from Selling Shares in Alibaba’s IPO, Fortune (Sept. 30, 2014), http://fortune.com/2014/09/30/yahoo-earned-a-9-4-billion-windfall-from-selling-shares-in-alibabas-ipo/.
[24] Michael Castillo, The Verizon-Yahoo Deal is Still on—for Now, CNBC (Jan. 24, 2017, 9:51 AM), http://www.cnbc.com/2017/01/24/the-verizon-yahoo-deal-is-still-on–for-now.html.
