Icahn Agenda in Focus As Yahoo Board Meets

Yahoo Inc.'s revamped board will meet for the first time next week, giving investor Carl Icahn his first chance to push his agenda for the Internet company from the inside.

The new board, which includes Mr. Icahn and two new directors Yahoo chose and Mr. Icahn supported, Frank Biondi and John Chapple, will hold a board dinner Monday night followed by a meeting Tuesday, according to people familiar with the matter.

It isn't clear whether Mr. Icahn will show up, according to someone close to the situation. What changes he intends to push for -- and how vigorously -- also remains unclear. He couldn't be reached for comment.

Mr. Icahn, Mr. Biondi and Mr. Chapple joined Yahoo's board this summer as part of the activist investor's agreement to drop his campaign to oust Yahoo's directors. Mr. Icahn attacked the Yahoo board for rebuffing multiple offers from Microsoft Corp. to buy all or parts of Yahoo.

Mr. Biondi is former chief executive of Viacom Inc. and former chairman and CEO of Universal Studios. Mr. Chapple is former CEO of Nextel Partners, a small wireless company that Sprint Nextel Corp. bought.

During Tuesday's board meeting, Yahoo executives will offer an update about ongoing talks with Time Warner Inc., said one knowledgeable person. The two sides continue to discuss a possible combination of Yahoo with AOL, according to people familiar with the matter, although talks haven't progressed significantly in recent weeks.

Another likely topic at that meeting: potential regulatory opposition to Yahoo's search-advertising partnership with Google Inc. Any unraveling of that agreement would be a big blow for Yahoo and could accelerate the board's consideration of other options. The board struck the search-ad pact in June as an alternative to selling its search business to Microsoft.

Some Yahoo investors are impatient. Shareholders withheld more than 30% of their votes cast for four of nine Yahoo directors at the company's Aug. 1 shareholder meeting. Yahoo's stock price fell to a five-year low of $17.58 earlier this month but has since made a small rebound. As of Aug. 1, Mr. Icahn controlled 68.8 million shares, roughly 5% of Yahoo.

By: Jessica E. Vascellaro and Joann S. Lublin
Wall Street Journal; September 20, 2008

Icahn Finalizes Proposed Slate for Yahoo

Little Progress Seen In Full Acquisition Of Firm by Microsoft


Yahoo Inc. and its opponents dug in for battle as investor Carl Icahn finalized his proposed slate of Yahoo directors and Microsoft Corp. pressed its own case for why a deal with the Internet company would benefit Yahoo shareholders.
[Carl Icahn]

The back-and-forth among the three parties, which included differing accounts of a proposal to break up Yahoo that the company rejected over the weekend, is part of the lead-up to an Aug. 1 meeting of Yahoo shareholders that will include a vote on Mr. Icahn's proposal to install a new Yahoo board.

But as the tension between Mr. Icahn and Yahoo escalates, there are few signs of progress on the option shareholders appear to want most: a full acquisition of Yahoo by Microsoft. That option, which Microsoft had spent the early part of this year pursuing, is no longer being seriously considered, people familiar with Microsoft's thinking say.

Instead, Microsoft executives are focused on buying Yahoo's Internet search business, a far-cheaper option and one that could boost Microsoft's efforts to counter Google Inc.'s steady growth.

Microsoft submitted its latest proposal for such a deal Friday. Mr. Icahn, who wanted his directors to control the remainder of Yahoo, helped deliver the offer to Yahoo. Yahoo's board rejected it Saturday but said it would be interested in selling the whole company.

By pushing for an outright purchase, Yahoo could be increasing its chances for keeping its board in place and fending off Mr. Icahn's assault. Investors continue to prefer a full acquisition to a more-complex deal for the search business of the sort Microsoft proposed in recent days. While Microsoft has focused on alternatives to a full purchase, Yahoo is keeping the notion alive by reminding shareholders that it told Microsoft it is open to such a deal and could complete it before the shareholders meeting.

"Yahoo definitely has the upper hand," said activist investor Eric Jackson, who represents a loose group of shareholders that collectively own 3.2 million Yahoo shares. But the momentum could shift, he said, if Mr. Icahn comes up with another offer.

One large Yahoo shareholder said in an interview Monday that while he preferred a full acquisition, he believes that Microsoft's latest search deal is a good start and that the Yahoo board ought to be replaced if it couldn't execute it.

In a letter to Yahoo shareholders Monday, Mr. Icahn continued to try to garner support for selling the search business to Microsoft, and he promised to fast-track discussions over that deal if his nominees were elected. The investor, who controls funds that own nearly 5% of Yahoo, accused Yahoo of distorting the facts in issuing its rejection of Microsoft's latest offer. He said that by his calculation, the value of the search sale to Microsoft, combined with the remainder of the company and other aspects of the deal, would be valued at close to $33 a share to Yahoo shareholders. The offer included a cash payment to Yahoo as well as an equity investment and a loan to the company.

