Tuesday, July 15, 2008

Wall Street Journal: Icahn Finalizes Proposed Slate for Yahoo

Little Progress Seen In Full Acquisition Of Firm by Microsoft

Wall Street Journal
July 15, 2008; Page B10

Yahoo Inc. and its opponents dug in for battle as investor Carl Icahn finalized his proposed slate of Yahoo directors and Microsoft Corp. pressed its own case for why a deal with the Internet company would benefit Yahoo shareholders.

The back-and-forth among the three parties, which included differing accounts of a proposal to break up Yahoo that the company rejected over the weekend, is part of the lead-up to an Aug. 1 meeting of Yahoo shareholders that will include a vote on Mr. Icahn's proposal to install a new Yahoo board.

But as the tension between Mr. Icahn and Yahoo escalates, there are few signs of progress on the option shareholders appear to want most: a full acquisition of Yahoo by Microsoft. That option, which Microsoft had spent the early part of this year pursuing, is no longer being seriously considered, people familiar with Microsoft's thinking say.

Instead, Microsoft executives are focused on buying Yahoo's Internet search business, a far-cheaper option and one that could boost Microsoft's efforts to counter Google Inc.'s steady growth.

Microsoft submitted its latest proposal for such a deal Friday. Mr. Icahn, who wanted his directors to control the remainder of Yahoo, helped deliver the offer to Yahoo. Yahoo's board rejected it Saturday but said it would be interested in selling the whole company.

By pushing for an outright purchase, Yahoo could be increasing its chances for keeping its board in place and fending off Mr. Icahn's assault. Investors continue to prefer a full acquisition to a more-complex deal for the search business of the sort Microsoft proposed in recent days. While Microsoft has focused on alternatives to a full purchase, Yahoo is keeping the notion alive by reminding shareholders that it told Microsoft it is open to such a deal and could complete it before the shareholders meeting.

"Yahoo definitely has the upper hand," said activist investor Eric Jackson, who represents a loose group of shareholders that collectively own 3.2 million Yahoo shares. But the momentum could shift, he said, if Mr. Icahn comes up with another offer.

One large Yahoo shareholder said in an interview Monday that while he preferred a full acquisition, he believes that Microsoft's latest search deal is a good start and that the Yahoo board ought to be replaced if it couldn't execute it.

In a letter to Yahoo shareholders Monday, Mr. Icahn continued to try to garner support for selling the search business to Microsoft, and he promised to fast-track discussions over that deal if his nominees were elected. The investor, who controls funds that own nearly 5% of Yahoo, accused Yahoo of distorting the facts in issuing its rejection of Microsoft's latest offer. He said that by his calculation, the value of the search sale to Microsoft, combined with the remainder of the company and other aspects of the deal, would be valued at close to $33 a share to Yahoo shareholders. The offer included a cash payment to Yahoo as well as an equity investment and a loan to the company.

A critical piece of Microsoft's offer was its guarantee of revenue that would be paid to Yahoo after it bought the search business. Under the proposal, Microsoft guaranteed to Yahoo from $19.5 billion to $26.5 billion over the next 10 years, according to people familiar with the situation. In return, Yahoo would need to guarantee that its Web site, which feeds traffic to the search business Microsoft would buy, would continue growing at a certain level, these people say.

Yahoo, in a letter to shareholders and in filings with the Securities and Exchange Commission, Monday disputed the value of the proposed deal and reiterated a laundry list of problems with the proposal.

In particular, the company said Microsoft's revenue guarantees were below expectations for its own business, called the proposal's estimation of cost savings "unrealistic" and said a recently struck agreement with Google can generate higher operating income. Mr. Icahn still "lacks a plan that makes sense for Yahoo stockholders," Yahoo Chairman Roy Bostock and Chief Executive Jerry Yang wrote in a joint letter.

Microsoft chimed in with a statement Monday, disputing Yahoo's account of talks last week, specifically Yahoo's contention that on Friday, Microsoft gave it an unreasonable deadline of 24 hours to agree to a deal. Microsoft said the offer wasn't an "ultimatum" but rather an attempt to see if Microsoft's offer was sufficient to "form the basis for the parties to engage in negotiations over the weekend on a letter of intent and more detailed term sheets."

Microsoft also addressed a dispute over whether the proposed deal would require changes to Yahoo's board and top management. Microsoft said its proposal "did not include changes to Yahoo's governance." A person close to Yahoo said "governance was a part of the offer," which was discussed in multiple calls between Yahoo, Microsoft and Mr. Icahn.

Sandeep Aggarwal, senior Internet analyst at investment bank Collins Stewart LLC, said Mr. Icahn probably can win a few seats with the search deal on the table but is unlikely to replace the entire board if Microsoft is unwilling to buy the whole company. "Convincing investors to vote in a new board because Microsoft will do a potential search deal is not going to be as easy as changing the board for a full acquisition," he said.

Mr. Yang prepared Yahoo employees for the proxy fight to intensify in a company-wide email Monday. "Proposals and attacks by Microsoft and Carl Icahn leading up to our meeting are likely to get even more contentious," he wrote.

Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com and Robert A. Guth at rob.guth@wsj.com

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