Posted by: Rob Hof on July 7, 2008
The pressure for Yahoo to knuckle under and do a deal with Microsoft just keeps rising. This morning, Microsoft said in a statement that it’s willing to return to the table for a new deal—either for Yahoo’s search operations or even for the whole company—if a new board proposed by activist financier Carl Icahn is elected at Yahoo’s Aug. 1 annual meeting.
That’s a big if—two big ifs, in fact. Despite speculative investors bidding up Yahoo’s stock this morning by about 10%, there’s no guarantee Icahn will be successful in capturing a board majority, let alone electing his entire slate. And even with a new board, there’s also no guarantee that a deal would get done.
Microsoft said it’s not discussing price for now, which obviously is a key issue in either kind of deal. Henry Blodget at Silicon Alley Insider, a Yahoo shareholder who has said he would probably not vote for the Icahn slate, sounds skeptical and, I suspect like most shareholders, wants more specifics such as who would be CEO, what that person will do besides sell to Microsoft, and what the terms of a Microsoft deal would be.
After all, if Icahn gains control and his only plan for Yahoo is to do a deal with Microsoft, Microsoft quickly gains the upper hand in any negotiations. No dummy, Icahn surely realizes this. So I have to think he and Microsoft must have come to a pretty firm gentleman’s agreement, at least, on price and terms. And it wouldn’t necessarily have to be as high as Microsoft’s last $33-a-share offer to make Icahn—who is believed to have bought in at around $25 a share—a lot of money.
Still, there’s no doubt that investors who clearly have been unhappy Yahoo didn’t close a deal with Microsoft now have more ammunition to push for a deal. Boomtown’s Kara Swisher says Capital Research’s Gordon Crawford, a major Yahoo investor, told Yahoo he’s leaning toward voting for Icahn’s slate.
In the statement, Microsoft said it had been in discussions with Icahn in the past week. “After the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company,” the statement said.
Icahn also released a letter this morning to Yahoo shareholders (full text of that, the Microsoft statement, and Yahoo’s response after the jump), in which he said he has had extensive discussions with Microsoft CEO Steve Ballmer and Kevin Johnson’s, president of Microsoft’s Platforms & Services Division and expects to have more:
If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase “Search” with large guarantees. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.
Icahn, who repeated his intention to replace CEO and cofounder Jerry Yang with a more experienced executive, also took the opportunity to take further jabs at Yahoo, which he said is “moving toward a precipice”:
There is no need to keep pointing out the mistakes I believe Yahoo! made by not immediately taking a $33 offer made by Microsoft. But one thing is clear — 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.
For its part, Yahoo shot back with its own statement that it has already offered to do a deal with Microsoft:
If Microsoft and Mr. Ballmer really want to purchase Yahoo!, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.
The newest turn in more than five months of twists and turns in the saga between the search giant and the Internet portal came as investor pressure mounts on Yahoo, which signed a search deal a few weeks ago with Google instead of Microsoft. That deal followed Microsoft’s walking away from its offer to buy all of Yahoo. Despite Yahoo’s stated willingness to consider a full buyout deal at around Microsoft’s last offer of $33 a share, or $47.5 billion, Microsoft has said it’s not interested because of likely regulatory delays and what it says is a decline in Yahoo’s business.
Whether shareholders will go along remains the big question, and it has been unclear in recent weeks that large shareholders will vote for Icahn’s entire slate without a deal in hand. The Icahn letter and Microsoft’s statement still don’t guarantee that, but they could be enough to swing investor sentiment in Icahn’s favor enough to get at least some of his proposed board members elected. That could be enough for him to exert pressure to get a Microsoft deal of some kind done.
Meanwhile, the Times of London reports that Yahoo and its bankers, Goldman Sachs, spent the July 4 weekend discussing a deal with Time Warner’s AOL unit. However, it’s unclear how active such discussions are, given that previous ones resulted in nothing.
Yahoo’s key challenge for now may be persuading investors its business isn’t tanking. Kara implies Yahoo pulled out the stops to make the second quarter look OK, partly by packing more ads onto its search pages. I gather that has been going on for some time, however.
The bigger question will be what kind of guidance Yahoo will provide. Between the poor economy and an exodus of key people from the company that might at some point affect revenues, it’s hard to imagine Yahoo will be able to issue anything resembling an optimistic outlook—or if it does, it’s hard to see investors putting much credibility in it.
Today, at least, investors appear to be more optimistic a Microsoft deal could get done. In early trading, Yahoo’s stock is up about 10%, to about $23.50 a share. Yahoo’s stock has been on a fairly steady decline since Yahoo rebuffed Microsoft’s search deal in early June.
Here's the text of the Icahn letter:
Dear Yahoo! Shareholders:
During the past week I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated. Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together. Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board. His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months and perhaps longer to obtain regulatory clearance in the U.S., Europe, and elsewhere. During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost.
For example, in a transaction to purchase the whole company, a very large amount of capital would be due at closing. Even in an "alternate" transaction, where just the "Search" assets were purchased, large guarantees would have to be made and, again, large sums could be lost if the company was mismanaged. Microsoft perceives this risk may be quite high with the current board and management in place. However, Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase "Search" with large guarantees. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.
Much has been said about how badly the Yahoo! board has "botched up" negotiations with Microsoft over the past months. There is no need to keep pointing out the mistakes I believe Yahoo! made by not immediately taking a $33 offer made by Microsoft. But one thing is clear -- 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.
Our company is now moving toward a precipice. It is currently losing market share in its "Search" function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google's income from operations grew 59% per year over the last two years while Yahoo!'s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.
If elected, I have little doubt that the new board, subject to its fiduciary duties, will do what the current board will not do, i.e.,
-- Immediately start negotiation with Microsoft to sell the whole company or, in the alternative, sell "Search" with large guarantees.
-- Move expeditiously to replace Jerry Yang with a new CEO with operating
CARL C. ICAHN
Here's the full text of the Microsoft statement:
REDMOND, Wash. — July 7, 2008 — Microsoft Corp. today issued the following statement:
In the past week we have had the opportunity to discuss with Carl Icahn the prospects for a possible agreement between Microsoft and Yahoo!.
Despite working since January 31 of this year, as well as in the early part of last year, we have never been able to reach an agreement in a timely way on acceptable terms with the current management and Board of Directors at Yahoo!. We have concluded that we cannot reach an agreement with them. We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.
As Mr. Icahn notes in his statement today, it would be premature to discuss at this time important details such as the price or other terms of a possible transaction. We respect the right of Yahoo!’s shareholders to determine the destiny of their company, and we do not intend to engage in ongoing commentary on these issues in advance of Yahoo!’s shareholder meeting.
As we explained on June 12 when Yahoo! announced an agreement with Google, we believe that our proposed search acquisition and partnership would have delivered superior value to Yahoo!’s shareholders and the marketplace as a whole. We have not changed our position, even as we continue to move forward with our own online search and advertising offerings. We therefore welcome interest by Mr. Icahn in pursuing this and other discussions.
While of course there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo!’s shareholder meeting if a new board is elected.
And here's Yahoo's statement:
Yahoo!'s Board of Directors continues to stand ready to enter into negotiations with Microsoft Corporation for an acquisition of Yahoo!. Indeed, as recently as June, Yahoo!'s independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future "negotiation" between Mr. Icahn's directors and Microsoft's management. We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo!'s stockholders. If Microsoft and Mr. Ballmer really want to purchase Yahoo!, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.