UPDATE 3-Yahoo investors unsure if they will support Icahn

(Adds comments from Janus)

By Muralikumar Anantharaman

CHICAGO, June 27 (Reuters) - Several major investors said on Friday they are not sure if they will support activist shareholder Carl Icahn's proxy battle to oust Yahoo Inc (YHOO.O) Chief Executive Jerry Yang and its board.

Icahn is seeking to revive buyout talks between Yahoo and Microsoft Corp (MSFT.O). If his slate of nine board nominees are elected at Yahoo's Aug. 1 annual meeting, they plan to hire a new CEO to replace Yang, who co-founded Yahoo.

Robert Hagstrom, a portfolio manager for Legg Mason Capital Management, Yahoo's third-largest institutional shareholder, called it a choice between "the devil you know and the devil you don't know."

"Icahn has got three things. He wants to fire Jerry, eliminate the severance package and he wants to force the sale," Hagstrom told reporters on the sidelines of Morningstar's annual investment conference in Chicago.

"If he can't force Microsoft to buy them, what's plan B? I need a plan B. And if you are going to fire Jerry, who do you hire?" he said. Legg Mason Capital Management, a unit of Legg Mason Inc LM.M, held 5.24 percent of Yahoo as of March 31.

His comments come after Legg Mason's star portfolio manager, Bill Miller, said in late May that he has not decided whether to support Icahn's proxy battle.

Since then, Yahoo has rejected another Microsoft offer to buy its search business and to take a minority stake in the Web company. Instead, Yahoo chose to sign a search advertising deal with Internet leader Google Inc (GOOG.O) in mid-June.

Shares of Yahoo have fallen 20 percent in the weeks that followed, as Microsoft signaled that it was not interested in renewing its bid for the Silicon Valley company. Whatever the merits of the Google deal, analysts said it would not boost Yahoo's share price to the $33 that Microsoft had offered.

But while many shareholders are unhappy with Yahoo's management, it was not clear how much of that anger would translate into support for Icahn as it was not certain if he could bring Microsoft back to the table.

Brian Rogers, chairman and chief investment officer at T. Rowe Price Group, also said he was not sure how the firm would vote on Aug. 1. The firm owned 1.11 percent of Yahoo shares as of end-March and is the 11th-largest institutional shareholder.

Like Hagstrom, Rogers said a Microsoft and Yahoo combination made sense. Both men blamed personalities for getting in the way of a deal, but held out hope that Microsoft CEO Steve Ballmer would return to the table eventually.

"I think in hindsight, one wonders if there could have been a reasonable compromise found between Yahoo and Microsoft if some of the personalities weren't the way they were," Rogers said on the sidelines of the Morningstar event.

"The return of one of the founders of Yahoo to running the company after the turmoil they had a couple of years ago probably was a big barrier to that. Because whenever you have the kind of legendary founder returning, it becomes a different dynamic," he said.

Yahoo shares were off 1 percent to $21.14 in late Friday trading on Nasdaq.

"We think the assets are reasonably undervalued in current market prices and we are going to be working hard to try to encourage the company and the board and everyone else to sort of realize some of the value that we see there," Janus Capital Group (JNS.N) portfolio manager Jason Yee told Reuters.

Janus owned 10.1 million Yahoo shares as of end-March, ranking 14th among institutional shareholders.

Legg Masons' Hagstrom said he had thought Yahoo was worth closer to $40 a share when Microsoft first made a bid at $31.

"Somebody made the wrong decision. Steve either made the wrong decision walking away or Jerry made the wrong decision not to sell. And their careers will be defined by that in the next 12 months," Hagstrom said. (Go to Reuters MediaFile blog for more on the Yahoo/Microsoft saga blogs.reuters.com/mediafile/) (Writing by Tiffany Wu; Editing by Tim Dobbyn, Phil Berlowitz)