Steel Partners Files 9.9% "Active" Ownership in ModusLink

It looks as though Steel Partners is rejoining the increasingly busy activist investing space.

After a few years of remaining quiet, Steel filed a 13D today with ModusLink (Ticker: MLNK) through a Company they control - Handy & Harman (Ticker: HNH).  While the filing doesn't say much, it did disclose that they have been aggressively purchasing the stock since early August - just after Peerless Systems (Ticker: PRLS) announced that they have nominated two directors to the board for election at the next annual meeting (which is expected to take place in December).

Here is some background on the ongoing activist situation at MLNK.

Here is a link to Steel's 13D filing today.

He's Baaaaack! Dan Loeb sends letter to Yahoo board

It's been a few years since Dan Loeb has sent one of these letters.

[LETTERHEAD OF THIRD POINT LLC]

September 8, 2011
Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Mr. Roy Bostock, Chairman

Dear Ladies and Gentlemen:

Third Point LLC (“Third Point”) is a registered investment adviser with approximately $8 billion under management.  We are writing to inform you that certain investment funds we manage have acquired a 5.1% interest in Yahoo! Inc. (the “Company” or “Yahoo”), bringing our holdings of common stock and currently-exercisable equity options to 65,000,000 of the outstanding shares, and positioning us as the Company’s third largest outside shareholder.

This letter details our principled demands for sweeping changes in both the Board of Directors (the “Board”) and Company leadership, and outlines the hidden value of Yahoo, which has been severely damaged – but not irreparably – by poor management and governance.

The Failures of Yahoo’s Board of Directors Necessitate a Significant Infusion of Fresh Board Talent

1.  Yahoo’s current Board of Directors has made a number of decisions that have directly harmed the Company and resulted in a stock price far below the Company’s intrinsic value.  While we are focused on the future for Yahoo under new management, it is instructive to understand how this Board’s many mistakes have created the current conditions at an asset and talent rich company.   Among others: It is now widely accepted that the Board made a serious misjudgment in approving the hiring of Carol Bartz as Yahoo’s Chief Executive Officer, given her inexperience in the consumer-oriented internet space.   Although we are pleased that the Board has terminated Ms. Bartz’s employment, we fail to understand why this decision was so long in coming given her abysmal performance over the last two and a half years.  During this period, Ms. Bartz’s poor decision-making and communication skills publicly alienated the Company’s highly respected Asian partners, as well as its shareholders, sell-side analysts, bloggers, customers and employees.

While the decision to hire her alone is grounds for questioning the Board’s competence, its willingness to turn a blind eye to these serious problems and inexplicably remain supportive of Ms. Bartz notwithstanding the negative impact she was having on the Company is even more troubling.  As recently as June 23, 2011, at the Company’s annual meeting, Chairman Bostock reportedly stated that the Board remained “very supportive of Carol and this management team” and that they were “confident that Yahoo [was] headed in the right direction."  These comments demonstrate that this Board lacks the courage to urgently make the difficult decisions required by the situation today.

2.  It is also now widely recognized that the Board made a gross error in turning down the $31 per share Microsoft bid in 2008, which would have generated significant returns for Yahoo’s shareholders.  This mistake is all the more frustrating given Yahoo’s current depressed stock price of $13.61 per share — far below the Company’s intrinsic value, which we currently place in excess of $20 per share, as detailed below.

From the failed Microsoft sale negotiations, to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections, and most recently the Alipay debacle, this Board’s failures have destroyed value for all Yahoo stakeholders.  Ms. Bartz’s exit and Mr. Morse’s elevation to interim CEO makes him Yahoo’s fourth CEO in four years and further demonstrates the poor corporate governance Yahoo investors have been saddled with for too long.  Even before Ms. Bartz’s hire, Yahoo’s shares materially underperformed the market and their peer group, as graphically evidenced in the Company’s most recent 10-K.  Against this background, it is evident that merely replacing the Company’s CEO – yet again – will not be enough to alter the direction of the Company.  Instead, a reconstituted Board with new Directors who will bring fresh eyes, relevant industry expertise and increased investor alignment to the table is immediately necessary.

