Yahoo CEO Marissa Mayer downplayed the threat posed by activist investors for more than a year, dismissing the danger as a noisy distraction and setting the stage for a showdown that could now cost Mayer her job.

The fight between Mayer and activist investor Starboard Value took a dramatic turn on Thursday when Starboard publicly floated a plan to replace Yahoo’s entire board of directors with its own people — a brazen move that would effectively hand control of the Internet company to Starboard.

According to some Yahoo insiders, Mayer’s recognition and efforts to quell the outside threat came far too late.

“She viewed [Starboard] as a ‘bit player’ because they owned such a small percentage, that this was a standard ploy for them to garner PR and attention,” one person familiar with the matter recounted of Mayer’s attitude to Starboard’s initial criticisms in 2014. “She did not take them seriously, when it first arose.”

With Yahoo now under siege by Wall Street activists for the third time in eight years, the company finds itself in an all-too-familiar situation. And for Mayer, who was herself hired as CEO by the previous activist investor to gain influence at Yahoo, the showdown reflects an almost poetic culmination to an ambitious and still inconclusive Silicon Valley comeback story.

Small stake, small threat

There’s no telling if Starboard will prevail in a looming proxy fight with Yahoo. But the hedge fund has achieved a fearsome reputation for its aggressive tactics, best exemplified by its success ousting the entire board of the Olive Garden restaurant chain’s parent company, Darden, in 2014. “They’ll rip your face off,” says one industry insider.

Even so, there were no alarm bells ringing at Yahoo when the struggling Internet company landed in Starboard’s sights a couple of years ago.

When Starboard sent its first letter to Yahoo in 2014, the hedge fund had an even smaller stake than the 1.7 percent ownership it has in the company now. And despite making bold demands at the time — like advocating a merger between Yahoo and AOL — Starboard faded away and went quiet for a while, emboldening Mayer to believe she had regained the support of the broader investment community, according to a person close to management.

The message within the Yahoo senior ranks and to the rest of the company was that Starboard was not a serious threat. At an all-hands meeting held a few months ago, Mayer and her team seemed to downplay Starboard’s impact, given its small stake in the company, and told employees that the negative press reports were all part of the activist investor’s PR scheme to create “noise,” a current employee said.

Neither Yahoo nor Starboard responded to request for comment.

Changed attitude

Mayer started to take Starboard more seriously in recent months, after the activist investor resurfaced.

In November, Starboard called for Yahoo to abandon the sale of its stake in Chinese ecommerce company Alibaba and to focus instead on the sale of Yahoo’s core internet business. A month later, Mayer scrapped the Alibaba spin-off plan, and last month, she announced Yahoo would field offers for its core business.

Still, Mayer remained confident in her plan to turn the company around and didn’t always address the activist issue in company meetings, according to another former employee.

“She was dismissive of any questions from employees about this at company meetings,” this person said.

Given the challenges facing Yahoo’s business, Mayer’s decision to keep employees focused on the turnaround mission rather than spreading fear among the rank-and-file was not unreasonable, say some defenders. Mayer’s main priority was taking on Google and Facebook and reversing Yahoo’s stagnant revenue growth and shrinking market share.

Indeed, Mayer’s passion has instilled a sense of confidence in some Yahoo employees. Another insider at Yahoo has told Business Insider that some on the team still believe in Mayer and Yahoo and are not worried about the activist threat. Some employees feel like the company has survived similar storms in the past and believe that business will eventually go back to normal.

But the failure to take the activist threat seriously ran deeper than Mayer’s message to employees. Some executives urged her to pay more attention to shareholder demands, but Mayer insisted on staying laser-focused on product development, one of the people said.

“She believed that Yahoo was competing with Google and Facebook,” this person explained. “She was so passionate about the product, and it created a layer of disbelief she had that anyone would question her.”

Blind confidence

Yahoo’s recent moves suggest that the company may feel confident about its chances in a proxy fight against Starboard.

On the day that Yahoo and Starboard were scheduled to meet for the first time earlier this month, Yahoo announced two new board members, without having consulted Starboard, a move that many perceived as a sign that Yahoo was preparing for a fight.

Yahoo is also reportedly frustrating potential buyers by dragging its feet in any potential talks. Yahoo has made non-industry-standard, long nondisclosure agreements, keeping potential buyers on hold, according to another source.

“While the business rationale for making such a move on the eve of the meeting with Starboard remains unclear, we believe it likely signifies that Yahoo has already been gearing up for a proxy contest,” SunTrust analyst Bob Peck wrote in a note, referring to Yahoo’s hiring of the two new board members so close to its meeting with Starboard.

There’s still a chance that Yahoo and Starboard could reach a settlement that prevents the situation devolving into a proxy fight. And even if they do enter a proxy fight, there’s no guarantee that Starboard will win. In spite of Starboard’s success replacing the entire board of Darden, full board takeovers are typically extremely difficult, especially for a company of Yahoo’s size (nearly four times that of Darden).

Regardless, Mayer’s unwillingness to work more closely with activist investors has resulted in rising tension and the prospect of a bruising proxy fight, which puts her job on the line. Barring any sudden settlement, it will be the shareholders who decide if she gets to stay at the company.

“Something’s got to change now, quickly,” one of the former employees said. “It’s just a mess.”

This story originally appeared on Business Insider.


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