AOL, Inc. AOL
AOL's board lets management burn Access/Search cash on a Display strategy losing $500M+ a year; elect three Starboard nominees to enforce discipline and restructure or exit Patch.
Thesis
Starboard has invested approximately $129 million (5.3%) in AOL and is contesting the 2012 Annual Meeting with three director nominees. The core thesis is that AOL's profitable Access and Search segments generate roughly $900M of EBITDA that management has redirected into a value-destroying Display strategy: $668M of acquisitions plus $235M poured into Patch, while enterprise value declined $1.7B (59%) from 2009-2011 and Display lost an estimated $1.3B cumulatively. Patch is structurally unprofitable, with 70% local-advertiser churn, only 18% local ad fill versus an 80% target, and 30 of 30 surveyed national advertisers unwilling to pay for hyper-local inventory. Compounding this, AOL's cherry-picked peer group (Apple, Microsoft, Google) produces executive compensation 3.4x an appropriate peer median. Miller, Smith, and Warner would impose cost discipline, restructure or exit Patch, and realign governance.
SCQA
AOL's Access and Search segments generate roughly $900M of adjusted EBITDA annually, a legacy cash engine inherited from the 2009 spin-off from Time Warner, even as subscriber counts decline.
Management has diverted that cash into Display, spending $903M on acquisitions and Patch since 2009; Display now loses over $500M per year, Patch churns 70% of advertisers, and enterprise value fell $1.7B (59%).
Elect Starboard's three nominees (Miller, Smith, Warner) to enforce financial discipline on Display, restructure or exit Patch, realign the cherry-picked peer group, and reform pay-for-performance.
Shareholders recapture the roughly $933M of adjusted EBITDA currently masked by Display losses, close the peer performance gap, and benefit from governance aligned with ISS and Glass Lewis best practices.
The three reasons
- 1
AOL spent $903M on Display acquisitions while enterprise value fell $1.7B (59%) from 2009-2011
- 2
Display loses $500M+ per year; Patch alone drops ~$150M and churns 70% of local advertisers
- 3
Cherry-picked peer group (Apple, Microsoft, Google) drives exec pay 3.4x an appropriate median
Primary demands
- Elect Starboard's three nominees (Dennis Miller, Jeffrey Smith, James Warner) to the AOL Board at the 2012 Annual Meeting
- Substantially improve the profitability of AOL's Display business via full cost allocation and discipline
- Joint venture, sell, shut down, or otherwise restructure Patch to profitability
- Explore alternatives for remaining intellectual property, real estate, and capital structure efficiencies
- Reform the compensation peer group and pay-for-performance practices flagged by ISS and Glass Lewis
KPIs cited
Pattern membership
Where this document fits across the library's 12 rhetorical / structural patterns.
Precedents cited
- Starboard's 22.3% average 13D return (per 13D Monitor)
- Surmodics operating margins -4.6% to 30% under Jeffrey Smith
- Actel sale to Microsemi at 146% premium during Smith's directorship
- Phoenix Technologies operating margins -36% to ~20% under Smith as Chairman
- aQuantive sale to Microsoft for $6B during James Warner's tenure
Notable slides (6)
Notes
Classic Starboard proxy-fight deck: 96 pages of dense, prosecutorial analysis commissioned from L.E.K. Consulting and an independent compensation consultant. Three rhetorical engines drive the argument: (1) a peer-gap narrative on stock price and EBITDA margin, (2) a serial CEO-quote-contradiction sequence tracking Tim Armstrong's escalating Patch spend and shifting monetization timelines, and (3) a forensic peer-group takedown showing AOL benchmarked against Apple/Microsoft/Google to justify pay. No formal sum-of-parts valuation or single target price - the deck reveals the latent $933M ex-Display EBITDA but stops short of applying a multiple. The CY2011 segment P&L on page 14 is the most stealable slide: it isolates Display and Patch to show the core is masked. Segment-level break-out is present but not a valuation SOTP, hence contains_sum_of_parts=false. Stengel named as secondary villain with a Motorola-era ISS/Glass Lewis track record attached.