Paulson hedge fund backs Icahn's Yahoo slate

By Dane Hamilton

NEW YORK (Reuters) - Paulson & Co, the $30 billion hedge fund that recently built up a stake of 50 million shares in Yahoo Inc, said it intends to support a dissident board slate put forth on Thursday by investor Carl Icahn.

But Paulson, which is managed by merger arbitrage specialist John Paulson, said it hopes a proxy fight won't be necessary to get Yahoo and Microsoft Corp back to the bargaining table.

"We were disappointed that Yahoo failed to reach an agreement with Microsoft," said Paulson in a statement. "We continue to believe that a combination between Yahoo and Microsoft would form a dynamic company and a stronger competitor to Google.

"We intend to support the Icahn slate but sincerely hope that Yahoo will negotiate an agreement with Microsoft, thereby making a proxy fight unnecessary."

Paulson disclosed in a regulatory filing it had built up a Yahoo stake of about 3.4 percent of the company, valued at $1.44 billion.

Icahn disclosed on Thursday he holds a 59 million share stake in Yahoo, or 4.3 percent of the company, including 9.9 million shares and 49 million call options. Yahoo has 1.375 billion shares outstanding, according to regulatory filings.

So far, Icahn hasn't formally allied with any other hedge fund in his proxy contest launched on Thursday.

But Paulson's move adds to Icahn's support among Yahoo shareholders, since hedge funds tend to pursue returns more aggressively than other institutional shareholders and are more likely to vocally press for strategic moves that could boost stock values.

Paulson was among a handful of hedge funds that bet that credit markets would melt down, as they have over the last year. Its assets under management have quadrupled over the past year as investors poured money into the firm and as investments gained.

Paulson earned an estimated $3.7 billion in 2007, an astronomical sum that made him by far the highest-paid hedge fund manager that year and likely any year ever, according to industry publication Alpha Magazine.

(Reporting by Dane Hamilton; Editing by Brian Moss, Gary Hill)