Yahoo’s website states the Company’s values, among them: “We foster collaboration while maintaining individual accountability.”  It is time that certain members of this Board were held accountable for its past failures and their individual roles.  Accordingly, we insist that Mr. Bostock, who championed Ms. Bartz’s hiring and led the charge against the Microsoft deal, promptly resign from the Board.  We also demand that fellow Directors Arthur Kern and Vyomesh Joshi, who have stood by silently during these last five years of woeful performance, join Mr. Bostock in resignation.  Finally, we can only assume that Director Susan James, the President of Tri-Valley Animal Rescue, will also resign, given her close relationship with Ms. Bartz.  If she does not do so voluntarily, the Board should request her resignation as well.

As the Company sets out to recruit a new CEO and evaluate strategic alternatives, we are adamant that reconstituting the Board is crucial to provide any serious CEO candidate or strategic counterparty with a stable and responsive governance structure.   There is much work to be done and time is of the essence.  Even after the Company announced Ms. Bartz’s dismissal and the pursuit of strategic alternatives, Yahoo shares rose only 5%.  We believe the muted market reaction to Ms. Bartz’s dismissal represents a recognition that this management change is a necessary, but not sufficient, step towards unlocking Yahoo’s actual value.  Investors’ reluctance to embrace the stock and their lack of confidence in this Board’s ability to lead the franchise is understandable given the current Board’s track record.

Third Point has held discussions with many highly respected entrepreneurial executives active in technology, internet, media and consumer-related businesses.  From these discussions we have distilled an All-Star team of potential Director candidates, who would be indispensable in working with the reconstituted Board to pursue the three paths outlined in the recent company announcement:  CEO search, business review and strategic options.  We look forward to sharing our candidates with you shortly.

The Obscured Value in an Iconic American Technology Asset

We firmly believe that there is much to be gained from a successful and rapid transition in management, as we are convinced that Yahoo is grossly undervalued.  We have followed Yahoo for many years, and our analysis suggests that at a share price of $13.61, with $2.49 per share in tax adjusted net cash, $3.10 per share and $5.24 per share of after-tax values for the Yahoo! Japan and Alibaba Group stakes respectively, core Yahoo is left at an implied value of $2.78 per share or 2.2x 2012 EBITDA.   With more effective and focused management, one could realistically envision a re-rating to at least 7.0x 2012 EBITDA, driving a target of over $19.00 per share.  When coupled with tax efficient outcomes for its Asian assets, an additional $3.00-4.00 per share stands to be realized.  Continued share count reduction via buybacks and other potential capital structure optimization alternatives would further bolster the Company’s stock price.  In addition, based on our discussions with industry experts and entrepreneurs, we believe that with new management, there is significant further value in leveraging Yahoo’s globally trusted franchise and platform for a range of new products and innovations.

Focusing specifically on the Alibaba Group, the mid-term value potential for this stake alone could represent another $5.00 per share of upside.  The e-commerce interests housed under the Alibaba Group umbrella hold the dominant positions in the “B2B” (63% of 2010 market share according to Marbridge Consulting), “C2C” (85% share) and “B2C” (51% share) Chinese e-commerce markets.   Alibaba Group’s Taobao business is essentially Ebay and Amazon on steroids in terms of market share and revenue growth.   According to Goldman Sachs, the Chinese e-commerce market was $75 billion in 2010, with a 3 year forward compound annual growth rate of 43% compared to the $193 billion U.S. market with compound annual growth of 14% over the same period.   We currently estimate a pre-tax value for Alibaba Group of $25 billion.  Given Alibaba Group’s growth potential and market share, it is entirely conceivable that Yahoo’s 40% fully diluted stake in Alibaba Group could double in value over the next 2-3 years, highlighting its tremendous value.

Looking deeper into core Yahoo, it is clear that the Company possesses unique scale and scope as the Internet’s premier digital media company.  The near completion of significant platform transitions and increasing ad format creativity and client engagement translate to exciting prospects for 2012.   These compelling Yahoo initiatives were sadly lost in the chaos surrounding Ms. Bartz’s tenure as CEO.  Hidden by Yahoo’s senior management drama is a franchise benefitting daily from tremendous investment in resources and new platforms successfully built by Yahoo’s corps of talented, committed engineers, product development team and salespeople.

