Bob Peck: The Longer Yahoo Waits, The Worse It Gets

Yahoo! Inc. (NASDAQ: YHOO) has had a difficult past year, down more than 23 percent.

According to SunTrust Robinson Humphrey's Bob Peck, things aren't going to get any better if Yahoo doesn't do something soon.

Management Issues, Amalgamated Lawsuit Raise Concerns

Peck, who has a Buy rating and price target of $33.51 on Yahoo, issued a note in light of an announcement that the board was increasing its seats. "Today Yahoo announced that they expanded the board from 7 to 9 by adding 2 new external board members […] We are unclear why the company would make such a move before impending discussions reportedly this week to take place with Starboard," the note stated.

"We take this news as negative, as it likely means the company is gearing up for a proxy context."

SunTrust elaborated that the expansion appears to be a "negotiation move," which ultimately leaves the analysts "a little perplexed."

Investors have been calling us to discuss the focus on the board and management on their fiduciary responsibilities for several reasons: 1) A very slow core sale process – Verizon recently said they have not had discussions yet with Yahoo; 2) Expansion of the board before a what was hopefully a productive meeting with Starboard; 3) the recent Amalgamated vs. Yahoo judgement that permitted questioning of certain behavior.

"We have stated before that we have had faith in the board and would love to get more clarity on the above issues, if they would speak with us," Peck said.

Related Link: Can Yahoo Avoid Proxy War? Co. Said To Meet Starboard Next Week

Regarding the Amalgamated lawsuit, Peck posed five broad concerns and the subsequent court rulings deliberating those concerns:

• 1. "Was There Mismanagement? ‘The resulting record is troubling and fails to answer important questions […] there is possible mismanagement that would warrant further investigation'
• 2. "Did the CEO Breached [sic] Fiduciary Duty? ‘There is a credible basis to suspect possible breaches of fiduciary duty by Mayer during the hiring process … There is a credible basis to suspect that Mayer failed to provide material information to the Committee during the early stages of the hiring process … More seriously, there is a credible basis to suspect that Mayer provided inaccurate information to the Committee about the terms of the Original Offer Letter.'
• 3. "Did the Directors Breach their Fidicuiary Responsibility? ‘Grounds also exist for investigation into the roles played by the Yahoo directors.'
• 4. "Is there a Possibility of Wrongdoing? ‘[T]here is a credible basis to suspect the possibility of wrongdoing by Mayer, the Committee, and the Board.'
• 5. "Corporate ‘Waste' is an Issue Too? ‘In addition to a credible basis to suspect wrongdoing involving potential breaches of fiduciary duty, there is also reason to suspect waste […] The question for present purposes is whether there is reason to believe that waste may have occurred. There is reason to believe that by making changes to the Final Offer Letter, Mayer increased de Castro's compensation unilaterally, without Committee or Board approval, suggesting waste. There is also reason to believe that de Castro could have been fired for cause, thereby avoiding the payment of any severance. Instead, Mayer decided that the termination would be without cause, and the Committee members went along.'"

Peck concluded, "There is clearly robust interest in the core asset, but access to data is critical for serious buyers. Also, as the process drags on, we think the underlying fundamentals are likely to continue to deteriorate, which could suppress the ultimate sale value."