Starboard Raises Concerns About Yahoo Rumors -- 5th Update

By David Benoit And Michael Calia 

Activist investor Starboard Value LP sharpened its rhetoric toward Yahoo Inc., expressing concern about reports circulating on the company's potential next moves.

The investor pointed to media reports that have said Yahoo may be interested in acquiring cable entities. It also focused in on speculation that Yahoo was considering shedding its shares of Alibaba Group Holding Ltd. in a tax-saving maneuver known as a cash-rich split-off that Starboard believes would be the wrong choice.

"Such actions would be a clear indication to us that significant leadership change is required at Yahoo," Starboard founder Jeffrey Smith wrote in a letter to Yahoo Chief Executive Marissa Mayer, a threat the investor hadn't made in the past.

A Yahoo spokeswoman declined to comment on the letter. Ms. Mayer has said she plans to share more about her plan for the remaining Asian assets on or before Jan. 27, when Yahoo reports fourth-quarter results.

When Starboard first disclosed its investment in Yahoo in September, it pushed Ms. Mayer to stop making acquisitions and to focus on how to shed its Alibaba shares in the most tax-efficient way possible.

Starboard said it was concerned about recent reports that Yahoo is thinking about trying to acquire Scripps Networks Interactive or Time Warner Inc.'s CNN because Yahoo hasn't yet made clear its intentions for its Alibaba stake, worth more than $40 billion at recent prices. The investment makes up the vast majority of Yahoo's $46 billion market capitalization.

Yahoo hasn't approached Time Warner about buying CNN, a Time Warner spokesman said. And Yahoo hasn't had discussions with Scripps about buying all or part of the company, according to people familiar with the matter.

Mr. Smith urged Yahoo to disclose its plans for its Alibaba shares but warned again it believed that a so-called tax-rich split-off would be a bad move. Mr. Smith's letter says Yahoo agreed with that sentiment in a meeting between the two in October.

Starboard has urged Yahoo to separate its core operations--websites and Internet properties--from the Alibaba stake and other Asian properties.

In a cash-rich split-off, Alibaba would create an entity with two-thirds cash and one-third operating businesses that it would trade to Yahoo for the entire Alibaba stake. The move would save Yahoo from the taxes on its gains. Starboard has argued that approach would still cost more than breaking Yahoo up.

Bob Willens, a tax expert on corporate structures, said the cash-rich split-off would have more tax leakage and be "inferior to the other alternative." He also said that "a cash-rich split-off was going to be significantly more complicated than the spinoff."

Starboard hasn't disclosed the exact size of its Yahoo stake, but said it is a "significant" holder. Yahoo shares rose 2.2% to $49.68 in recent trading.

Douglas MacMillan and Keach Hagey contributed to this article.

Write to David Benoit at [e-mail] and Michael Calia at [e-mail]

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