Sunday, May 18, 2008

Half-Steps Aren't Enough: Icahn Needs to Step on the Gas

Today's news that Yahoo! and Microsoft are talking again tells me one thing: both sides need this deal.

Microsoft's walking away was a bluff. Despite some of their shareholders saying the deal was unwise, the logic they used internally to decide to launch the largest ever acquisition in their history is still valid. They need this deal to bolster their weak sister online division, and also strengthen them for the next wave of their desktop business which will inevitably move to software-as-a-service (which will need web services and ad revenues which this deal is all about).

You don't talk about a friendly deal with Yahoo! a year ago, then -- more recently -- convince your board to do a hostile offer, and then, after taking a little heat from shareholders, walk away. If they did walk away, they should really call a spade a spade and shut down their online group which has been a sinkhole for a decade.

Yahoo! is just as desperate for a deal. This board knows shareholders are out for blood. It's less than seven weeks until their annual meeting and all their directors (including a co-founder) have a legitimate shot of being thrown to the curb.

Icahn's slate already has a sizable number of supporters (including Paulson already and likely Dan Loeb soon) and this will grow over the coming weeks, as I imagine that several larger institutions, ISS/RiskMetrics and many pension funds throw their support behind a deal. This board is finally (justifiably) fighting for their lives and will do everything to head off Icahn.

However, Yahoo! shareholders and Carl Icahn need to step on the gas. A partial deal with Microsoft is not as preferable an outcome as a full-and-fair offer for all of Yahoo! It's a half-step that Yahoo! might embrace as a way of retaining independence and Microsoft might embrace as a foothold to the eventual endgame.

But the endgame is the endgame. Microsoft will buy Yahoo!

Will Microsoft and its shareholders be better off dragging this out for 2 more years before a deal is consummated and the clock finally starts on regulatory approval? Does that really help them and penalize Google?

Will Yahoo!'s shareholders be better off with the current board and management left to perform as they have performed for the last 4 years?

A deal should get done before the Yahoo! annual meeting (otherwise known as its Shareholders' Independence Day), but it should be for the entire company.

Icahn needs to start talking to Steve Ballmer and Chris Liddell and make it happen for the highest price possible.

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