AOL Takes Gloves Off in Proxy Fight

Activist investor 'lacks understanding,' writes Tim Armstrong

A few weeks ago it looked as though AOL was winning its proxy fight whereas Yahoo’s efforts were floundering. While Yahoo seems to have lost its battle with activist investor Third Point with the departure of Scott Thompson and the appointment of Third Point’s Daniel Loeb and two other nominees to Yahoo’s board, AOL’s is only just heating up.

Late Wednesday the company’s chairman and CEO Tim Armstrong took the gloves off in responding to Starboard. “We do not believe [Starboard Value CEO and chief investment officer] Jeffrey Smith and his Starboard nominees have demonstrated an understanding of AOL’s basic business model,” he wrote in a letter to shareholders that was filed with the SEC.

“They have put forth a series of what we believe to be misleading claims about our supposed standalone ‘display’ business,” Armstrong continued. “We believe they do not appreciate the interrelatedness of our content, advertising and access operations. We believe they have demonstrated no understanding of the local advertising opportunity, ignoring the impressive revenue growth that Patch has experienced over the last two quarters and its potential for future growth as we continue to implement our strategy in this high-growth area.”

Armstrong's missive comes just after Starboard Value had offered AOL an ultimatum. The firm would withdraw its nominees to AOL’s board provided the company return to shareholders all of the proceeds from its $1 billion patent sale to Microsoft—something AOL said a couple days later it would do—and “commit to specific, mutually-agreeable operating metric targets that would demonstrate meaningful improvement in profitability.”

Starboard didn’t outline what those targets would be, but according to a presentation filed with the Securities and Exchange Commission, it’s focused on returning AOL’s display business to profitability by examining the full costs of each AOL property and cutting the unprofitable ones, such as Patch, which Starboard calls “the largest single contributor to losses in display.”

While it's true that AOL’s domestic display business has suffered—the segment recorded $118.9 million in Q1 revenue, a 1 percent year-over-year dip—its global advertising business has been growing for four straight quarters, hitting $330.1 million in the most recent period on 5 percent year-over-year growth. The company didn’t break out numbers for Patch, but Armstrong said during last week’s earnings call that the business had already “booked 115 percent of revenue recorded in the entirety of 2011” and was expected to hit run-rate profitability by the end of 2013.

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