A critical piece of Microsoft's offer was its guarantee of revenue that would be paid to Yahoo after it bought the search business. Under the proposal, Microsoft guaranteed to Yahoo from $19.5 billion to $26.5 billion over the next 10 years, according to people familiar with the situation. In return, Yahoo would need to guarantee that its Web site, which feeds traffic to the search business Microsoft would buy, would continue growing at a certain level, these people say.

Yahoo, in a letter to shareholders and in filings with the Securities and Exchange Commission, Monday disputed the value of the proposed deal and reiterated a laundry list of problems with the proposal.

In particular, the company said Microsoft's revenue guarantees were below expectations for its own business, called the proposal's estimation of cost savings "unrealistic" and said a recently struck agreement with Google can generate higher operating income. Mr. Icahn still "lacks a plan that makes sense for Yahoo stockholders," Yahoo Chairman Roy Bostock and Chief Executive Jerry Yang wrote in a joint letter.

Microsoft chimed in with a statement Monday, disputing Yahoo's account of talks last week, specifically Yahoo's contention that on Friday, Microsoft gave it an unreasonable deadline of 24 hours to agree to a deal. Microsoft said the offer wasn't an "ultimatum" but rather an attempt to see if Microsoft's offer was sufficient to "form the basis for the parties to engage in negotiations over the weekend on a letter of intent and more detailed term sheets."

Microsoft also addressed a dispute over whether the proposed deal would require changes to Yahoo's board and top management. Microsoft said its proposal "did not include changes to Yahoo's governance." A person close to Yahoo said "governance was a part of the offer," which was discussed in multiple calls between Yahoo, Microsoft and Mr. Icahn.

Sandeep Aggarwal, senior Internet analyst at investment bank Collins Stewart LLC, said Mr. Icahn probably can win a few seats with the search deal on the table but is unlikely to replace the entire board if Microsoft is unwilling to buy the whole company. "Convincing investors to vote in a new board because Microsoft will do a potential search deal is not going to be as easy as changing the board for a full acquisition," he said.

Mr. Yang prepared Yahoo employees for the proxy fight to intensify in a company-wide email Monday. "Proposals and attacks by Microsoft and Carl Icahn leading up to our meeting are likely to get even more contentious," he wrote.

By: Jessica Vascellaro and Robert Guth
Wall Street Journal; July 15, 2008

Microsoft and Yahoo The Merger Drama Continues

Icahn, Ballmer pair up, talk Microhoo; Push to boot Yang and Yahoo’s board


Updated: Activist investor Carl Icahn and Microsoft are now in cahoots to toss Yahoo CEO Jerry Yang and the company’s board of directors.

Icahn says in a letter that he has been chatting up Microsoft CEO Steve Ballmer along with other key executives about how the two companies can “do a transaction together.” In the letter, Icahn claims that Ballmer “made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo.”

For its part Microsoft confirms Icahn’s account and says in a statement that “it would be premature to discuss at this time important details such as the price or other terms of a possible transaction.”

The message is clear: Boot Yahoo’s board at the company’s shareholder meeting on Aug. 1 and Icahn can pull off a deal with Yahoo. And Microsoft is interested.

The letter and Microsoft’s confirmation–timed to coincide with one another on the wires by the way–are notable because it puts all the cards on the table. Icahn and Microsoft are teaming up against Yahoo’s current management and aren’t being shy about it. To date, the biggest question about Icahn’s bid is whether Microsoft would actually step up to the plate if the billionaire managed to grab control of Yahoo’s board. Yahoo launched a few strikes last week to fend off Icahn’s upcoming assault. Meanwhile, Microsoft dropped hints that it was still interested in Yahoo.

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The opening paragraph of Icahn’s letter says it all:

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.

Microsoft bolsters Icahn’s letter with:

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.

The bottom line: If Icahn wins, Microsoft will “enter into discussions immediately after Yahoo!’s shareholder meeting if a new board is elected.”

There’s some good old fashioned hard ball for you.

Now the big question is whether Yahoo’s shareholders will toss the entire board, some of it or just enough to put Icahn in control.

Icahn indirectly panned Yahoo’s latest restructuring effort adding in his letter that:

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 (right) 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.

Icahn says that voting with his slate of directors will ensure that Yang and Yahoo’s board “will not be able to ‘botch up’ a negotiation with Microsoft again, simply because they will not have the opportunity.”

Yahoo responded to the Icahn letter in a statement noting that the Icahn-Ballmer plan is off the mark.

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.

For shareholders, this latest turn of events has really clarified the Yahoo decision. If you want Yahoo–or a part of it–to be acquired by Microsoft vote Icahn. There are no mysteries anymore. If you want Yahoo to stay independent in some fashion stick with your current management.

Full text of the Icahn letter:

Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153

July 7, 2008

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
experience.

Sincerely yours,

CARL C. ICAHN