Yahoo Hits Back at Icahn

(page 2 of 2)

And analysts say none of those deals is likely to hike Yahoo's value to near Microsoft's last offer. Yahoo shares rose 61¢, or 2.3%, to 27.75 on May 15.

Support System

What's more, many shareholders don't appear supportive of Yahoo's board. New York hedge fund Paulson & Co. has bought 50 million Yahoo shares and indicated it will support Icahn's slate of directors. Even longtime Yahoo holder Bill Miller of Legg Mason Capital Management cut the fund's Yahoo stake by 22%, to 72.2 million shares, though Legg remains the second-largest shareholder behind Capital Group. "Everyone seems to be climbing on the Icahn bandwagon," says Barry Genkin, a senior partner at Philadelphia law firm Blank & Rome. "He can put so much muscle on this," says Genkin, also chairman of the firm's shareholder activist practice.

Other shareholders are expressing support for Icahn, too, in hopes that he can push Microsoft and Yahoo back into each other's arms. "There's a really good shot that Microsoft could come back at the right price and if the Yahoo board is supportive of the deal," says Ryan Jacob, portfolio manager of Jacob Internet Fund. "Microsoft and Yahoo's shareholders understand that the combination gives them a decent chance to compete with Google."

Adding to Yahoo's challenges, the company this time faces a raider who, even more than Microsoft, will take no prisoners. In Microsoft, Yahoo had a suitor that, if unwelcome, at least had an interest in making sure the most valuable of Yahoo's assets were retained and enhanced over time, once inside Microsoft. Icahn has no such interest, so if Yahoo continues to resist and manages to prevent a deal with Microsoft, Icahn may force changes that could reduce Yahoo's long-term prospects.

Back to the Drawing Board?

If Icahn can't get Microsoft back to the table, for instance, he might insist Yahoo sell off valuable stakes in fast-growing properties such as China's Alibaba. Or he might lobby for a deal to outsource all of Yahoo's search advertising to Google, analysts have speculated. Yahoo and Google have been talking about a more limited deal, but an arrangement that ends Yahoo's search efforts completely would also limit its potential for growth. Those prospects, analysts and shareholders say, could help drive Yang and his board back to Microsoft.

At the same time, Microsoft's strategic imperative for the deal hasn't changed, in many analysts' view. The company needs Yahoo's huge audience of more than 500 million unique visitors worldwide to compete with Google in online advertising. And even though Yahoo's share of the search-advertising market is far smaller than Google's, it's still way ahead of Microsoft's. "Microsoft really does not have a Plan B, especially to win in search marketing," says Sandeep Aggarwal, an analyst with Collins Stewart.

New negotiations may not happen immediately, however. Genkin notes it's in Ballmer's interest to sit on the sidelines for now, letting Icahn do the dirty work to try to soften up Yahoo's resolve. For its part, Yahoo likely will take some time to assess how much shareholder support it has to hold out for a higher price, if not independence. "But unless somebody at Yahoo pulls a rabbit out of his hat, this kind of thing can't go on in perpetuity," Genkin says. At the least, the drama could come to a close at Yahoo's July 3 shareholder meeting when all the votes will finally be tallied.

Hof is BusinessWeek's Silicon Valley bureau chief .