Yahoo and AOL are both former tech/media darlings in the midst of turnaround efforts, but lately they’ve had a striking divergence of fortune. One is mired in a tawdry CEO resume-puffing controversy, while the other is enjoying Wall Street favor. Both have received heaps of abuse in recent years as they’ve labored in the shadow of Google and Facebook, and both still face a steep climb to get anywhere near their former glory. But so far this year, AOL shares have soared over 70%, thanks in part to a savvy, billion-dollar patent sale to Microsoft, while Yahoo shares have languished, down 5%
Indeed, Yahoo appears to be hovering close to disarray. The troubled Internet pioneer finds itself embroiled in a bizarre episode involving its CEO Scott Thompson, who has admitted he doesn’t posses the computer science degree he listed on his resume when he got the Yahoo job. AOL, by contrast, is riding a wave of shareholder good will after raising $1 billion selling most of its patents to Microsoft. And on Wednesday, AOL beat Wall Street expectations with a four-fold increase in profit. (Disclosure: This author was a reporter at AOL Daily Finance from 2009-2010.)
One thing both companies have in common: a contentious proxy fight with a powerful shareholder. AOL has so far managed to fend off its combatant, a hedge fund named Starboard Value that owns 5.3% of the company’s shares. Yahoo, meanwhile, has been bloodied by its foe, finance titan Dan Loeb’s Third Point hedge fund, which owns 5.8% of its shares. Loeb has waged an aggressive campaign against Thompson, recently — and correctly — calling the CEO’s academic record into question.
Thompson, it turns out, embellished his resume by adding a non-existent computer science degree from Stonehill College, in the Boston area, which he attended three decades ago. The phantom computer science degree was listed on Thompson’s official Yahoo bio, as well as filings with the Securities and Exchange Commission. Apparently no one at Yahoo checked out Thompson’s degrees when he was hired, just a few months ago. Loeb has demanded that Thompson be sacked over the bogus credential.
Yahoo initially called the matter an “inadvertent error” and said it “in no way alters that fact” that Thompson is a “highly qualified executive with a successful track record leading large consumer technology companies.” Then as the controversy grew, the board formed a “special committee” to review Thompson’s academic record, as well as “the facts and circumstances related to the review and disclosure of those credentials” in his hiring process. Just hours later, Yahoo announced that International Game Technology CEO Patti Hart, the board member who played a key role in Thompson’s hiring, would be departing. (Her academic credentials have also been questioned.)
Meanwhile, perhaps smelling blood, Loeb escalated his assault Wednesday, demanding that Yahoo CFO Tim Morse or media chief Ross Levinsohn become interim CEO. “Third Point has over $1 billion invested in Yahoo, and we take no joy in witnessing this carnage,” Loeb wrote to the board. “This board’s unchecked value destruction must stop once and for all.” He added: “It seems farcical to us that the Board will most likely spend more time deliberating over whether Mr. Thompson should be fired than it did properly vetting whether he should have been hired.” (Speaking at a hedge fund conference in Las Vegas Wednesday, Loeb piled on, saying: “They’ve missed every major trend on the Internet: social, local, you name it,” according to CNBC’s Kate Kelly.)
While Yahoo has been slowly twisting in the wind, AOL very-pleasantly surprised Wall Street on Wednesday, reporting earnings that topped analyst forecasts. The company said it would be returning to shareholders all of the $1 billion it made in an intellectual property deal with Microsoft. (Microsoft, in turn, is re-selling most of the patents to Facebook, in a kind of strategic gesture of good will ahead of the social network’s forthcoming IPO. Facebook is currently locked in a patent showdown with, you guessed it, Yahoo.) AOL shares rose 3.5% after the results were announced and Reuters quoted Needham & Co analyst Laura Martin describing the quarter as “awesome.”
It’s been a long time since Wall Street analysts were throwing the word “awesome” around in reference to AOL. But the company shouldn’t celebrate: It still has the looming proxy battle with Starboard Partners, which could boil over at the annual meeting in June. And it still faces a very steep business challenge. As Citigroup’s Mark Mahaney wrote Wednesday in a note to clients: “Overall fundamentals remain weak and there are no signs of market share gains in any of AOL’s core businesses.”
But at least it’s not dealing with an embarrassing personal ethics scandal involving its CEO. As for Yahoo, the mis-credentialed Thompson may be able to hang on for a while longer, if the controversy dies down. But it’s questionable whether Thompson will ultimately be able to win a war of attrition with the deep-pocketed Loeb, who appears committed to his ouster.