Icahn Begins Yahoo Board Battle

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Risks in Icahn's Move

Icahn, who in recent years has agitated for change at companies including Motorola (MOT), has some wind at his back. Some high-profile shareholders such as Gordon Crawford at Capital Research & Management have expressed unusually public criticisms of Yahoo and its board for not coming to an agreement with Microsoft.

So have some smaller shareholders, such as Eric Jackson, who led a campaign to unseat former Yahoo Chief Executive Terry Semel last year and recently told BusinessWeek he's unhappy with co-founder and current CEO Jerry Yang. "If I'm a small shareholder, I would appreciate Carl Icahn forcing the issue," says Espen Eckbo, founding director of the Center for Corporate Governance at Dartmouth College's Tuck School of Business.

Presumably Icahn would want to get the highest possible price for Yahoo. However, it's uncertain that would result from a proxy fight alone. Icahn's move, says Eckbo, could end up reducing Yahoo's bargaining position if it drags on and results in an outflow of talent or somehow makes Microsoft less likely to revisit a bid. So Icahn likely would want to move quickly to get the two companies together.

Ask.com's "Extraordinary Opportunity"

Icahn's other options for extracting further value from a Yahoo stake appear limited. Various other possible deals, such as Yahoo alliances with Google on search ads or with Time Warner's (TWX) AOL unit or News Corp.'s (NWS) MySpace unit, haven't materialized yet. Yahoo also holds some valuable stakes in overseas Internet companies such as China's Alibaba. But analysts have indicated that none of those options would likely hike Yahoo's value to the $33-a-share level that Microsoft said was its last offer.

Rivals of Yahoo and Microsoft, including Google and a raft of smaller competitors, are poised to take advantage of the current uncertainty. "It's an extraordinary opportunity for Ask.com," says Jim Safka, CEO of the small search site owned by IAC/InterActiveCorp. (IACI). "We're not going to miss a beat trying to exploit the distraction."

Ultimately, says Aiken, "Most people believe that Microsoft at some point will get the deal done." But the road to a Yahoo acquisition clearly has a few more twists and turns.

Hof is BusinessWeek's Silicon Valley bureau chief .