YAHOO INVESTOR PRESSURE TO SELL CORE BUSINESS GROWS

Original Story: marketwatch.com

Another activist investor is pressuring Yahoo Inc. to move faster to sell its core business, amid growing concerns on Wall Street of a disconnect between Chief Executive Marissa Mayer and the company’s board over a potential sale. A Los Angeles finance lawyer is following this story closely.

On Tuesday, Canyon Capital Advisors, a Los Angeles-based hedge fund, wrote a letter to Yahoo’s YHOO, +0.80%  board about its concerns. According to a copy of the letter obtained by MarketWatch, the hedge fund wrote “that the process is not moving as quickly as it should and that Company management does not fully support the Board’s direction in this regard.”

The letter follows Yahoo’s statement on Friday that the board had formed a special committee to explore strategic options, while it still continues to consider a spin-off of its nearly $40 billion stake in Alibaba Group Holding Ltd. BABA, +1.88% That statement, combined with Mayer’s comments on Yahoo’s fourth quarter conference call, seemed to confirm that the board is at odds and operating separately of Mayer as it looks to possibly sell its core Internet business.

Canyon also noted in its letter that “Recent news reports indicate that, while there have been numerous expressions of interest, lack of engagements on the part of the Company has been a source of frustration to potential buyers.” Canyon added that while it hoped these reports are inaccurate and that there are always complexities to any sale process, “delay at this stage is unwarranted for any reason (including in an effort to defend against a threatened proxy battle).” Business exit planning is important to provide adequately for key partners financial needs.

In addition, Canyon advised that Yahoo “should not make any acquisitions, regardless of size and no matter how far the valuations of digital media assets fall,” a statement likely seeking to prevent Yahoo from buying any more startups as some private company valuations have tumbled.

A Yahoo spokeswoman did not respond immediately to a request for comment.

Canyon, according to FactSet Research, had a 2.5% stake in Yahoo as of Dec. 31 and the company is among its top 20 holdings. Canyon joins Starboard Value LP, another activist fund, which has been pressuring Yahoo to sell its core business. In a letter sent to the company in January, Starboard called for a change in leadership, a restructuring of the board and a new strategy.

With a growing chorus of vocal activist investors, Yahoo could be heading for a proxy battle to shake up its board of directors this spring. Bob Peck, an analyst with SunTrust Robinson Humphrey, wrote in a note last week that shareholders are required to deliver a written notice to Yahoo between Feb. 25 and March 26 if they want to nominate any potential directors to Yahoo’s board. “At this time, we think activist shareholders are likely to engage the Board and/or management in trying to negotiate a settlement,” Peck wrote last Thursday. “If it does not work out, we think the shareholders will likely wait until the latter part of the window to announce their nominations.” A Boston M&A attorney is reviewing the details of this case.

So investors will now wait to see what happens, now that Yahoo has hired investment bankers and activist investors are clearly gearing up for a proxy battle. It’s going to be a tough spring for Yahoo.

Yahoo May Reverse Alibaba Cash Plans

Story first reported from WSJ.com

Yahoo Inc. said Thursday it could reverse its May decision to return more than $4 billion to shareholders from selling part of its stake in a Chinese Internet company, a signal that new Chief Executive Marissa Mayer may want to use the cash for other purposes.

Yahoo's statement, contained in a regulatory filing signed by Chief Financial Officer Tim Morse, sent the Sunnyvale, Calif., company's shares down 3.5% in after-hours trading to $16.17.

In May, Mr. Morse helped engineer the sale of part of Yahoo's stake in Chinese Web company Alibaba Group Holding Ltd. He said on a July 17 earnings call with analysts that Yahoo's board was committed to returning the proceeds from the Alibaba sale to shareholders, though the company hadn't determined the form or timing of such an action.

On Thursday, Yahoo said in the filing it may change its prior decisions because Ms. Mayer, who was hired three weeks ago, is reviewing the company's strategy.

Ms. Mayer's "review process may lead to a reevaluation of, or changes to, our current plans, including our restructuring plan, our share repurchase program, and our previously announced plans for returning to shareholders substantially all of the after tax cash proceeds" from the sale of Yahoo's stake in Alibaba.

Anne Espiritu, a Yahoo spokeswoman, said in a statement that Ms. Mayer is "carrying out a careful review of the company's business" and is looking at "potential strategy changes to Yahoo's current plans" along with fellow Yahoo directors. She declined to elaborate.

Joseph Grundfest, a law professor at Stanford University who is an expert on corporate governance, said that "management can, for entirely legitimate reasons, change its mind as long as it hasn't made a binding commitment" to return the cash to shareholders. Mayer seems to have a different plan in mind for the funds than what was originally intended, as she works to pull Yahoo back to it's earlier successes, while the market is focused largely on Google SEO.

The potential about-face in Yahoo's spending plans falls in line with Ms. Mayer's technology-heavy background, said Ron Josey, an analyst with research firm ThinkEquity, but it still caught some investors by surprise.

