Monday, June 09, 2008

MarketWatch: Can Icahn's 'theatrics' sway Yahoo investors?

Billionaire activist outlines plans for Web portal but may have limited appeal

By John Letzing, MarketWatch
Last update: 5:17 p.m. EDT June 6, 2008

SAN FRANCISCO (MarketWatch) -- Following two vitriolic letters to Yahoo Inc. detailing plans to oust its board and chief executive while putting the company at the mercy of Microsoft Corp. in resumed merger talks, the appeal of Carl Icahn's proxy bid is not clear.

Icahn started his day Friday by sending a second highly critical note to Yahoo's board, suggesting that it and Chief Executive Jerry Yang should step aside as the Web portal offers itself to Microsoft for exactly $34.375 a share. He also expressed skepticism about Yahoo's efforts to reach an alternative partnership with the software giant. See related story.

Later in the day, Icahn followed up by officially filing his preliminary proxy statement seeking to nominate his own slate of directors at the Yahoo's annual meeting, scheduled for Aug. 1. Icahn had first announced his intention to pursue a proxy bid for control of Yahoo last month.

Shares of Yahoo rose slightly to $26.44 by Friday's closing bell, while shares of Microsoft fell more than 2% to $27.49.

It remains to be seen whether Icahn's vehemence will sway the bulk of Yahoo investors to his cause.

Other activist investors, including T. Boone Pickens and John Paulson, already have joined forces with Icahn by increasing their stakes in Yahoo following the announcement of his proxy bid. A fund manager with Legg Mason Inc., a major and long-term Yahoo shareholder, said last week that he's open to the Icahn effort, though he'd have to see how the proxy fight shapes up. See related story.

But Icahn's desire to position himself as a broker for new merger talks between Yahoo and Microsoft may undercut by the fact that the companies are already engaged in negotiations.

"Icahn's source of bargaining power is if they're not willing to talk, or if they're in massive disagreement," said Collins Stewart analyst Sandeep Aggarwal. "But they are talking to each other."

Talks in progress

Yahoo itself pointedly has mentioned the fact that it's in talks with Microsoft, noting that both companies are now more inclined to seek out partnerships rather than a merger.

But it's unclear how seriously Yahoo is taking the current talks, according to Jefferies & Co. analyst Youssef Squali. "The heart of the issue is whether Yahoo management is negotiating with Microsoft in good faith or not," he said.

For his part, Icahn said he doubts such an arrangement will bring Yahoo's stock to the same value offered by the Microsoft buyout offer.

"I intend to ask our new board to inform Microsoft that unless any alternative transaction can insure a $33 or higher stock price (of which I am skeptical), all talks of alternative transactions are over," the investor wrote in his letter Friday.

Instead, Icahn thinks that Yahoo should publicly offer itself to Microsoft for $34.375 a share -- a small premium to the $33 bid price Microsoft offered before pulling its bid last month. If a deal cannot be reached, Icahn said Yahoo should enter some sort of search agreement with Google Inc. See full story.

Roger Kay, an analyst with Endpoint Technologies Associates, cautioned that Yahoo investors shouldn't get hung up on Icahn's bluster. "He oversimplifies, he's always done this," he said.
"Even with all the theatrics, I think shareholders get helped, because he has skin in the game and he wants to get out."

Bitter shareholders

Squali commented that Icahn likely isn't losing any favor by issuing nasty missives. "I do not believe that Icahn's letters are turning other shareholders against him. I think it actually may be the opposite."

The analyst said that's because many shareholders are sufficiently embittered at this point to be able to look past any perceived shortcomings in Icahn's approach.

In a column posted on Wednesday, activist Yahoo shareholder Eric Jackson wrote that he doesn't buy the notion that Icahn and his slate have to prove anything. Jackson, whose stake is relatively small, has been a particularly vocal about his desire for a change of direction for the struggling Web portal.

"As far as I'm concerned, after Yahoo's last four years of slipped deadlines, missed opportunities and chronic market underperformance, the burden of proof should lie on the shoulders of the incumbent board," wrote Jackson, who did not respond to a request for comment.

Another seemingly discordant note in Icahn's letter Friday was the suggestion that should a deal with Microsoft fail to materialize, Yahoo should pursue a vaguely defined partnership with Google as an alternative.

Icahn previously has criticized Yahoo's attempt to reach a deal with Google, though that was widely seen as a means to preempt a Microsoft takeover, not as a plan B to a takeover. Such a deal would likely see Yahoo outsourcing a portion of its search-advertising business to its rival, while many analysts suggest that the company would lose merit in the eyes of Google if the
Microsoft bid gets conclusively dropped.

"Working with Google and selling to Microsoft seems to me like two separate things," Aggarwal of Collins Stewart said.

In addition, some have wondered whether the nasty back and forth between Icahn and Yahoo may actually work to seal a deal at a value lower than what Yahoo shareholders might want.

"Microsoft is probably quite happy to letting Icahn 'soften up' Yahoo's management before it swoops in once again," Squali wrote to clients Friday.

John Letzing is a MarketWatch reporter based in San Francisco.

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