Yahoo Hits Back at Icahn

In a May 15 letter to Carl Icahn, Chairman Roy Bostock details negotiations with Microsoft and defends the board's actions

by Robert Hof

Just hours after billionaire financier Carl Icahn launched a battle to replace Yahoo's board and get the Internet icon back into talks with onetime suitor Microsoft (MSFT), Yahoo! (YHOO) fired back. In a May 15 letter to Icahn, Yahoo Chairman Roy Bostock disputed Icahn's characterization of Yahoo's aborted talks with Microsoft as "completely botched" and insisted Yahoo's current board is the best group to lead the company.

Bostock's letter provides some of the most detailed insight yet into months-long negotiations between Yahoo and Microsoft, which on Feb. 1 made public its unsolicited takeover offer of $31 a share. The strongly worded riposte also underscores the company's resolve to chart its own course in the face of investor criticism over how it has grappled with competition from Google (GOOG) and responded to Microsoft's overtures.

At the same time, the letter gives little indication of Yahoo's next move in response to Icahn's broadside. The only hint comes in Bostock's statement that "we have been and remain willing to consider any proposal from any party including Microsoft if it offers our stockholders full and certain value." The latter adjective, "certain," indicates Yahoo considered a key obstacle to reaching a deal to be Microsoft's half-stock offer, whose value declined along with Microsoft's market value since the initial bid.

Bostock also shot back at Icahn, whose earlier withering letter said Yahoo's board "acted irrationally." Icahn nominated 10 potential directors, including himself, lieutenant Keith Meister, Dallas Mavericks owner Mark Cuban, and former Viacom (VIA) Chief Executive Frank Biondi Jr., expressing hope they'll be more willing to cut a deal with Microsoft. Bostock noted that no offer is now on the table from Microsoft or anyone else. "We do not believe it is in the best interests of Yahoo! stockholders to allow you and your hand-picked nominees to take control of Yahoo! for the express purpose of trying to force a sale of Yahoo! to a formerly interested buyer who has publicly stated that they have moved on," he wrote.

"Misunderstanding of the Facts"

The letter outlined in some detail how the three-month-long talks proceeded with Microsoft. It disputed Microsoft's contention when it walked away from the deal on May 3 that Yahoo's board didn't bargain in good faith. "Unfortunately, your letter reflects a significant misunderstanding of the facts about the Microsoft proposal and the diligence with which our board evaluated and responded to that proposal," Bostock wrote.

Bostock said Yahoo's board met more than 20 times to review Microsoft's proposal and other alternatives. He also said senior management of Microsoft, Yahoo, and their financial advisers spoke on "numerous occasions" and met in person seven times. Bostock said that Yahoo at an Apr. 15 meeting presented a list of "key non-price deal terms," to which he said Microsoft did not respond. He also repeated Yahoo's contention that Microsoft did not deliver its final $33-a-share offer in writing and did not include details of the mix of stock and cash, which could affect the actual value of the offer.

Although Bostock's letter didn't make Yahoo's course of action clear, Yahoo's options today appear limited. A potential deal to let Google run its more lucrative ads alongside Yahoo search results hasn't come to pass, despite a trial that both companies said was successful. Likewise, nothing has come of rumored talks about combining forces with Time Warner's (TWX) AOL or News Corp.'s (NWS) MySpace.