Icahn to battle Yahoo to accept Microsoft bid

NEW YORK Thu May 15, 2008 7:50pm EDT

Investor Carl Icahn speaks at the Wall Street Journal Deals & Deal Makers conference, held at the New York Stock Exchange, June 27, 2007. REUTERS/Chip East

Investor Carl Icahn speaks at the Wall Street Journal Deals & Deal Makers conference, held at the New York Stock Exchange, June 27, 2007.

Credit: Reuters/Chip East

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NEW YORK (Reuters) - Financier Carl Icahn launched a proxy battle on Thursday to force Yahoo Inc (YHOO.O) to reopen buyout talks with Microsoft Corp (MSFT.O), saying the Yahoo board had acted "irrationally" in refusing its $47.5 billion offer.

Icahn harshly criticized Yahoo for the breakdown in talks, saying he had accumulated 59 million shares and options in Yahoo and had assembled a 10-member dissident board slate for election at Yahoo's annual meeting on July 3.

In an open letter to Yahoo chairman Roy Bostock, Icahn said the board had "acted irrationally and lost the faith of shareholders and Microsoft. It is obvious that Microsoft's bid of $33 per share is a superior alternative than Yahoo's prospects on a stand alone basis." (For text of letter see nN15278966)

But the New York-based billionaire left the door open for a settlement instead of a full-blown proxy battle in which both sides typically spend millions of dollars and unleash a barrage of attacks against each other. Icahn urged Yahoo to "move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary."

Icahn's move garnered public support from at least one other large investor. Paulson & Co., a $30 billion hedge fund that raked in billions of dollars betting on the credit meltdown, disclosed Thursday it had amassed a 3.4 percent Yahoo stake worth $1.44 billion.

"We intend to support the Icahn slate, but sincerely hope Yahoo will negotiate an agreement with Microsoft, thereby making a proxy fight unnecessary," said Paulson.

On Thursday, Microsoft spokesman Frank Shaw repeated the same line it has used since the talks ended. "The company has moved on," he said. Yahoo declined to comment.

Two weeks ago, Microsoft walked away after negotiating for three months in hopes it could clinch a deal that would catapult the software giant into a top provider of on-line commerce and services.

Microsoft's final $33-per-share offer wasn't enough to sway Yahoo co-founder and Chief Executive Jerry Yang, who wanted $37 per share. Shares traded at around $19 prior to the Microsoft bid.

On Thursday, Yahoo shares closed up 61 cents, or 2.3 percent, at $27.75, while Microsoft stock was up 52 cents, or 1.7 percent, at $30.45, both on Nasdaq.

ROUGHER ROAD FOR YANG

Industry watchers said Yang faces a rougher road dealing with Icahn, a blunt-spoken veteran financier known for bare-knuckle takeover tactics, than with Microsoft CEO Steve Ballmer.

"If Jerry Yang had a tough time dealing with Steve, wait till he meets Carl Icahn," said Colin Gillis, a Canaccord Adams analyst.

A bigger threat, said Gillis, will be if Microsoft is unwilling to come back to the table. "It's not clear that he has a buyer. We think that Microsoft has really walked away."

Others said there is a reasonable chance of revived talks, arguing that the strategic rationale for Microsoft's initial interest in Yahoo hasn't changed in the last two weeks.

"Microsoft may still be interested as, in our view, it needs Yahoo to compete against Google Inc (GOOG.O)," UBS technology analysts said in a note. "We continue to think a deal could be reached, with the value in the $34 to $35 range."

The proxy contest gives new wind to annoyed shareholders who felt Yang overplayed his hand in turning down Microsoft's $33 per share offer, holding out for a higher price.

"We view this as a very positive development," said a portfolio manager at a large investment firm that holds Yahoo shares. "It seems that the initial deal did not get done because some Yahoo directors got in the way. Getting some new blood on the board would be very beneficial."

'WIN-WIN' FOR HOLDERS

Icahn also disclosed in the letter that he sought antitrust clearance from the U.S. Federal Trade Commission to acquire up to about $2.5 billion worth of Yahoo stock. In a regulatory filing, he said he now holds a stake of 4.3 percent, including 9.9 million shares and 49 million call options.

One analyst said things are now looking up for Yahoo shareholders. The stock jumped from $19.18 just prior to Microsoft's initial $31 per-share bid to nearly $30 in early February, only to dive to around $24 in May when talks collapsed.

"Barring procedural objections, (Yahoo shareholders) are now in an almost win-win situation," Sanford C. Bernstein analyst Jeffrey Lindsay wrote in a note.

"Either the existing Yahoo management team now proposes an alternative -- most likely a paid search outsourcing deal with Google. Or the Icahn slate gets elected and reopens negotiations to sell the company to Microsoft," Lindsay said. "Icahn's bid now forces the issue."

Icahn's slate of nominees includes himself, Frank Biondi, a former Viacom Inc VIAb.N chief, and Keith Meister, vice chairman of Icahn Enterprises LP IEP.N.

Mark Cuban, owner of the Dallas Mavericks professional basketball team and co-founder of cable network HDNet, is also on Icahn's slate. Cuban is familiar with Yahoo's negotiating style since he sold Broadcast.com to the company in 1999 for about $5 billion.

Other nominees include Lucian Bebchuk, professor of law, economics and finance at Harvard Law School; John Chapple, president of Hawkeye Investments; Adam Dell, managing partner of Impact Venture Partners; Edward Meyer, CEO of Ocean Road Advisors and former CEO of advertising firm Grey Global Group; Brian Posner, former CEO of ClearBridge Advisors LLC; and Robert Shaye, former co-CEO of Time Warner Inc's (TWX.N) New Line Cinema.

(Reporting by Dane Hamilton, Kenneth Li, Michele Gershberg, Eric Auchard, Svea Herbst-Bayliss and Diane Bartz; Editing by Tim Dobbyn/Jeffrey Benkoe)

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