Finally, the Company’s leadership needs to rebuild relationships with its valued Asian partners in Yahoo Japan, Softbank and the Alibaba Group.   These are important sources of value for Yahoo, and the Company needs to enter a new, constructive era with these critical allies and friends of the Company.

In conclusion, we are eager to present to the Board our candidates and thoughts on the Company’s future.   We hope that the Board will take our proposals seriously and move towards the leadership overhaul that we are championing.  While the decision to undertake Board turnover initially rests with individual directors, ultimately, shareholders like Third Point have other means to effect changes necessary to protect their investment.  We are prepared to propose a slate of directors at the Company’s annual meeting next year should it become necessary.  Such proxy disputes are burdensome, and we sincerely hope that one will not be necessary here.  Shareholders have already suffered enough.

It is time for new leadership at Yahoo.   Yahoo’s investors, employees, clients and users deserve it.   We look forward to having what is great about Yahoo make headlines, encouraged and communicated by new CEO and Board leaders.

Sincerely,

 /s/ Daniel S. Loeb

Daniel S. Loeb
Chief Executive Officer
Third Point LLC

CC:    Ms. Patti Hart
          Ms. Sue James
          Mr. Vyomesh Joshi
          Mr. David Kenny
          Mr. Arthur Kern
          Mr. Brad Smith
          Mr. Gary Wilson
          Mr. Jerry Yang

Shareholder Activism Webinar on Board Corporate Governance

TUESDAY AUGUST 23, 2011 

12:30 - 2:00 PM EST

Join an experienced faculty as they explore the following questions that every company concerned being targeted by activist investors should ask of its Board, including:

- Is the Board lacking sufficient industry expertise?
- Is the Board lacking the necessary competencies among its members?
- Is the Board sufficiently independent?
- Do the Board members have little or no stake in the company?
- Can the Board's compensation be perceived as excessive?
- Are the Board's chairman and CEO roles combined?
- Is there an unusually low turnover among Board members?
- Does the Board have a record of failing to heed the will of its shareholders?
- Does the Board have a record of facilitating its own entrenchment?
- Does the Board have a record of failing to hold management accountable?

Faculty:

Chris Cernich - Director of M&A and Proxy Contest Research, Institutional Shareholder Services Inc. (ISS), oversees analyses and vote recommendations for high profile and contentious mergers and proxy fights globally. Prior to joining ISS, Chris was Director of Mergers & Acquisitions and Quantitative Analysis at Proxy Governance, Inc., another proxy advisory firm. His previous management experience includes eight years in corporate finance and strategy at the Ford Motor Company. Chris is also the chief author of two studies sponsored by the IRRC Institute: "The Effectiveness of Hybrid Boards" (2009), which examined the impact of shareholder activism on corporate financial performance and "Compensation Peer Groups at Companies With High Pay" (2010), which examines systemic bias in compensation benchmarking processes at S&P 500 companies. Chris holds an MBA from the University of Michigan in Finance and Strategy.

Keith E. Gottfried – Partner, Blank Rome LLP, advises clients with respect to public company matters, including mergers and acquisitions, securities regulation, corporate governance, shareholder activism, and NYSE and Nasdaq compliance. Keith also advises clients in connection with proxy contests and other contests for corporate control as well as vulnerability assessments and the implementation of stockholder rights plans and other types of defensive strategies.

Paul Schulman — Senior Vice President, MacKenzie Partners, Inc., primarily advises clients on shareholder engagement and proxy solicitation strategies in proxy contests, mergers & acquisitions, corporate financings and restructurings. He also counsels clients on governance and compensation issues and activist issues. Over the course of his career, Paul has worked on over 100 contested solicitations, representing companies, limited partnerships, shareholder groups, activist institutions and hedge funds.

Click here to register online.

Posted by David Schatz

Mock Proxy Battle Conference - Seating is Limited and Filling Up Fast!!

