Tuesday, May 06, 2008

Dow Jones: Wall Street Bids Up Yahoo In Anticpation Of Proxy Battle

DOW JONES NEWSWIRESMay 6, 2008 9:33 p.m.

By Scott Morrison of


SAN FRANCISCO (Dow Jones)--Jerry Yang's fight to remain in control of Yahoo Inc. (YHOO) may be entering a new perilous phase.

Wall Street was abuzz with speculation Tuesday that one or several activist shareholders were cobbling together a significant stake of Yahoo shares in preparation for a proxy fight at the struggling Internet giant's annual meeting on July 3.

Top Yahoo shareholders have openly blasted Yang, the company's co-founder and chief executive, for the way he responded to Microsoft Corp.'s (MSFT) sweetened $47.5 billion takeover offer on Saturday.

Microsoft Chief Executive Steve Ballmer increased his three-month-old offer for Yahoo to $33 per share. Yang countered at $37. Ballmer concluded they had reached an impasse over price and withdrew the offer. Shareholders then indicated they would have been willing to sell to Microsoft for a lower price than indicated by Yang.

"The tide turned when you started to see major Yahoo shareholders question what happened," said Scott Kessler, analyst at Standard & Poor's. "Serious questions about (Yang's) credibility have been raised."

Yahoo shares plunged 15% Monday after the deal collapsed, but the Internet company's stock rebounded more than 5% on Tuesday as investors bet that Microsoft might revive its bid if dissident shareholders gained control of Yahoo's board.

But it wasn't clear whether Ballmer remained interested in acquiring Yahoo. The software giant has cryptically said it has "moved on" after talks broke down over price, although it hasn't ruled out a Yahoo deal. Yahoo declined comment.

Observers said it was highly unlikely Ballmer would at this point come back to the table, even if Yang were to buckle to shareholder pressure to get a deal done.

"From an optics perspective it would be difficult for either side to agree to a friendly deal in the short term," said Chris Young, director of M&A research at RiskMetrics Group, the risk management and corporate governance firm. "There is nothing really preventing an activist hedge fund, or two, or three, to get involved and use a proxy fight to get the (Yahoo) board in line."

At least one small Yahoo shareholder, Ironfire Capital president Eric Jackson, said he is trying to recruit an alternate slate of directors to put up for election at Yahoo's annual meeting. The main purpose of replacing Yahoo's board would be to revoke the company's anti-takeover measure, typically known as a poison pill.

But Jackson holds just 96 of Yahoo's 1.4 billion shares and corporate governance experts said any successful campaign would require the participation of major activist shareholders and the support of top institutional investors.

Jackson said top investors were mulling support for his effort but were putting off their decision until after he draws up a slate of nominees.

Arbitrageurs suggested a number of well-known activist hedge funds were responsible for the unusually high volume Yahoo shares traded on Tuesday, but traders were unable to specify which funds were active in the market and no major shareholders had announced that they were preparing to spearhead a proxy fight.

A campaign to topple Yahoo's board would face two major challenges. The first is that it's not clear whether Microsoft would step in to buy Yahoo should dissident shareholders gains control of the board.

That could leave activists with a position and board seats at a company they don't want to own. Given such a risk, activists must put together a credible slate of directors with the industry expertise, capital markets background and corporate governance experience to improve the company's operations and make it more attractive to potential acquirers, said Young.

"Their first priority would be to get the company sold to Microsoft at a premium price, but they have to prepare for the possibility that Microsoft won't play ball," he said.

The second challenge is the short window. Yahoo announced the date of its annual meeting late Monday, which now gives shareholders until May 15 to submit an alternate slate of directors for Yahoo's board. One arbitrage trader said the short time frame would work against dissidents looking to cobble together a credible slate.

But others argued it has been done before and it could easily be could be done again. "A lot can happen in 10 days," said Charles Elson, a corporate governance expert at University of Delaware.

One reason is that dissidents would be more likely than not to nominate a "short slate" consisting of one to three directors, rather than try to replace Yahoo's entire 10-person board.

Shareholders would be less likely to replace an entire board because such a move could be too disruptive to a company's operations, said corporate governance experts. A short slate option, on the other hand, lets shareholders add new blood on a board and deliver a message to remaining board members without creating wholesale disruption.

Numerous shareholders have made it clear they're extremely unhappy with Yang's performance in this saga and observers said he would almost certainly be the priority target for any group of dissident shareholders. Even worse for Yang is the fact that dissidents who agitate against corporate boards more often than not get their way.

"In the majority of cases we've tracked over the past several years, the activists have won," said Young.

-By Scott Morrison; Dow Jones Newswires; 415-765-6118; scott.morrison@dowjones.com

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