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Yahoo Cedes Three Board Spots to Icahn, Ending Proxy Fight

By Peter Whoriskey
Washington Post Staff Writer
Tuesday, July 22, 2008

A duel for control of Internet giant Yahoo ended yesterday with company officials and billionaire investor Carl C. Icahn announcing that they had reached an accord.

Icahn comes away earning a seat for himself and two others on a newly enlarged, 11-member Yahoo board.

Yahoo leaders, meanwhile, have blocked Icahn from gaining an even larger share of board seats at the company's annual shareholder meeting on Aug. 1.

"Everyone is able to save face," and by avoiding a bitter showdown, the pact makes sense for shareholders, said Chris Young, director of mergers and acquisitions research at RiskMetrics Group. But because neither side can claim victory, "neither will feel terrific."

Namely, Yahoo chief executive Jerry Yang and Chairman Roy Bostock have been forced to give board seats to the sometimes brash Icahn, who conducted a dissident campaign in which he belittled their business decisions.

And Icahn, who had accumulated a 5 percent stake in Yahoo, has been forced to give up his attempt to take control of the Yahoo board and force a sale of the company to Microsoft. While Microsoft had earlier this year sought to acquire Yahoo, it no longer seems interested.

"Icahn is obviously not in the position he wanted to be in," Young said. "He won't be able to force a sale to Microsoft. I don't know that he will feel that he has won."

The battle over Yahoo, one of the world's most popular Web companies, has been closely watched not only for the deal's proportions but because it is coveted by those who think nearly all media will be delivered via the Internet in the future. If so, a Web company whose sites get as many as 140 million visitors a month may be well-positioned to profit.

Yahoo's second-quarter earnings are due today.

Microsoft, which has fallen behind in Web services, sought to catch up in the Internet arena by trying to acquire Yahoo for $44.6 billion.

When Yahoo officials rebuffed Microsoft, some Yahoo shareholders expressed frustration, arguing that the offer had been too generous to pass up.

Out of that discontent sprang Icahn, who accumulated a stake in Yahoo and nominated an alternate slate of directors.

In launching his bid in May to replace the board, Icahn wrote a letter to Yahoo calling the board's actions regarding Microsoft "irrational," "irresponsible" and "unconscionable" -- all in the opening paragraph.

The sniping between the sides continued. Just last week, Bostock and Yang sent a letter to shareholders saying Icahn and Microsoft were working together to serve "only their very narrow special interests, clearly not your interests."

They said that Icahn had bungled his bargaining position with Microsoft by declaring that the sale was his main focus.

"He has set himself up for failure," they wrote.

Behind the scenes, the two sides were negotiating, a source close to Yahoo said. They reached the deal over the weekend, hastening to finish before RiskMetrics issued its influential recommendation on the proxy fight this week, said the source, who spoke on condition of anonymity because permission to speak for the record had not been granted.

RiskMetrics was scheduled to talk to Icahn today.

Under the terms of the agreement, Yahoo's nine-member board would expand to 11 members. With one member stepping down, there will be three vacancies to fill: one by Icahn and two by candidates from his slate.

One of the members of the proposed slate is Jonathan Miller, former chairman and chief executive of AOL.

The pact "eliminates a certain amount of risk going into the meeting," the source said. "It was the most expedient way to end the proxy fight, which was distracting."

The agreement may not end the turmoil, however.

In his statement, Icahn said he continues to press for selling the company, saying the idea must be given "full consideration."

Moreover, some experts said that even though the board-member elections will no longer be contested, shareholders could pressure some members to resign by withholding votes.

Claudia Allen, an expert in corporate governance at Neal, Gerber & Eisenberg, a Chicago law firm, noted that during a previous Yahoo shareholder meeting, a relatively large percentage of voters withheld votes from some directors.

"If a strong enough message is sent, a director may have to step down," she said. "Otherwise, the meeting should be fairly tame."

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