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Forget AOL -- Activist Attack on Yahoo Is All About Forking Over Alibaba Cash

The Silicon Valley Internet giant has been like catnip to Wall Street's shareholder warriors over the years.

While the noisy late Friday afternoon attack on Yahoo by perennial shareholder attacker Starboard Value was designed to attract headlines, especially the suggestion that the Silicon Valley Internet giant merge with AOL, it was just a feint for the real purpose of the parry.

Which is — according to a spate of sources I talked to and because it is as obvious as can be — to put pressure on Yahoo CEO Marissa Mayer to hand most of the cash from its huge stake in Alibaba Group and other Asian assets — both today and in the future — back to investors rather than using it to make big acquisitions.

Yahoo already has promised give back half of the billions of dollars it is garnering in the sale of a portion of its large stake in the Chinese e-commerce company in its IPO last week.

But a range of big shareholders want it all, as Re/code has previously reported they did, as well as the rest of any money Yahoo makes when it can sell any of the 16 percent stake it has left in Alibaba. In addition, investors want Yahoo to unlock the value of its 35 percent ownership in Yahoo Japan, by employing a variety of creative tax-saving tactics that Yahoo CFO Ken Goldman has publicly promised he would do.

What it’s not as much about is a strategic hook-up with AOL, which Yahoo has been pitched by a variety of investment bankers over the last year and also very recently and which Mayer has largely rejected.

As I wrote previously, many think such a merger could save costs by bringing together two companies that are in the same two key businesses, advertising and content. Others consider it a potential disaster, knitting together two companies saddled with backward-looking assets and a questionable recipe for future growth.

That is, outside of acquisitions, which Mayer has employed heavily in the past two years of her leadership, frantically buying up a range of small mobile-focused startups to try to inject more innovation, talent and product savvy into the long-moribund Yahoo.

While the effort is laudable in principle, investors seem unimpressed with her purchases, and, at this point at least, they have yielded no concrete bottom-line improvements to Yahoo’s much-flagging core business.

Thank goodness for the Asian assets then, which have caused the stock of Yahoo to soar over the last two years and shielded Mayer from her apparent lack of progress in turning around the company.

Now, as the gift that keeps on giving, the Asian holdings have become a kind of poison pill for Yahoo, because the rest of the Alibaba stake must be held for at least a year and unwinding the Japanese assets is extraordinarily complex. Most of all, any related transactions require elaborate cooperation with both Alibaba and also SoftBank, which controls both Yahoo Japan and holds a huge chunk of Alibaba.

In other words, Mayer best be trying really hard to get along with Alibaba’s Jack Ma and SoftBank’s Masa Son right about now.

She will certainly need the help if Starboard’s aggressive move — one hedge fund big told me that it was one “ballsy, but crazy” effort — causes others to pile on. That did not happen in the case of AOL, when Starboard took a shot at AOL two years ago by trying to shake up its board and questioning CEO Tim Armstrong’s leadership. But, while it lost the bid to install its own directors, it eventually forced the company to sell valuable patents and distribute the money to investors.

With Yahoo — which has been like catnip to activist investors over the years — Starboard is back to the “unlocking value” argument, pointing to the Asian assets and also to cutting costs and halting the incessant purchases by Mayer. Most loudly, it proposed the AOL merger, which it claimed — presumably Starboard pretty much made up the number — could save $1 billion.

So far, there have been no serious talks between Yahoo and AOL, though Starboard is hoping to prime the pump.

“Interestingly, based on our research and the legal advice we have received on how to unlock the value of Yahoo’s equity holdings, we believe a merger of AOL and Yahoo’s core business may be one of the best ways to both fully seize the cost reduction opportunity and also to tax-efficiently monetize Yahoo’s non-core equity holdings,” wrote Starboard’s Jeffrey Smith. “We trust the board and management will do the right thing for shareholders, even if this may mean accepting AOL as the surviving entity in a combination, should that be the best and most tax efficient structure.”

That line had to hurt Mayer, whom sources say has been particularly focused on AOL’s Armstrong not taking the CEO role when she has been presented such a deal in the past. Both worked previously at Google.

Tiresome leadership rivalry aside, in the last few months, numerous sources have told me Mayer has told them that she has also been on the receiving end of a lot of messages from big investors that they want a lot of the Asian money back. Such requests have been vexing to Mayer, these sources said, who has a large shopping list of companies to help get Yahoo on track.

Thus, it will be interesting to see how Mayer reacts to the Starboard attack. She did issue a statement Friday, titled “Yahoo! Inc. Reiterates its Commitment to Delivering Shareholder Value” that said exactly nothing:

We are committed, as an organization, to acting in the best interests of the Company and all of its shareholders. We have maintained, and will continue to maintain, an open dialogue with all of our shareholders. As part of our regular evaluation of Yahoo’s strategic initiatives to drive sustainable shareholder value, we will review Starboard’s letter carefully and look forward to discussing it with them.

Going forward, we have great confidence in the strength of our business. The management team and the Board of Directors remain committed to building value for all shareholders through the continued execution of our strategy, investing in products that will drive sustainable growth: search, communications, digital magazines and video. We continue to leverage our portfolio of world-class products which include Yahoo Search, Mail, News, Sports, Flickr, Tumblr, and advertising solutions among others. Additionally, we will continue to focus on evaluating various capital allocation initiatives, an update to which we plan to provide on our third quarter earnings call.

Her best move next, say many who have been through this before, is to at most to continue to publicly agree with Starboard that much needs to be done at Yahoo without promising to do anything specific at all.

And then do what she whatever wants. “Her only bad move is to panic now and react to Starboard with more than a meaningless smile,” said one person familiar with the situation. “Mayer has a board that is in her pocket, and they are not going to argue with her in any way, so why worry too soon?”

Translation: Just because a dog barks at you doesn’t mean it’s going to bite. Then again, it just might.

This article originally appeared on Recode.net.

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