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Game over at AOL

by Richard Morgan | Published June 25, 2012 at 2:20 PM

AOL Inc. released its voting results on June 20, which put its proxy battle behind it -- not for just a year but always.

This is unfortunate in that the results show Jeffrey Smith, the CEO of dissident shareholder Starboard Value LP, captured 76% of the vote necessary to displace a standing member of AOL's eight-member board. Despite the strong showing, wherein Smith fell just 10.6 million votes shy of the 45 million necessary to secure a board seat, the probability that AOL chairman and CEO Tim Armstrong will face another proxy challenge as reasoned, determined and sophisticated as the one mounted by Starboard now hovers around 0%.

Only a fool, after all, seems likely to replicate the mission to which Starboard dedicated itself a full six months before AOL's June 14 annual meeting. And it effectively doesn't matter that, of its proposed slate of three dissident nominees, Starboard managed to win recommendations for two of its nominees from Institutional Shareholder Services Inc. and for one nominee from Glass, Lewis & Co. LLC.

Still, even though these recommendations were worthless, the historic reluctance of proxy advisories to cast their lot with dissidents leaves them with some significance. As Glass Lewis explained in its 26-page analysis, "We generally believe incumbent management, with access to more and better information regarding the company, should be given the benefit of the doubt regarding its strategic business decisions." But in the case at hand, the advisory came to "believe the incumbent board would benefit from a fresh perspective," which motivated it to tout Starboard's Smith "for election to the AOL board."

That it was easier for Starboard to convince the two proxy advisories of the need for a fresh perspective at AOL than it was the company's shareholders is telling in its own right. Also, were it not for its practice of keeping the number of dissident endorsements in line with the amount of equity owned by the dissident, Glass Lewis might have recommended the same two nominees from Starboard's slate as fellow advisory ISS did.

For investors, the implications are obvious. To own AOL stock today is to believe that Armstrong's faith in Patch -- the hyperlocal online news sites that AOL has rolled into 863 towns -- will deliver profits tomorrow. It is to believe in assurances by Armstrong that Patch will cease producing Ebitda losses estimated at $151 million in 2011 to achieve run-rate profitability by the fourth quarter of 2013.

But what if it doesn't? What if Patch proves to be the game-ender envisioned by Starboard instead of the game-changer promised by Armstrong? That discussion is over, sadly, having ended when Starboard, true to its anti-Patch position, sold down its 5.3% AOL equity stake. And it will resume only in the unlikely event another AOL shareholder musters the courage to step up in Starboard's stead.

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Game over at AOL

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