Carl Icahn Keeps Yahoo in Play

Posted by: Rob Hof on May 13, 2008

Ten days after escaping a bear hug from Microsoft, Yahoo hasn’t completely won its independence yet. Billionaire financier Carl Icahn is looking at launching a proxy fight against Yahoo’s board, according to a CNBC report. That’s a fight that Microsoft, which dropped its unsolicited bid for Yahoo on May 3, was unwilling to take on.

Icahn reportedly has been accumulating as many as 50 million shares, or 2.5% of Yahoo’s stock, which helps explain why Yahoo’s stock has remained well above its pre-Microsoft bid of about $19 a share. Icahn could nominate a full slate or a “short slate” of three or four directors, which would be a minority of Yahoo’s 10-member board. According to the Wall Street Journal, other investors, including Scott Galloway, founder of investment firm Firebrand Partners, also could get involved.

The sources are saying the notorious corporate raider’s aim would not be to make a run at the company himself, but instead to try to force a sale to Microsoft. It’s unclear whether Microsoft is still interested, however. Investors took the bait anyway, as Yahoo’s stock rose 5% today, to $26.56 a share.

If not Microsoft, who? Icahn wouldn’t appear to have many other ways to extract further value from a Yahoo stake. Various other possible deals, such as Yahoo alliances with Google on search ads or with Time Warner’s AOL unit or News Corp.’s MySpace unit, haven’t materialized yet. And 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.

Although Microsoft CEO Steve Ballmer appeared to become less enamored of a Yahoo deal over his three-month-long pursuit, a number of analysts and others close to the companies think a deal still could happen. Some high-profile shareholders such as Capital Research’s Gordon Crawford have expressed unusually public criticisms of Yahoo’s failure, or unwillingness, to seal a deal with Microsoft.

Some shareholders are unhappy in particular with Yahoo CEO and cofounder Jerry Yang, whose apparent opposition to a deal was believed to be a key factor in Microsoft’s decision to walk away. Although replacing Yang on the board might be seen by some shareholders as a drastic step, his board position presumably could be one of those targeted by Icahn. Potentially, the replacement of Yang, whose stake in Yahoo is only 3.9%, and other board members believed to be close to him, such as longtime Yahoo director Eric Hippeau, could help clear the way for a deal.

Icahn would have to act fast, however. The deadline for nominating Yahoo directors is end of day Thursday for shareholders to be able to vote on the board slate by the July 3 Yahoo board meeting.

Even then, a proxy fight wouldn’t be an easy task to pull off successfully. According to one source close to the situation, Microsoft may have decided not to mount a proxy fight partly because it wasn’t apparent that the majority of voting Yahoo shareholders would go along with its $33 bid.

One activist investor, Eric Jackson, has just ditched plans to mount a full alternate board. He told me Friday that the expense of up to $1 million likely would prove too much, and at the time, he didn’t think any other groups would step up. “Even though some people are so upset and irate,” he said, “to translate that anger into getting a group organized and a slate proposed is tough.”

Icahn can be persuasive. He managed to get Oracle to come back to the bargaining table to buy BEA Systems after talks broke down. That deal, sealed in January, is expected to close later this year.

However, it’s less clear how much of a success Icahn’s investment in Motorola last year was, since Motorola’s shares have dropped sharply since last November, so his record is mixed. If Icahn persuaded Microsoft and Yahoo to agree to a $33-a-share deal, that would represent a 24% premium to today’s closing price.

Whatever happens, this saga clearly isn’t over yet.

Reader Comments

WilliamBanzai7

May 14, 2008 2:44 AM

It will be interesting to see what kind of shareholder activist babble will be applied to the MS/Yahoo saga. No one seems to be able to articulate the strong business case for a combination of these two internet laggards in the rapidly evolving "social graph economy". Combine two losers and create a winner? Will Icahn be able to articulate a merger business case transcending "we ought a maximize value for hedgefunds"? Google his Myspace page for clues.

Jimbo Jonze

May 14, 2008 2:44 AM

Here's hoping Icahn goes down in flames when everyone realizes MS came to their senses and isn't coming back.

random

May 14, 2008 7:51 AM

Icahn is what would technically be classified as a major pain the posterior. All he does is buy shares and force companies to do ridiculous things so he can make a few million on a short-term and generally boneheaded sale. He brings no ideas, no management experience, no strategies for long term growth, improvement or innovation. The only thing that comes with him is whining about selling a company or breaking it up for a quick boost in share price. People like him have the ability to wreck a perfectly good company when raising his trademark storm in a teacup.

It doesn't seen that Yahoo's investors are thinking about the long run. In that long run, Microsoft's inability to acquire the search engine will make it even more of a marginal player in the field and reduce the competition down to just Yahoo and Google, guaranteeing Yahoo a large slice of the market almost by default. I know, I know, Microsoft has big plans that they've eagerly been talking up to any business writer who will listen but they've had over a decade to build a decent search engine and so far, they haven't succeeded. What makes them think that trying for another decade will somehow make it work?

And do you really want Microsoft in charge of a search engine? They have no clue how to run one and will probably cripple it in the best case scenario. Top talent will bolt, integrating the wildly different infrastructures will be nothing short of a nightmarish mess and do you really want your mailbox designed by the same guys who made Vista?

How about Icahn learns some fundamentals of the businesses he pressures, blackmails and wrecks? After all, this is what good investors are supposed to do. Any overconfident dolt with too much money and bravado can be a raider.

John

May 14, 2008 9:29 PM

Yahoo has another option out there...

They can sell their search engine to the highest bidder for over $1 Billion.

They can sign a search partnership with Google and make more money than they are making now with panama.

They can do the job cuts that Yang hasn't had the balls to make.

They can sell their $15 Billion in assets of holdings in companies like Alibaba & Baidu.

They can they buy back $16 Billion of the company stock and retain control of their company.

Then they can strategically rebuild their portfolio of businesses for the future.

Sri

May 15, 2008 7:14 AM

Yahoo! are not doing very well at the moment so everyone is having a go at them. But, at the same time Jerry is not doing things right either. If majority of Yahoo! employees and shareholders/board do not want to see people who built Windows, Exchange etc., controlling their company, Jerry and co have to come up with a strategy that would at least instill some hope and faith into every single person who is unhappy with the fallout of MS-Yahoo deal. At the end of the day, whatever your company values are, if you are not making money for the shareholder, you're in trouble!

If Jerry and co can somehow buy back the shares and retain control of their company, that would be a good move as well. Then they can implement the so called 3 year strategy/plan and see where it goes.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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