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Carl Icahn Starts Proxy Battle: The Next Step in Selling Yahoo! to Microsoft


by Caroline Dangson, IDC

On the eve of Yahoo!'s May 15th deadline for board nominations, billionaire investor Carl Icahn announced he had acquired 59 million shares worth about $1.5 billion of Yahoo! stock, and that he will exercise his power to nominate an entirely new slate of directors for Yahoo!'s board. Icahn risks making such a hostile move in order to persuade Yahoo! to invite Microsoft back to the negotiation table. If the deal goes through this time, Icahn could sell his shares of Yahoo! to Microsoft, hence gaining more of what he loves: money and power.

After months of talks, Yahoo! refused to take Microsoft's $33 per share bid on May 3rd and Microsoft walked away from the deal. Yahoo!'s decision not only turned off Microsoft, but its own shareholders as well who wrote letters of disappointment and criticism in reaction to the news. The Microsoft takeover was shareholders only hope of recouping the majority of losses their stock has experienced over the past year. Yahoo!'s plan to go it alone means shareholders have to be patient several more years before they could hope to see a similar type of return in the form of an increased stock price. Shareholders are not that patient; but are they so eager to sell that they would support a bold move by Icahn to oust Yahoo!'s current board? And can Icahn pull it off?

Icahn has three decades worth of experience in proxy battles - some he has won, some he has lost, but he certainly knows the drill. Most recently, Icahn was in the news for arguably forcing Motorola to split into two independent companies in order to unlock shareholder value. Time Warner resisted Icahn for a long time but had to agree to a few of his demands in order for Icahn to give up the proxy fight. Another reason Icahn also gave up the fight in this case is because large institutional investors for Time Warner did not back his plan. Of course, Time Warner's Board of Directors elected to replace CEO Richard Parsons last November.

In this case, Icahn has some good names on his candidate list: Amongst them are former Viacom CEO Frank Biondi, Adam Dell, a venture capitalist and brother of Dell founder and CEO Michael Dell, former Nextel Partners CEO John Chapple, and Robert Shaye, founder and co-CEO of New Line Cinema. So we believe there is bite to his bark. Icahn is in the business of making quick money and that is exactly his intention in threatening Yahoo! Icahn purchased Yahoo! at around $25 per share. If he manages to bring Microsoft back to the table, and the partners agree on Microsoft's last bid of $33 per share, he stands to make about $470 million. Shares of Yahoo! have risen 5% since Icahn announced his intentions two days ago raising the value of his share by $118 million ($2 increase times 59 million shares).

The fact that shares of Yahoo! rose 5% after CNBC reported Icahn's plan further indicates that at least some investors support his cause. The Wall Street Journal is reporting that people close to Icahn who are familiar with the matter told them that some large Yahoo! shareholders have contacted Icahn in recent days to encourage him to become involved. The question that remains is whether or not the majority of large Yahoo! shareholders agrees with Icahn's proxy plan. The truth will be known on July 3rd when shareholders vote on nominees at Yahoo!'s annual stockholder meeting.

Icahn and shareholders expect the new proxy threat will open the door for renewed negotiation talks between Yahoo! and Microsoft, now that Yang himself finds his position is in jeopardy. Microsoft has kept silent during all of this and the Wall Street Journal reports that people close to the matter confirm that Icahn has failed to get a response from Microsoft. We believe Microsoft still wants Yahoo! despite their recent statements of the opposite.

Three things could happen as a result of Icahn's threat:
- The new threat to oust Jerry Yang may be just enough to manipulate the situation to where Yahoo! is forced to return to the negotiation table with Microsoft. It should be clear to Yang by now that a few shareholders want the Microsoft deal to work bad enough to get Icahn involved. Steve Ballmer has found his match in Carl Icahn, who is as tough as investment moguls come.
- Yahoo! could potentially offer to enlarge its board to include a few directors on Icahn's list of nominees in return for his dropping any proxy effort to unseat the current board. This tactic recently worked for New York Times Co. when it added two seats to its board of directors to give them to dissident investors. Enlarging its board of directors to add a few seats for Icahn's nominees is not the strategy for Yahoo! to take as it will accomplish nothing. Icahn could have nominated just a few board members, but he has decided to go hostile in nominating an entirely new dissident board. Clearly, Icahn's deal is all or none.
- Yahoo! could push to finalize a partnership with Google to outsource its search advertising. Yahoo! and Google continue to be in talks about this matter. However, Google appears to be less enthused now that Microsoft has walked away becoming less of a threat. We believe Yahoo! would only agree to a deal with Google if it cared nothing about its board and shareholders and is dead set in resisting Microsoft (which is not likely the case). Outsourcing search ads to Google concedes defeat for Yahoo! Search ads remain a critical part of total advertising revenues and are key to web portal strategy. If Yahoo! wants to compete with Google, it has to do so with search. Therefore, Yang is left with returning to the negotiation table with Microsoft if he cares to keep his job.

Time is running out with no real winning options for Yahoo!. Yang will definitely do everything he can to avoid being ousted by Icahn. Therefore, Yang is cornered into choosing the lesser of several evils. Although Microsoft walked away from the deal earlier this month, IDC believes it still wants and needs Yahoo! to make any inroads in the online space. By appearing disinterested, Microsoft can take advantage of the high-risk tactics of Carl Icahn and the desperation that comes with the passage of time to acquire Yahoo! for possibly a little less than $33 per share ($33 was never put in writing). It's an unfortunate fate for Yahoo!, but nevertheless the only one that would work given the circumstances. Short-term shareholder value does not always match up with long-term corporate strategy, but unfortunately shareholders have the final say. It will be interesting to see what is left of Yahoo! after this saga plays out.



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