A Very Hostile Bid for Yahoo
Salvo From Icahn Opens Proxy War

By Peter Whoriskey
Washington Post Staff Writer
Friday, May 16, 2008

When Microsoft chief executive Steve Ballmer was trying to buy Yahoo, he didn't want to appear disagreeable, let alone hostile.

Now comes billionaire investor Carl C. Icahn, who has no such qualms.

In launching his bid yesterday to replace the entire Yahoo board with a slate of his choosing, Icahn wrote a letter to Yahoo in which he called the board's actions in dealing with Microsoft "irrational," "irresponsible" and "unconscionable" -- all in the opening paragraph.

Yahoo Chairman Roy Bostock fired back: "Unfortunately, your letter reflects a significant misunderstanding of the facts . . . [the current board] remains the best and most qualified group to maximize value for all Yahoo! stockholders."

So went the first round in the new fight over Yahoo, one of the world's largest Web companies with 137 million monthly visitors.

Icahn, who has acquired 59 million shares of Yahoo, is trying to gain control of the Yahoo board and lure Microsoft back to buy the company. He is counting on the disgruntlement of other shareholders, who watched as the Yahoo board resisted Microsoft's $33-a-share bid, a large potential premium over the $19 shares were selling for before the offer.

"Microsoft wanted the deal to be friendly -- they didn't want to be seen as the hostile acquirer," said Chris Young, director of mergers and acquisition research at RiskMetrics Group, which advises large investors in such cases.

Ballmer's tactics were constrained by the fact that, if successful, he would be in charge of merging the companies, too.

But, Young said, "Icahn can take the heat."

Icahn, who is widely known for his aggressive posturing, enters the Yahoo drama as several technology and media companies are jockeying for position to dominate the Internet and all the billions of advertising dollars it could command.

So far, Google is way ahead.

The renewed battle for Yahoo is expected to be fierce and should last at least until early July, when Yahoo shareholders meet.

"Microsoft was tough but they never threatened knockout punches," said Bob Davis, managing general partner of Highland Capital Partners and former chief executive of search engine portal Lycos. "Icahn will."

Icahn is proposing to replace the Yahoo board with his own slate, made up of Lucian A. Bebchuk, a Harvard law professor specializing in corporate governance; Frank J. Biondi Jr., the former chief executive of Universal Studios and, before that, of Viacom; John H. Chapple, former president and chief executive of Nextel Partners; Mark Cuban, owner of the Dallas Mavericks basketball team; Adam Dell, the managing general partner at Impact Venture Partners, a venture capital firm; Keith A. Meister, principal executive officer of Icahn Enterprises; Edward H. Meyer, chairman of an investment management company; Brian S. Posner, a private investor; and Robert K. Shaye, co-chairman and co-chief executive of New Line Cinema.

The 10th nominee to the board is Icahn himself.

Once Icahn puts his nominees forward, he will be counting on the discontent of Yahoo shareholders to win his candidates' election.

After Microsoft rescinded its offer on May 3, Gordon Crawford, portfolio manager of Capital Research Global Investors, one of the largest of Yahoo's shareholders, said that Yahoo had driven away "a willing and fairly generous buyer, and all of us are the poorer for it today."

It was an uncharacteristically blunt statement for a large firm, one that Young described as "an engraved invitation for a more aggressive investor like Carl Icahn to launch a proxy fight."

While Icahn appears to be focused on reviving the Microsoft deal, there is no guarantee that the tech giant is still interested.

After Ballmer wrote to Yahoo's Jerry Yang to say he was rescinding the offer, multiple Microsoft sources said the company's interest in Yahoo was finished. Yesterday, a Microsoft spokesman reiterated that sentiment: "We're moving on."

All the while that Icahn was plotting his move, Yahoo was simultaneously trying to strengthen its position against another takeover by striking an advertising deal with Google.

Under the terms of the deal being discussed, Google would run its ads, which are more profitable, along with some of Yahoo's search results. If Yahoo shareholders are convinced that such a deal offers great promise, they might be willing to stick with the current slate of directors and reject Icahn's bid.

But Microsoft -- and now Icahn -- believes that such a deal would reduce Yahoo's value and effectively end any possibility of a merger.

"What Yahoo is talking about doing with Google is the ultimate poison pill," Highland Capital's Davis said. "I don't see how it makes sense to take your core business and outsource . . . it is loaded with risk."

Icahn appeared to allude to the potential Yahoo-Google alliance in his letter, which warned, "I therefore hope and trust that if there is any question that these 'strategic alternatives' might in any way impede a future Microsoft merger you will at the very least allow shareholders to opine on them."

Much of the Yahoo-Google negotiations have revolved around business aspects of the deal, such as the length of the deal and how revenue would be shared. Google is caught between wanting to help ward off Microsoft while keeping Yahoo at bay.

In recent days negotiators for Yahoo and Google have been in "close contact," a source familiar with the negotiations said. But "there are still some parts of the deal that the two sides are pretty far apart on."

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