UPDATE 3-Icahn to battle Yahoo to accept Microsoft bid

(Adds Microsoft spokesman, antitrust lawyer, further analyst comment, byline)

By Dane Hamilton

NEW YORK, May 15 (Reuters) - Financier Carl Icahn on Thursday launched a proxy battle to force Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) to reopen buyout talks with Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz), saying the Yahoo board had acted "irrationally" in refusing its $47.5 billion offer.

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

"The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft," Icahn wrote in an open letter to Roy Bostock, Yahoo's chairman. "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, where both sides typically spend millions of dollars and unleash a barrage of negative charges against each other. He urged Yahoo to "move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary."

The move came just two weeks after Microsoft walked away from three-month talks to buy Yahoo in a bid to catapult it into a top provider of on-line commerce and services. But Microsoft's final $33-per-share offer wasn't enough to sway Yahoo CEO and co-founder Jerry Yang, who wanted $37 per share.

Yahoo shares initially moved up on the news, but were down 6 cents, or 0.2 percent, to $27.08 in afternoon trading.