Yahoo: Icahn's Eager-Seller Tactics

The billionaire investor has lured Microsoft back to the table, but lack of an alternative Yahoo strategy could result in a lower price

by Catherine Holahan

Yahoo! investors hoping for a Microsoft (MSFT) buyout finally got cause for celebration. After losing one-third of its value since a February peak, Yahoo (YHOO) shares rallied on July 7 on news that Microsoft would return to the negotiating table, provided that Yahoo's board gets ousted (BusinessWeek.com, 7/7/08). "We will be prepared to enter into discussions immediately after Yahoo's shareholder meeting if a new board is elected," Microsoft said in a statement. The stock leaped 12%, to $23.91.

But how rich a deal do investors hope they'll get? Even if billionaire corporate raider Carl Icahn succeeds in his efforts to replace the board and boot Yahoo Chief Executive Jerry Yang, he's not likely to succeed in wresting the $33 a share Microsoft once offered. Indeed, the final sale price could be much lower—in the vicinity of $27, the current value of the half stock-half cash offer made public Feb. 1.

No Top-Dollar Offer Likely

There are several reasons Microsoft may not need, or want, to pay anywhere close to the $47.5 billion it was once willing to pay for Yahoo. Time, as Microsoft CEO Steve Ballmer has often said, is money. In the five months since Microsoft announced its $31-a-share offer, economic prospects have worsened and the regulatory climate has become less favorable.

Moreover, Icahn's desire to get a deal done, and his failure to offer a strategic plan for Yahoo should a deal come unraveled, could give Microsoft a negotiating advantage. "There is no tension in the process," says a source close to Yahoo. "You would just have to trust that Microsoft is somehow interested in what's best for Yahoo's shareholders." Icahn favors an acquisition with Microsoft over running Yahoo independently and he's repeatedly maligned Yang for not closing earlier talks with Microsoft. "Jerry Yang and the current board of Yahoo will not be able to 'botch up' a negotiation with Microsoft again, simply because they will not have the opportunity," Icahn wrote in an open letter to shareholders, reiterating his intention to sell Yahoo, or at least its search business, to Microsoft.

Sources insist that Microsoft and Icahn have not discussed a sale price, but Icahn clearly gives credence to Microsoft's concerns over spending as much for Yahoo as it once offered. Icahn takes the first couple of paragraphs of his letter outlining the risk Microsoft would be taking in doing a deal with Yahoo that could keep it from offering top dollar. "[Ballmer's] logic is simple," Icahn writes, explaining that Microsoft fears losing money while the transaction undergoes regulatory scrutiny due to mismanagement. "Microsoft would be putting its money at risk and a great deal could be lost."

Shareholders Not Favoring Independence

Icahn's desire to close a deal with Microsoft without proffering alternative strategies is a key reason Yahoo's board is urging investors to vote against the financier's proposed slate. Icahn's leadership "would not lead to an outcome that would be in the best interests of Yahoo," the board said in a statement. The company also challenged Icahn to have a plan for Yahoo's turnaround, should Microsoft decide that it does not want to pursue a deal. Without one, what's to stop Ballmer from continuing to walk away until Yahoo caves? Microsoft quit talks May 3 amid disagreements over price and since then has insisted it's no longer interested in an outright acquisition of Yahoo.

The prospect of a high price is diminished all the more by an economic slump.