Two notable activist filings were released this past week, both involving shareholders who see tremendous value from separating pieces of the business. Interestingly, one is a traditional brick and mortar business while the other is an Internet based business. Yet, both are in the business of delivering information and while the two situations are different, the approach taken by both activists is in many ways similar.
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Now Deeply Undervalued
Investment firm Starboard Value has increased its stake in AOL (NYSE:AOL) and has stated that the company is "deeply undervalued." AOL may forever go down in history as making one of the most value destroying acquisitions in corporate history: the purchase of Time Warner (NYSE:TWX) back during the height of the Internet bubble. Today, both are separately traded companies. Time Warner commands a market cap of $37 billion and yields nearly 3%, while AOL has a market valuation of $1.7 billion. This valuation is a far cry from the $100 billion plus valuation AOL commanded over a decade ago.
According to Starboard, AOL's current valuation gives no value to the company's media assets, which include things like MapQuest. AOL currently has over $300 million in net cash and has the potential to generate massive free cash flow. In 2009 and 2010, free cash flow was about $750 million and $500 million, respectively. Starboard, at the moment, is hoping to work with current management to improve operating performance and pursue opportunities. Starboard owns 5.1% of AOL after buying another 1.25 million shares at $13.87 to $18.77 a share. Shares currently trade for $18.14. (For related reading, see Free Cash Flow: Free, But Not Always Easy.)
Saving a Dying Industry
Barnes and Noble (NYSE:BKS), the largest remaining brick and mortar retailer of books, is under attack from an activist investor to spinoff the company's Nook eReader business. Hedge fund G. Asset Management owns 5% of BKS through stock and call options. In a letter to the Board, G. asked the company to separate the Nook business "as soon as possible." Earlier this year, the company undertook a plan to separate the Nook business. Amazon (Nasdaq:AMZN) has changed the way people buy books forever, and even after the bankruptcy of rival Borders reduced competition, the environment is still tough. In addition to getting books cheaper on Amazon, strong sales of eReaders such as the Amazon Kindle and Apple's iBooks app for the iPad, eBook shares continue to take share away from traditional books.
The Bottom Line
Many see Barnes' Nook as a strong competitor to the Kindle. Spinning it off as a separate entity will likely give a higher stand-alone valuation or make it an attractive acquisition for Amazon, Apple or even Google (Nasdaq:GOOG) as a way for it to beef up its eBook business.
Investors in AOL and BKS both believe in differing ways that each company possesses valuable assets that are not being properly valued in the market. Any moves made to make that happen could be favorable to shareholders.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.