Market Overview

AOL Retains Full Board, Wards Off Starboard's Activism


AOL (NYSE: AOL) shareholders have rejected a bid by activist investor Starboard Value to shake up the company's board of directors. AOL's slate of board nominees -- Tim Armstrong, Richard Dalzell, Karen Dykstra, Alberto Ibarguen, Susan Lyne, Patricia Mitchell, Fredric Reynolds and James Stengel -- were elected at the company's annual meeting in Boston.

Starboard, which is run by Jeffrey Smith and controls a 5.3% stake in the company, was seeking to install three board members. Investors have benefited from a rising stock price in 2012, and likely took this into consideration in backing the company's slate of board members. Year-to-date, AOL shares are up more than 67% as the company seeks to transform itself into a major player in the internet advertising business. Shares, however, are under pressure on Thursday after the announcement and were last trading down nearly 7%.

AOL purchased Huffington Post for $315 million last year and is spending as much as $300 million investing in local news service Patch, which was co-founded by CEO Armstrong. “The company is re-engergized and refocused, and we have one of the best brands in the Internet space,” Armstrong told shareholders at the meeting. “We are going to grow the brand back to where it should be.”

Despite the steps that the company has taken to transform its business model, more challenges certainly lie ahead for AOL. Investors are currently paying a premium for the stock, suggesting that there is some optimism that the company will be able to successfully re-brand itself. Shares trade at trailing P/E of nearly 89, a forward P/E of 28.43, and a PEG ratio of 2.38. The stock does not pay a dividend.

Compare this to Yahoo (NASDAQ: YHOO), which has also struggled mightily in recent years, which trades at a trailing P/E of 17.46, a forward P/E of 13.61 and a PEG ratio of 1.20. Despite being a larger, more established player in the online advertisement business, YHOO is trading at a substantial discount to AOL shares, and it could be argued that YHOO is slightly overvalued given its abysmal track record.

Short-sellers are certainly somewhat skeptical about the future prospects for AOL, as around 12.50% of the float has been sold short. On Thursday, the sell-off in the stock has pushed the shares below both their 20-day and 50-day moving averages which might be foreshadowing more losses ahead.

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