Interactive Case Study on Shareholder Activism MOCK PROXY BATTLE CONFERENCE Main Event August 31, 2011 Capital One Headquarters, McLean, VA LIMITED NUMBER OF SEATS AVAILABLE A licensed educational product from Hedge Fund Solutions, LLC www.hedgerelations.com

Join us on August 31, 2011 for what's being billed as the fight of the decade!! INTERACTIVE CASE STUDY ON SHAREHOLDER ACTIVISM This is an Interactive Case Study on shareholder activism (Download the Case Study). This case, which is fictional, presents a dilemma facing many boards of directors and managers at publicly traded companies today. ABSTRACT The case describes the efforts of two activist investors (Yuri N. Trubl and D. Mandy More) who have formed an investment group and call themselves The Committee For Value Improvement and Shareholder Accountability. The Committee is attempting to obtain three board seats on WidgeCo's eleven member board and want to persuade the other board members to divest an underperforming business unit and use the proceeds from the transaction to repurchase some of the Company's shares outstanding. WidgeCo's board is not sure whether to concede, fight or attempt to seek middle ground. Download the Activist Letter to Management  Each participant will play the role of a board member and will consider analyses presented by management, the dissident investors, institutional shareholders, company advisors and others. In the end, based on the information presented, each board member will recommend to the others how to proceed. PURPOSE To simulate an activist campaign at a mid-sized public company plagued with business and governance issues. Participants will gain a greater understanding of the causes, effects and complexities of shareholder activism, and wrestle with key fiduciary issues as if they were directors of a public firm. BACKGROUND WidgeCo (WIDG) a manufacturer of specialized widgets for the defense, shipping, electronics and food service industries is challenged by flat sales, a declining stock price, an underperforming, overpriced and not-yet integrated acquisition that is the brainchild of the CEO's recently hired heir apparent, and a number of governance issues. ADDITIONAL INFORMATION & REGISTRATION  For additional information about the conference and to register (NOTE: Seating is limited to 80 total participants and places are filling up fast!) go to www.niricapital2011.com. AGENDA: Download the Updated Agenda.

Free Activist Investing Research (Week Ending August 5, 2011)

Click here to download Hedge Fund Solutions' activist investing research  for the week ending August 5, 2011.  

Sign up to receive this free research every Monday afternoon.

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Guest Contributor: Activist Investor Phil Goldstein Says "CSX Opinion is Not About Swaps"

Phil Goldstein - Bulldog Investors

I think that for most activist shareholders the most significant takeaway from the Second Circuit's CSX opinion is not about swap contracts.  See Blog Post on CSX Decision

More important is that it reduces the fear that mere communication between like minded shareholders can subject them to a lawsuit alleging that they formed an undisclosed 13d group. The Court significantly narrowed the ability of an issuer (or the SEC) to allege that such a group exists.  Merely alleging "concerted action" is not enough.  Instead, applying the statute literally requires that coordinated  purchases must be alleged (and proven). It said:

As we have noted, the statute and the implementing rule are both concerned with groups formed for the purpose of acquiring shares of an issuer. See 15 U.S.C. § 78m(d)(3); 17 C.F.R. § 240.13d-5(b)(1). The District Court recognized that whether a group exists under section 13(d)(3) “turns on ‘whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding, or disposing of securities.’” CSX I, 562 F. Supp. 2d at 552 (quoting Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286F.3d 613, 617 (2d Cir. 2002) (emphasis added).

Endeavoring to meet the statutory standard, the District Court found that TCI and 3G formed a group, within the meaning of section 13(d)(3), “with respect to CSX securities,” and that this group was formed no later than February 13, 2007. See id. at 555. Then, after identifying the Defendants’ “activities and motives throughout the relevant period,” id. at 553, the Court stated, “These circumstances . . . all suggest that the parties’ activities from at least as early as February 13, 2007, were products of concerted action . . . .” Id. at 554 (emphasis added).

These findings are insufficient for proper appellate review. Although the District Court found the existence of a group “with respect to CSX securities,” the Court did not explicitly find a group formed for the purpose of acquiring CSX securities. Even if many of the parties’ “activities” were the result of group action, two or more entities do not become a group within the meaning of section 13(d)(3) unless they “act as a . . . group for the purpose of acquiring . . . securities of an issuer.” 15 U.S.C. § 78m(d)(3).

****

[A] precise finding, adequately supported by specific evidence, of whether a group existed for purposes of acquiring CSX shares outright during the relevant period needs to be made in order to facilitate appellate review."

Presumably, the same requirement would apply to a group formed for the purpose of either selling or of holding shares.  However, it is unlikely that a group would ever be formed for either of those purposes after the shares were independently acquired (which is presumably why the Circuit Court focused on acquisitions.) The bottom line is that general allegations of shareholders acting "in concert" are no longer sufficient to survive a motion to dismiss IMO.  There must be a specific allegation that their purchases were coordinated.