He noted a lot of shareholders bought the stock thinking that Yahoo was going to start a multibillion-dollar buyback plan that would help lift the stock's near-term value.

For years, the vast majority of Yahoo's market valuation has been tied to its stakes in Asian Web companies Alibaba and Yahoo Japan. Investors have placed little value on Yahoo's core business, which generates around $5 billion in revenue annually, mainly from selling online advertising.

Yahoo currently has around $2 billion in cash, and Ms. Mayer already has shown signs she is willing to spend substantial sums to turn around the struggling Internet company.

"She didn't come here to wind the company down," Mr. Josey said. "She came here to restore Yahoo to what it used to be."

She has told colleagues she is interested in hiring or acquiring new talent and products through acquisitions, among other things, and possibly investing in Yahoo's advertising technology, according to people briefed on the matter.

"For someone who's thinking about a growth strategy, of course you should maintain as much cash on the balance sheet as possible, maybe for acquisitions," said Mark Mahaney, a stock analyst at Citigroup Inc.

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Funds Exit Early from Facebook

 Story first reported from WSJ.com

It wasn't supposed to end like this.

Fidelity Investments was an early buyer of Facebook Inc. shares. In the spring of 2011, two dozen of its funds bought more than $200 million worth of the company's private stock. Then, when Facebook went public in May, many of those funds and other Fidelity funds loaded up on publicly traded shares.

Now, many of the giant Boston-based company's fund managers are shrinking their stakes.

Twenty-one Fidelity funds sold more than 1.9 million public Facebook shares combined in June, with 16 of them selling more than a quarter of their stakes in the company, according to investment-research firm Morningstar Inc. Private shares can't be traded until later this year.

It is unclear whether the Fidelity funds made or lost money on the Facebook shares, but the stock has languished below its $38 offering price on May 18. In June, it traded between $25.52 and $33.45; shares hit an all-time low of $20.84 before closing at $20.88 on Wednesday.

The moves represent an about-face for Fidelity, one of the first institutional investors to take a significant stake in Facebook and the country's third-largest mutual-fund company by assets. Fidelity's funds owned the shares for at most six weeks—much shorter than the median holding period of about 22 months for U.S. stock funds, according to Morningstar.

To be sure, the sales represent a very small portion of the funds' holdings. Also, 13 Fidelity funds bought 2.2 million shares of Facebook in June, though more than 1.3 million of those went to index funds, which passively track established stock indexes.

Mutual-fund analysts say it is uncommon for mutual funds to flip shares so quickly.

Nearly two dozen Fidelity funds are dumping Facebook funds at a hurried clip, and they sold nearly two million shares in June alone.

A Fidelity spokeswoman said, "Our managers are not tied to a minimum holding period and need to be able to respond to changes in market conditions."

Facebook Chief Executive Mark Zuckerberg met with Fidelity executives, along with other large asset managers, during Facebook's IPO roadshow in May. Morgan Stanley and other underwriters of Facebook stock also called top institutional clients, including Fidelity, before the IPO to tell them their analysts had lowered Facebook's earnings and revenue estimates.

Fidelity wasn't the only company with funds that flipped Facebook shares. Turner Investment Partners' Large Growth fund, which has a typical holding period of about seven months, sold 28% of its shares within weeks of buying them. OppenheimerFunds Inc.'s Global Allocation fund in June sold more than 10,000 shares, or 10% of its holdings.

A fraction of mutual-fund companies, including Fidelity, report holdings on a monthly basis, while the majority report only quarterly. That means investors in most funds that sold shares in May and June won't ever know how much Facebook stock their funds once owned.

The biggest reported seller of shares in June was the Fidelity Puritan fund, a "balanced fund" that invests in both stocks and bonds. It sold more than 623,000 shares, or a quarter of its overall stake. Other big sellers included Fidelity Disciplined Equity, which invests in both growth and value stocks and sold more than 444,000 shares, or 47% of its stake, and Fidelity Dividend Growth, which sold more than 167,000 shares, or 25% of its stake. Fidelity Magellan, one of the best-known actively managed funds in the country, sold more than 155,000 shares, or 17% of its stake.

Fidelity Puritan has an average holding period of about eight months, according to Morningstar, and Fidelity Dividend Growth has an average holding period of a year and a half.

It is unusual for an IPO like Facebook to be sold so quickly by long-term fundamental investors. Typically, IPOs see growing ownership by such investors and shrinking ownership by trade-oriented hedge funds, according to a study completed last year by Ipreo, a capital-markets data and advisory firm.

In a study of 270 IPOs of U.S. companies between 2009 and 2011, institutions such as mutual funds and pension funds represented 45% of the IPOs' initial allocation. But one quarter later, they represented 67% of the shareholders in those same stocks.

This doesn't mean many mutual-fund managers won't try to cash in on a post-IPO pop, said University of Florida finance professor Jay Ritter, who studies IPOs. Such managers, many of whose companies pay millions in commissions to underwriters, expect to get shares of an IPO and try to flip the shares for a profit once they are widely traded, he said.

