Microsoft, Yahoo trade barbs over talks breakdown

NEW YORK/SAN FRANCISCO (Reuters) - Yahoo Inc and Microsoft Corp traded new accusations on Monday over the latest breakdown in deal talks, as the battle for control of Yahoo heated up ahead of an August 1 showdown.

Activist investor Carl Icahn, leading a proxy campaign to dump Yahoo's current management and board at the August shareholder meeting, blasted Yahoo for rejecting a joint proposal he made with Microsoft that he said contained enhanced protections to Yahoo and its investors.

All three parties were involved in talks on Friday on a new Microsoft offer to buy Yahoo's search business and take a 14 percent stake in the Web pioneer if it agreed to shed its Asian assets and focus on its remaining businesses.

During the negotiations, according to Icahn, Microsoft Chief Executive Steve Ballmer said Yahoo's concerns over who would control the company were a distraction from the deal at hand. "'First, tell us if you like the deal,'" Icahn quoted Ballmer as saying.

"Microsoft and Mr. Icahn are trying to dismantle the company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo stockholders," Yahoo Chairman Roy Bostock said of the latest Microsoft offer.

Yahoo turned down that offer Saturday night, complaining that it had only 24 hours to consider a deal it called financially inferior and more risky than its current business prospects and a search ad partnership with rival Google Inc.

Yahoo also said it was now open to a full-scale merger with Microsoft if it offered at least $33 a share.

Yahoo shares closed down $1, or 4.2 percent, to close at $22.57, while Microsoft shares fell 10 cents, or 0.4 percent, to close at $25.15, both on Nasdaq.

Sandeep Aggarwal, an Internet sector analyst with brokerage Collins Stewart, said investors are discounting the prospect of a full-scale Microsoft merger.

"What is becoming increasingly clear is that Microsoft's heart is set on Yahoo search," Aggarwal said.

ULTIMATUM?

For its part, Microsoft said it made the new offer in response to a request for a new proposal from Bostock.

Microsoft denied it set a 24-hour ultimatum, saying it was seeking only a commitment by Yahoo to accept the framework and agree to a timeline to move to intensive talks.

Icahn said Microsoft's new offer provided assurances to Yahoo of $2.3 billion in annual search revenue for up to 10 years, assuming Yahoo's audience remains intact and the parties agree to renew. Yahoo said the offer, with all of its conditions, would leave it at the mercy of Microsoft.

Icahn said Microsoft's offer valued Yahoo at $33 per share, which included a proposal for Microsoft to tender $3.9 billion for 14 percent of Yahoo.

The offer assumed Yahoo could realize $9 a share on its Asian assets, Microsoft would provide debt financing worth $2 a share, leaving around $16.73 for the remainder of Yahoo, Icahn said in a U.S. financial regulatory filing.

The latest proposal follows six months of on-again, off-again talks that started when Microsoft made an unsolicited $31-per-share cash-and-stock offer to buy Yahoo in late January. Microsoft then raised its offer to $33 per share, or $47.5 billion, before pulling that bid in May when Yahoo's leaders said they would not settle for less than $37 a share.

Icahn mocked Yahoo's current willingness to accept a Microsoft buyout of around $33 a share, after rejecting the same a few months back: "It is hard to understand why it (Yahoo) turned down $33 and is now willing to accept it."

"Within the past month, Yahoo's bargaining power has come down dramatically," Aggarwal said. "Clearly, from Yahoo's perspective, they were working on a certain set of wrong assumptions about Microsoft's willingness to buy it."

But Sanford C. Bernstein analyst Jeffrey Lindsay disagreed, saying the latest push by Microsoft and Icahn to reach a deal with Yahoo appeared to have been a long-shot attempt to reach a last-minute deal or, more likely, a way of gaining ammunition in its August 1 proxy vote.

Lindsay said Icahn and Microsoft may have overplayed their hand by giving Yahoo the chance to look reasonable by saying it was willing to sell the company for as little as $33.

While acting in concert with Microsoft, Icahn has failed to answer questions about whether he will have any serious negotiating power with Microsoft if he succeeds in removing Yahoo's board and Yang as CEO, the analyst said.

"For investors to get behind Icahn they have to be convinced that he has a credible alternative," Lindsay said.

Icahn, who controls about 5 percent of Yahoo shares, has nominated a slate of nine directors to replace Yahoo's board and oust CEO Jerry Yang on August 1.

Yang would remain at the company as "Chief Yahoo," according to Icahn, who also said he was open to discussing keeping a number of the current board members.

Yang co-founded the pioneering Web company in 1994 and held the irreverent executive-without-portfolio title until becoming CEO in 2007.

(Editing by Jeffrey Benkoe and Andre Grenon)