Outraged Icahn refocuses on ousting Yahoo board

[July 15, 2008]  SAN FRANCISCO (AP) -- Apparently abandoning hopes for a truce with Yahoo Inc., investor Carl Icahn sharpened his focus on replacing the Internet company's board Monday after his attempt to negotiate a deal with Microsoft Corp. was angrily rejected.

Icahn filed the final nominating papers for a slate of candidates that will oppose Yahoo's current nine directors in a showdown scheduled for an Aug. 1 shareholder vote. In separate letter to Yahoo shareholders, Icahn accused the incumbent board of being more interested in protecting its jobs than evaluating the merits of Microsoft's latest offer for Yahoo's online search operations.

Icahn, who owns a 5 percent stake in Yahoo, also accused the board of misleading shareholders about some aspects of the proposal, which was rebuffed late Saturday.

"Our company is on a precipice and our board seems ready to take the risk of seeing it topple," Icahn wrote to Yahoo shareholders.

Yahoo reiterated its disdain for Microsoft's "ludicrous" offer in its own shareholder letter, which underscored the Silicon Valley company's determination to fend off Icahn's attempted coup.

"We are prepared to let you, our stockholders, not Microsoft and Carl Icahn, decide what is in your best interests and we look forward to the upcoming vote," Yahoo Chairman Roy Bostock and Chief Executive Jerry Yang wrote.

Yang advised Yahoo's employees to brace for even more turbulence during the next few weeks, predicting that Microsoft may make more buyout proposals as Icahn ridicules the board.

"The last few months and weeks have certainly been challenging, and the waters are not likely to calm before our stockholder meeting," Yang wrote in one of two e-mails Monday to Yahoo employees and senior managers.

The standoff caused Yahoo shares to fall $1, or 4.2 percent, to finish at $22.57 in Monday's trading. The stock price had surged 10 percent last week on hopes that Icahn might be able to broker a deal between Microsoft and Yahoo after five months of on-again, off-again talks.

If Yahoo shareholders want a deal with Microsoft, Icahn said they should elect him and his other hand-picked nominees to the board.

But putting Icahn in control of Yahoo would be risky, given his inexperience in the Internet industry and the lack of any guarantee that Microsoft would be willing to pay anything near the $47.5 billion that it offered for Yahoo in its entirety in early May. That bid, worth $33 per share, was withdrawn after Yahoo sought $37 per share.

Microsoft has said it might consider making another bid for all of Yahoo if Icahn gains control of the board. Many analysts, though, believe Microsoft might not be willing to pay much more than $30 per share this time around.

Icahn, who has a long history of challenging corporate boards, has already persuaded Microsoft CEO Steve Ballmer to sweeten a previous offer for Yahoo's search engine, but the way it was presented last Friday irked Yahoo's board.

Bostock derided it as a "take it or leave it" proposal that gave Yahoo just 24 hours to reach a decision. The proposed deal also was conditioned on the removal of Yahoo's entire board and top executives so Icahn would be running Yahoo's remaining business after the sale of the search engine, Bostock said.

Microsoft countered Bostock with a Monday statement that asserted Yahoo had mischaracterized its offer as "a take it or leave it ultimatum, rather than a timetable in order to move forward to intensive negotiations." The Redmond, Wash.-based software maker also said it hadn't insisted on any changes to Yahoo's board.

In his letter Monday, Icahn said Yahoo could have had more time to consider Microsoft's offer if the company agreed to postpone the Aug. 1 shareholder meeting "for a short period." He also said he was willing to let Yahoo's current board keep an unspecified number of seats on the board.

Yang would have been banished as CEO, Icahn said, but he could have remained in the amorphous role of "chief Yahoo" that he has traditionally held.

Microsoft's complex offer included $1 billion for Yahoo's search engine, and guaranteed annual payments of $2.3 billion for five years. The proposal included a renewal option that would have guaranteed $1.6 billion to $3 billion annually for another five years.

The proposal also envisioned realizing about $9 per share from spinning off Yahoo's Asian holdings. In addition, Microsoft would have loaned Yahoo $2.8 billion to help finance a special shareholder dividend of $4.50 per share and invested $3.9 billion in Yahoo.

In its response, Yahoo pointed out that it could sell its Asian assets and arrange to finance a special shareholder dividend without Microsoft's help.

Another point of contention: Microsoft and Icahn say the latest deal's total value would have been worth $33 per share to Yahoo. Yahoo disagreed with Microsoft's calculations, though it did not specify how much it believed the offer was worth.

Even with Microsoft's financial guarantees, Yahoo argues it can make more from holding on to its search engine and supplementing its advertising revenue in a proposed partnership with Google Inc. By relying on Google's superior technology, Yahoo estimates it will increase its operating cash flow by $250 million to $450 million annually, compared to $300 million under Microsoft's latest proposal.

The Google alliance faces a rigorous antitrust review by federal regulators and lawmakers, who have scheduled hearings Tuesday to examine whether the partnership would hamper competition in the search advertising market.

If Yahoo does a deal with Microsoft instead, Google would be owed a termination fee of up to $250 million -- a cost that Yahoo said was omitted from the Microsoft proposal. Yahoo also faulted Microsoft and Icahn for not factoring the taxes that would be due on the $1 billion sale of its search engine.

[Associated Press; By MICHAEL LIEDTKE]

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