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Eastbay Asset Management Letter To Shutterfly

EastBay Asset Management, LLC, together with its affiliates ("EastBay Onshore Fund, LP" and "EastBay Offshore Fund Ltd") currently own approximately 5.4% of the outstanding common shares of Shutterfly, Inc. ("Shutterfly" or the "Company").  We are writing to you to express serious concerns related to Item 8.01 in an 8K issued by the Company on February 23, 2016.   The Item is copied below:

The Company recently received communications directed to the Board from a private equity firm indicating an interest in acquiring the Company. The Company has also learned that a copy of a letter directed to the Board by the private equity firm has been sent by an anonymous source, without the Company's permission or knowledge, to certain participants in the investment community. The Board exercises its fiduciary duties in giving due consideration to such indications of interest, but is not engaged in negotiations regarding the sale of the Company. The Company's highest priorities at this time are delivering its 2016 results and hiring a new Chief Executive Officer. The Company does not intend to provide any further comment on this matter.

Management reiterated yesterday at the Cantor Fitzgerald Internet & Technology Conference that they were not engaged in negotiations regarding the sale of the Company.  We found several aspects of this communication to be deeply troubling-

1)To mention that "The Board exercises its fiduciary duties" yet is "not engaged in negotiations regarding the sale of the Company" is lip service and a contradictory statement.  Especially when it is our understanding that the offer is from a highly respected private equity firm with the initial bid materially above the current stock price.  Furthermore, the Board should also realize that this is just a "starting offer" that would likely be increased if an NDA is signed and a sale process is commenced.  Claiming that "delivering its 2016 results and hiring a new CEO" are higher priorities than exploring a very credible takeover offer is hard to fathom.

2)We strongly encourage the Board to fully investigate and identify the source of the leak.  We have our own suspicions given the unusual nature of the leak (electronically sent to multiple sell-side analysts!?!) that suggests someone new to this game with a motivation to sabotage the process.  Disseminating material insider information is a serious criminal offense.

3)We were surprised that the Company chose to disclose news of acquisition interest at the end of the filing under "Other Events"- behind items that were "old news" and previously disclosed by the Company.  The placement buried at the end of the 8K on top of the dismissive language suggests that this highly credible takeover approach is being viewed by the Board as an afterthought.

We find it hard to imagine a more opportune time to explore a strategic review.  An attractive unsolicited bid is on the table.  Despite many distractions, the busiest and most important quarter of the year is behind the Company with encouraging results.  The Company has an interim CEO in place and a new CFO.  The next logical step is to put the permanent CEO search on hold and conduct a formal review process with all prospective financial and strategic buyers.

Despite solid market share gains and consistent double-digit growth, Shutterfly has been in a five-year stretch of "no returns".   Amazingly, the key drivers of shareholder value destruction have been mostly self-inflicted.  These factors include collapsing returns on capital, egregious "pay for no performance" CEO compensation, numerous false promises, ever changing strategic priorities, and a lack of trust that the Board is looking out for shareholder's best interests.  While the CEO of the past 11 years is no longer at the helm of the company (as of last week), the Board of Directors that approved these ill-fated capital allocation decisions and unjustified compensation plans remains relatively intact.

We strongly encourage the Board to commence a proper strategic review and to be open to a sale of the Company that maximizes shareholder value.  The process was flawed in the Summer of 2014 and another botched opportunity is unacceptable.  Failure to represent the best interests of shareholders will lead to the second proxy contest in as many years and much needed change.