Yahoo, Daniel Loeb and his Third Point LLC hedge fund did something that may become increasingly common as a result of new rules to increase shareholder oversight of publicly traded companies.By using the threat of a proxy fight to win significant change at
And tech companies, with cultures that often clash with the straitlaced, profit-driven motives of Wall Street, seem particularly vulnerable to proxy fights. While Third Point’s power play - which resulted in three new board members and the company’s sixth CEO in five years -- is expected to benefit shareholders, it is less clear what impact it will have on Yahoo employees or the people who still visit the Web portal more than half a billion times each month.
Earlier this month, Loeb released documents showing that CEO Scott Thompson had listed on his resume a degree in computer sciences that he had not earned. By last week, International Game Technology CEO Patti Hart said she would not seek re-election to Yahoo’s board of directors after Loeb raised questions about her role in hiring Thompson. And by Sunday, Yahoo had reached a deal with Third Point that included Thompson’s resignation, a new chairman and seats for Loeb and three allies on Yahoo’s board.
The dustup, however, has far broader implications than a simple case of calling someone out on an embellished resume. It shows the considerable sway that hedge funds hold over the companies in which they invest, and how the Wall Street culture often clashes with the tech darlings into which they've put money.
When times are good, companies such as LinkedIn and Groupon, which went public last year, and Facebook, which will go public later this week, benefit from the relationship. But when times are bad, the public companies quickly realize they are never completely in control of their operations. Experts also believe that the rise in shareholder activism is a direct result of hedge fund involvement, and investors, companies and customers can expect more activism going forward.
Hedge funds “are better at organizing people. They have tremendous resources, and proxy fights are one of their tools,” Franklin Allen, a finance professor at the Wharton School, said in an article on the school’s website. "Proxy fights are one way they can make money."
Hedge Funds Profit Through Control
Even after Thompson's resignation, Yahoo is continuing to investigate Thompson to see if his departure can be considered to be for cause, which would save the company millions of dollars in severance. It’s an abrupt about-face from just last week, when Yahoo called Thompson’s listing of a degree from Stonehill College an “inadvertent error” that “in no way alters the fact that Mr. Thompson is a highly qualified executive with a successful track record leading large consumer technology companies.”
What happens now will be bottom-line driven. Wall Street analysts are already praising the shakeup, saying it would boost long-term growth prospects.
Loeb may push Yahoo to drop its patent lawsuits against Facebook, as Facebook has retaliated with what could be costly countersuits. As Richard MacManus noted Sunday, Loeb and Third Point will be fixated on boosting profits (and, by extension, their 5.6% stake in the company). That could ultimately mean selling off certain assets and streamlining Yahoo down to its core (and most lucrative) assets.
“I'm not entirely convinced that Daniel Loeb's motivations are good for Yahoo long term,” MacManus wrote. “They seem more focused on making money for Wall Street shareholders than returning Yahoo to its roots of being a true innovative force on the Web.”
Given the context and Third Point’s true motives, it seems more and more as though Thompson is just a convenient casualty as opposed to the real target of Loeb’s attack.
While shareholders tend to vote with management, making proxy fights ineffective, Allen said that could change as they become more common. Allen said hedge funds aren't opposed to stepping in and running the business.
"Mutual funds don't want to run the business. If they don't like something, they will just sell shares,” he said. “Hedge funds will try and run the business to improve the value of the firm. All shareholders can benefit."
Scott Thompson photo courtesy of Yahoo