Judge Winter, in his concurrence, was even more emphatic about the requirement to prove a plan to coordinate purchases by the group members.  He said:

The district court’s finding of a group also suffers from a second error. That finding was that “the parties activities from at least as early as February 13, 2007, were products of concerted action.” Id. However, Rule 13d-5(b)(1) applies only to groups formed “for the purpose of acquiring, holding, voting or disposing” of “securities” of the target firm. The Rule does not encompass all “concerted action” with an aim to change a target firm’s policies even while retaining an option to wage a proxy fight or engage in some other control transaction at a later time. Indeed, the Rule does not encompass “concerted action” with a change of control aim that does not involve one or more of the specified acts.

****

There is no evidence that 3G’s purchases at this time were more than the result of this sharing of information, which hardly amounts to an agreement to buy CSX shares.

Thus, two large stockholders that independently acquired their positions can discuss their investment and the company with each other and possible actions they might take separately or together to enhance shareholder value but the existence of such discussions alone is insufficient to support a finding of the formation of a 13d group.  In almost all cases such shareholders independently determine how they will vote their shares so there is no reason to form a group for voting them.  Unless they actually agree to do something together that suggests a voting agreement, e.g. to fund a proxy solicitation, there is no group.

Guest Contributor Phil Goldstein

Question Over Cash-Settled Derivatives Remains Unresolved, Requirement for Disclosing 13D Group Activity Narrowed

In a proxy fight that begun in late 2007, hedge funds TCI (The Children's Investment Fund Management) and 3G Capital Partners nominated five candidates to the board of railroad company CSX. Owning 9% of the stock and 11% more through long cash-settled derivatives, TCI and 3G Capital Partners were successful in getting four of their five nominees elected to the board. In the process, however, CSX sued the hedge funds for violating the Williams Act, arguing that they failed to report their cash-settled derivatives as beneficial ownership and that they were acting as a group before TCI filed its Schedule 13D statement, among other things. 

On June 11, 2008, Judge Kaplan of the lower court found that investors were deemed to constitute a group under broad circumstances: should investors merely meet to discuss, they would trigger a group filing requirement in the event that they own collectively more than 5% of a company's outstanding shares. 

A July 18, 2011 majority-opinion on CSX v. TCI by the U.S. Second Circuit Court of Appeals reversed this notion and accordingly narrowed the extent to which shareholders could be considered a group for Section 13(d) of the Williams Act, a 1968 amendment to the Exchange Act of 1934. The Second Circuit found that proof that shareholders were acquiring shares in concert was needed before they could be deemed a group. Subsequently, the Second Circuit remanded the case. Thus the Second Circuit's opinion represents a favorable shift for activist hedge funds--which will now have less reservations in communicating investments with other shareholders--as far as group filing requirements go.

As far as resolving the issue of whether or not cash-settled derivatives would count as beneficial ownership--this remains very much a work in progress. Both the lower court and now the Second Circuit side-stepped the issue. Judge Kaplan in the lower court took a broad view of cash-settled derivatives counting as beneficial ownership, finding that one should consider "all of the facts and circumstances to identify situations in which one has even the ability to influence voting, purchase, or sale decisions of its counterparties". Despite this broad view, Judge Kaplan ultimately never made a rule on his judgement and thus did not "sterilize" the shares derived from from the cash-settled derivatives (ie. they could be used for voting purposes). The Second Court also did not make a rule on the issue due to "disagreement within the panel".

In a separate concurrence, however, Judge Winter was clear about his opinion on cash-settled derivates. He found that "without an agreement between the long and short parties permitting the long party ultimately to acquire the hedge stock or to control the short party's voting of it, such swaps are not a means of indirectly facilitating a control transaction". According to corporate law firm Schulte Roth, which represented TCI in the proxy fight and ongoing litigation, "given Judge Winter's thoughtful analysis of the beneficial ownership question, it can be expected that, in the absence of guidance from Congress or the SEC, future courts confronted with this issue will take guidance from the Winter concurrence, and consider his analysis in the context of subsequent cases".

Posted by David Schatz