Starboard Value urges Yahoo! and AOL to merge

On Friday, Starboard Value send a letter Marissa Mayer’s way. The contents listed ways to increase shareholder value, one of which was to merge with AOL.

Starboard mentioned having a small stake in Yahoo! and a 4.5 per cent stake in AOL. William Meade, president of Billionaires Portfolio, suggests that this is a trend were increasingly seeing. Because everyone is so closely scrutinising these positions, it’s almost more powerful to take a one to two per cent stake in Yahoo as a five per cent piece of Darden.

Starboard stated that a tie-up between Yahoo and AOL” could “offer synergies of up to $1bn”.

“[W]e believe a merger of AOL and Yahoo’s core business may be one of the best ways to both fully seize the cost reduction opportunity and also to tax efficiently monetise Yahoo’s noncore equity holdings,” the letter, signed by CEO Jeffrey Smith, said.

It also described Yahoo! as “deeply undervalued relative to the sum of its parts” and said the company must take “immediate steps to remedy this valuation discrepancy.”

Starboard pointed to a valuation gap of about $11bn.

“The core problem for Yahoo, outside of Alibaba, is they don’t really have an exciting story,” said Gene Munster, an analyst at Piper Jaffray. “If they could use acquisitions as a way to drum up some excitement in a longer-term business I think that most investors would look upon that favourably.”

“AOL is a fading giant, as is Yahoo… the combination of that doesn’t add excitement that new users are going to come to,” he said.

Yahoo! CEO Mayer has acknowledged the letter. 

She said: “As part of our regular evaluation of Yahoo’s strategic initiatives to drive sustainable shareholder value, we will review Starboard’s letter carefully and look forward to discussing it with them.”

AOL shares jumped by six per cent, while Yahoo! rose by four per cent.

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