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The Morning Brief: Starboard Pushes for Changes at Yahoo

Starboard Value’s Jeffrey Smith is taking on perhaps his most high-profile target since he launched his activist hedge fund firm in 2002. New York-based Starboard, which until recently was specializing in targets with $1 billion in market capitalization and less, on Friday sent a letter to Yahoo president and CEO Marissa Mayer, urging the head of the $40 billion-market-cap company to merge with AOL, a one-time Starboard target.

“We believe that a combination of Yahoo and AOL could offer synergies of up to $1 billion by significantly reducing the cost overlaps in their display advertising businesses as well as synergies in corporate overhead,” states Smith in the letter. The activist, who said Starboard has acquired “a significant” but unspecified stake in Yahoo, also calls on the company to cut costs, end its aggressive acquisition strategy and execute “a tax-efficient monetization” of Yahoo’s non-core assets — Alibaba and Yahoo Japan. Smith states in the letter that Yahoo’s stakes in the two companies are worth $56.62 per share on a pre-tax basis and $40.82 a share on an after-tax basis. Yahoo’s stock closed Friday at $40.66, after rising 4.39 percent.

Starboard is concurrently engaged in a high-profile proxy fight with Darden Restaurants.

Smith, who has been one of the most active activist hedge fund managers over the past few years, has total committed capital of roughly $3 billion, according to people familiar with the firm. He recently launched a new fund, the Starboard Partners Fund. Institutional Investor reported earlier this year that the firm has racked up a 15.5 percent annualized return from its 2002 inception through May 2014.

This is Yahoo’s second encounter with an activist hedge fund firm. In 2011, Daniel Loeb’s Third Point reported a 5.2 percent stake and the following year he and two others joined the board and played a prominent role in ousting the former CEO and bringing in Mayer. They resigned in 2013 and Third Point sold its stake back to Yahoo, generating a 129 percent gain on its original stake, according to reports at the time. Several years ago Smith lost his proxy fight with AOL but posted big gains on the stock.

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In other Starboard news, the firm on Friday said in a regulatory filing that proxy research and governance firms ISS and Glass Lewis & Company each recommend that shareholders vote for all 12 of Starboard’s director nominees at Darden Restaurants’ upcoming annual meeting. The hedge fund quotes Glass Lewis stating that Starboard “has made a compelling case that election of all of its nominees is warranted” and that the election of all 12 of Starboard’s nominees “is more likely to effect long-term improvements and provide greater board oversight” at Darden. Starboard quotes ISS asserting that the hedge fund has “made a compelling case that a change in control is warranted, have provided a detailed strategic and operating plan to minimize the risk of unintended consequences, and nominated a compelling slate of candidates.”

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Valeant Pharmaceuticals International announced that Jeffrey Ubben, founder of San Francisco-based ValueAct Capital, was appointed to its board of directors, effective October 1. It also stated that ValueAct, which has had a major stake in Valeant since 2006, intends to add to its existing position, which is the fund’s second largest holding already.

Valeant has teamed up with activist hedge fund Pershing Square Capital Management to make a hostile bid for Allergan. Earlier this year ValueAct president Mason Morfit resigned from the board of directors of Valeant, where he served since 2007. Over the years, ValueAct played a major role in Valeant’s cost-cutting campaign and its decision to sell its pharmaceuticals pipeline so it could focus on its less volatile branded generics business, enabling it to slash its research and development budget by more than half. In 2008, ValueAct recruited J. Michael Pearson from McKinsey & Co. to serve as chairman and chief executive officer of Valeant.

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Big shake-up at Michael Platt’s BlueCrest Capital Management. The London-based firm said it is spinning off its $8.3 billion computer-driven hedge funds into a new firm, Systematica Investments, according to Bloomberg. The firm, which will be led by Leda Braga, BlueCrest’s head of systematic trading, will be responsible for the BlueTrend Fund and BlueTrend 2x Leveraged Fund.

In a separate development, BlueCrest laid off four U.S. stock fund managers for performance-related reasons, according to Bloomberg, citing a person with knowledge of the matter. BlueCrest’s assets had fallen to $27.4 billion from a peak of $37.4 billion in May 2013, according to the report.

Earlier this month, the BlueTrend funds cut their management fee from 2 percent to 1.5 percent. In an interview with Bloomberg, Braga said the spinoff will make it easier to control risk. Braga and Platt have “talked about this over a period, on and off, and the different reasons and in different contexts for doing it,” she said, although she did not provide additional details.

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Steven Cohen’s family office, Point72 Asset Management, disclosed that it owns 5.1 percent of Stage Stores Inc., a retailer known for its Bealls, Goody’s Palais Royal, Peebles and Stage chains. It is a passive investment, according to a regulatory filing.

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