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Yahoo Japan in Talks for Buybacks

Story first appeared on Yahoo News.

Yahoo Japan Corp's talks with key shareholder Yahoo Inc for a share buyback have ended with no agreement, but the companies left open the possibility of further negotiations, Yahoo Japan's chief financial officer said on Tuesday.  They stated that they want to positively consider resuming negotiations if the conditions are right.

Yahoo Inc's chief executive said last week the plan to sell its stake in Yahoo Japan has been plagued by a "valuation gap" that the parties have failed to bridge.

Yahoo Inc, under pressure to free up cash for shareholders and simplify its ownership structure, has been looking for more than a year to monetize its stake in Yahoo Japan, which was formed as a joint venture between the U.S. Internet pioneer and Japan's Softbank Corp in 1996.


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Amazon is Faltering in Recent Revenue Estimates

First appeared in Bloomberg

Amazon.com Inc. (AMZN) fell the most in three months after sales missed estimates, signaling that its investments in media services, Kindle devices and shipping promotions have been slow to pay off.

Amazon shares dropped 7.7 percent to $179.46 after the Seattle-based company said yesterday that fourth-quarter revenue was $17.4 billion, trailing the $18.3 billion estimated by analysts in a Bloomberg survey. It was the biggest one-day stock decline since Oct. 26.

Amazon, the world’s largest Internet retailer, got less revenue from digital media than anticipated, especially in the video-game market. The company also is relying more on third- party sellers, which can bolster profit but generate less revenue than direct sales. Amazon has conditioned investors to expect stronger growth, making the latest results disappointing, said Colin Gillis, an analyst at BGC Partners LP in New York.

“To miss on the top line, that’s what breaks the momentum,” said Gillis, who recommends selling Amazon stock.

Net income fell 57 percent to $177 million, or 38 cents a share, from $416 million, or 91 cents, a year earlier, the company said in a statement.

First-quarter operating income may range from a loss of $200 million to a gain of $100 million, the company said. Analysts were projecting a profit of $268.1 million. Sales will be $12 billion to $13.4 billion, Amazon said, compared with an estimate at the top of that range.

Hard to Explain

Chief Executive Officer Jeff Bezos is squeezing margins in search of growth, looking to add customers by pushing free shipping and offering its Kindle devices at cut-rate prices. While investors were expecting profit to take a hit, the sales slowdown is harder to accept, said Brian Nowak, an analyst at Nomura Securities International Inc. in New York. The reasons outlined by the company don’t seem to fully account for the sluggishness, said Nowak, who rates Amazon shares “neutral.”

Amazon’s third-party sellers use the company’s site to hawk their products and then provide a commission. Unit sales by outside retailers increased 65 percent during the holiday quarter and now make up 36 percent of units sold, Bezos said in the statement. Total sales rose 35 percent.

“Whenever there’s a mix-shift toward third party, it helps margins, but it reduces revenue,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. He has an “outperform” rating on Amazon’s stock.

Earnings Top Estimates

The shift helped earnings top estimates last quarter, even with the sales shortfall. Analysts projected 16 cents a share. Still, the operating margin tightened to 1.5 percent in the period, from 3.7 percent a year earlier.

“Trying to predict during a seasonal Q4 is challenging,” Tom Szkutak, Amazon’s chief financial officer, said on a conference call. “That third-party increase is great for customers, great for sellers and helped our bottom line.”

Amazon’s Prime program, which offers unlimited two-day shipping for $79 a year, boosted expenses over the holiday shopping season, said Jason Helfstein, an analyst at New York- based Oppenheimer & Co.

“With shipping, if you look at that net loss number as a percentage of revenue, it keeps going up,” he said. “They’re trying their best to offset that in other ways.”

The money-losing Kindle Fire tablet also has raised expenses. At $199, the device is less than half the price of Apple Inc. (AAPL)’s cheapest iPad. The expectation is that consumers will spend the money they save on Amazon’s e-books and video content, Jordan Rohan, an analyst at Stifel Nicolaus & Co., said in a note this week. That eventually will more than make up for revenue lost selling the device, he said.

Video-Game Decline

For now, Amazon’s media sales aren’t growing as quickly as anticipated. U.S. media revenue climbed 8.1 percent last quarter, about half the 15 percent that Sebastian was predicting. The decline in video-game sales hurt the unit’s results, Szkutak said.

Investors had speculated that the company would get a bigger boost from a 15 percent gain in industrywide holiday e- commerce spending, which ComScore Inc. (SCOR) pegged at a record $37.2 billion.

Shareholders may now be wondering if the stock has become too expensive, Gillis said. It trades at 141.9 times earnings over the past 12 months, according to data compiled by Bloomberg. By comparison, Apple’s price-to-earnings ratio is 13.

“When you have revenue growth start to stall, then the valuation question marks start to rise,” he said.

The company also elaborated on its potential risks in a filing today. Amazon said it relies on third-party providers for the technologies that encrypt, authenticate and send confidential information, and that a security attack could result in litigation.