Icahn to battle Yahoo to accept Microsoft bid

By Dane Hamilton

NEW YORK (Reuters) - Financier Carl Icahn launched a campaign to replace Yahoo Inc's board with directors who would reopen talks with Microsoft Corp, saying Yahoo acted "irrationally" in refusing the software company's $47.5 billion bid.

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

In a letter to Yahoo's board, Icahn said that directors had "acted irrationally and lost the faith of shareholders and Microsoft. It is obvious that Microsoft's bid of $33 per share is a superior alternative than Yahoo's prospects on a stand alone basis."

Within hours, Yahoo board Chairman Roy Bostock responded with a letter to Icahn saying the financier's plans were not in the best interests of investors as Yahoo remained "willing to consider any proposal from any party including Microsoft if it offers our stockholders full and certain value."

Yahoo's board has met 20 times in recent months to consider options, including Microsoft's bid. The top managers of Yahoo and Microsoft met face-to-face seven times, the letter said.

But Icahn left the door open for a settlement instead of a full-out proxy battle where both sides typically spend millions of dollars and unleash a barrage of attacks on each other. Icahn urged Yahoo to "move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary."

The New York-based billionaire's move garnered public support from at least one other large investor. Paulson & Co, a $30 billion hedge fund that raked in billions of dollars betting on the credit meltdown, disclosed on Thursday that it had amassed a 3.4 percent Yahoo stake worth $1.44 billion.

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

Microsoft spokesman Frank Shaw declined to comment on Icahn's move and reiterated the line Microsoft has used since talks with Yahoo ended. "The company has moved on," he said.

Microsoft walked away after negotiating for three months in hopes of clinching a deal to form a counterweight in Web search and online advertising to market leader Google Inc.

Microsoft's final $33-per-share offer wasn't enough to sway Yahoo co-founder and Chief Executive Jerry Yang, who wanted $37 a share. The stock traded around $19 prior to Microsoft's bid.

On Thursday, Yahoo shares closed up 2.3 percent at $27.75, while Microsoft rose 1.7 percent to $30.45, both on Nasdaq.

ROUGH ROAD FOR YANG

Industry watchers said Yang faces a rougher road dealing with Icahn, a blunt-spoken financier known for bare-knuckle takeover tactics, than with Microsoft CEO Steve Ballmer.

"If Jerry Yang had a tough time dealing with Steve, wait till he meets Carl Icahn," said Colin Gillis, a Canaccord Adams analyst.