Legg's Miller backs Yahoo in proxy war with Icahn

The headquarters of Yahoo Inc. is shown in Sunnyvale, California May 5, 2008. .

BOSTON/SAN FRANCISCO (Reuters) - Fund manager Bill Miller, one of Yahoo Inc's top shareholders, dealt a blow on Friday to billionaire investor Carl Icahn's two-month campaign to replace the Internet firm's directors, throwing his support behind Yahoo's current board.

Miller, a prominent portfolio manager at Legg Mason Inc, also called for an end to the "disruptive" battle between Yahoo and Icahn, an activist shareholder who has sought to force Yahoo to restart talks to sell itself to software maker Microsoft Corp.

Miller urged Icahn and Yahoo to settle their differences ahead of an August 1 annual meeting where shareholders will vote to elect the entire board of the company.

"It is our intention to vote in favor of the slate of directors proposed by the current board," said Miller, who is chairman and chief investment officer at Legg Mason Capital Management, in a statement.

Legg Mason's 4.4 percent stake of 60.7 million shares makes it Yahoo's second-biggest institutional shareholder.

Since February, Yahoo has rebuffed Microsoft's $47.5 billion offer to buy the firm, triggering a slide in Yahoo's stock price and paving the way for Icahn to align himself with Microsoft and start a proxy battle.

Icahn announced in May he had amassed a stake that now totals about 5 percent of Yahoo shares.

Microsoft has since made alternative proposals to Yahoo, which says it's open to a takeover by the software titan but little headway has been made.

Miller, 53, had been critical of Yahoo's board earlier for rejecting Microsoft's $33 a share offer but swung toward it after Icahn and Microsoft offered a plan to effectively dismantle Yahoo by selling its search business to Microsoft, according to Jefferies & Co analyst Youssef Squali.

"Icahn has done a 'bait and switch' on Miller and everybody else," Squali said. He added that by strongly backing Yahoo's board, Miller is in a position to help the sides reach a compromise before the deal.

FUND'S PAIN

Miller told Reuters last week Icahn would have more support if he promised not to sell Yahoo below $33 per share. On Friday, he praised the Yahoo board's actions in the bruising battle with Microsoft.

"We believe the current board acted with care and diligence when evaluating Microsoft's offers. We believe the board is independent and focused on value creation for long-term shareholders," Miller said.

Miller, however, said he was not opposed to Icahn having representation on the Yahoo board.

"In general, we believe it is appropriate for large shareholders to have representation on corporate boards if they so desire. Mr. Icahn's slate includes people experienced in technology, advertising, capital markets and governance," he said.

"We would prefer that the company and Mr. Icahn reach a mutual agreement on the composition of the board and end this disruptive proxy contest," Miller said.

Capital Research & Management is the biggest shareholder of Yahoo, owning about 16.3 percent of the firm as of the end of March. Capital has not said how it intends to vote at the meeting but blog AllThingsD reported earlier this month that it was inclined not to vote for the Yahoo board.

Capital portfolio manager Gordon Crawford was not available for comment.

Yahoo shares were up 1 cent at $22.45 on Friday afternoon amid a sell-off in technology stocks. Microsoft shares were down 6.7 percent at $25.67 after the company posted disappointing earnings.

Miller is the only manager to have beaten the Standard & Poor's 500 index for 15 straight years, until 2006. But then his performance began to falter.

His main fund, the Legg Mason Value Trust, has shed 30.5 percent this year through Thursday's close against the S&P index's negative 13.2 percent return. It was in the 100th percentile in its category, according to Lipper data.

The size of the fund, which owned $542 million worth of Yahoo shares at the end of March, was down to $9.7 billion at the end of June, from $16.5 billion at the start of the year.

Separately, in a video message to employees, Yahoo Chief Executive Jerry Yang unveiled a campaign to use the Yahoo.com home page to take its proxy defense campaign to mainstream Yahoo users.

The home page now features an advertisement in the company's core color of purple that makes fun of Icahn's self-professed lack of understanding of technology companies such as Yahoo.

(Additional reporting by Kenneth Li in New York; Editing by Brian Moss and Jason Szep)