Microsoft, Yahoo trade barbs over talks breakdown

By Kenneth Li and Eric Auchard

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.