Wednesday, May 21, 2008

Welcome the Wolverines

A quick postscript to last week’s blog about Microsoft-Yahoo (and then I’m done with this subject, I promise): Speaking strictly professionally, I view Carl Icahn (the old corporate raider, greenmailer and current CEO of the hedge fund Icahn Capital) the way I would a wolverine. I see both of them as ruthless, fanatically determined, and exceedingly dangerous when crossed. Since I wrote last week’s blog castigating Jerry Yang for failing to embrace Microsoft’s lofty life-support offer of $33 a share, Carl the Wolverine has entered the fracas with the obvious question: Where the hell has Yahoo’s board of directors been all this time? Of course, we know the answer, and the answer transcends Yahoo. Boards of directors are supposed to serve as a check to CEO power run amok. They are supposedly responsible for fiduciary oversight on behalf of shareholders. In reality, they are often a joke. In many companies, they’re cronies of the CEO (who often has chosen them). Or they’re part of a good-old-boys network operating with the implicit understanding that their job is to lob softball queries to the CEO without embarrassing him/her. Or, in a classic follow-the-money scenario, they make sure not to jeopardize their lucrative “director” gig by doing things like, well, asking uncomfortable questions and holding CEO’s accountable for dumb decision. That’s where Icahn comes in. As a self-professed shareholder advocate, he has been a royal pain in the butt to a number of lethargically performing companies laden with entrenched executives--like TWA, Motorola, and Blockbuster, among others. Sometimes he wins, sometimes not, but his “M.O.”, often sorely needed, is to shake up the complacency of top management when corporate performance has stagnated and shareholders are long-suffering. Icahn Capital has bought 4.3% of Yahoo shares, and along with allies like hedge fund investor John Paulson (3.7%) and old warrior T. Boone Pickens (.75%) Icahn is agitating to unseat Yahoo’s board and replace it with a new slate that would be more responsive to insanely generous offers like Microsoft’s. Of course, before we cast Icahn as a hero, let’s remember that like all wolverines, he and his ilk can be mindlessly destructive. Sometimes, these “shareholder advocates” are so self-centered and short-term in their approach to the business (‘do whatever it takes to raise my share price so I can clear out with a fat return on my investment, damn the consequences’) that the longer term prospects of the firm are seriously damaged. For example, I remember back in 2003, then- CEO of Kodak Daniel Carp unveiled his grand plan to dump much of the cash-cow film business, cut annual dividend by 72 percent, and plow billions into building a strong presence in the fast-growing digital imaging market. A lot of wolverine investors howled (which ironically helped depress their stock by the way). Their reasoning was that Kodak should have used its income and free cash flow not for the long-term risk of transformation, but for supplying investors with juicy dividends and for temporarily propping up the old business to get it ready for sale. Let Kodak die if the price is right, snarled the wolverines, which would have been a justifiable option if Kodak leaders were clinging to a dying business model. But they weren’t. To their credit, Kodak leaders ignored the nay-sayers and moved aggressively towards their new goals. Kodak is still shaky today, but at least it is off life support and I wish its current leaders luck.Sometimes the wolverines lose themselves in a feeding frenzy. Remember how “Chainsaw Al” Dunlap systematically gutted Scott Paper and Sunbeam in the 1990’s? Dunlap never lacked for “shareholder advocates” who loved his approach, because they were able to bet on Dunlap to eviscerate the companies he ran and then carve up the carcasses to sell off at the most attractive prices. Who cared that what Dunlap was doing was essentially destroying companies and hence participating in a grotesque parody of “creating shareholder value”? The wolverines loved it. Having said all this, sometimes shareholders need those wolverines when it’s clear that CEO’s and boards of directors are either paralyzed with incompetence, or serving their own interests more than shareholders’. And even though I’ve argued that Microsoft would not be wise to do this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html), I think Icahn is absolutely correct to put public pressure on Yahoo’s directors to justify why they didn’t leap at it. I think it’s fair to state the following challenge to Yahoo’s senior leadership and board of directors: Please unveil a concrete growth plan that will arguably raise investors’ confidence to the same level of stock value that Microsoft was offering, or thanks for the memories and let someone else take the helm.

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