Microsoft, Icahn join forces for Yahoo takeover

Investor activist Carl Icahn and Microsoft on Monday asked Yahoo investors to oust Yahoo's board and in its place elect Icahn's dissident slate, potentially paving the way for a purchase of the internet company in its entirety or just its search assets.

Here is part of a statement from Icahn, who is running a dissident slate of directors to unseat Yahoo's entire board, that cites discussions with Microsoft CEO Steve Ballmer:

Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase "Search" with large guarantees.

A few minutes later, confirmation came from Microsoft on those discussions with Icahn. Microsoft has been frustrated so far in its months-long pursuit of Yahoo and not long ago said it was giving up the chase — though apparently not all interest. According to Microsoft:

We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company.

Shares of Yahoo jumped as high as US$24.25 a share during intra-day trading, before ending the session at US$23.91 a share, up nearly 12 per cent.

While Microsoft's announcement that it supports Icahn's efforts potentially gives his proxy battle a bigger stick, it is far from offering any guarantees.

It has yet to be seen whether Microsoft's public statement will be enough to sway investors, absent of any specific price, terms or other details prior to Yahoo's annual shareholders meeting on 1 August. Microsoft stated it does not plan to make such information available before the annual meeting.

Advisory services to institutional investors, for example, may be reluctant to recommend support for Icahn's proxy slate, in absence of any details of what Microsoft plans to offer, according to one source with such an advisory service. Institutional advisory services can be influential in proxy battles, given some mutual funds, pension funds, and asset management companies rely on their recommendations to vote on proxy matters.

Microsoft could lend a greater hand to Icahn's proxy battle if it were to go directly to Yahoo's investors with a tender offer and work in tandem with Icahn's proxy battle.

A tender offer could include all the details of a buyout offer and be set to expire sometime after Yahoo's annual shareholders meeting. That would give investors a guarantee a deal was waiting to be done at the end of the day.

Both Microsoft and Icahn note in their statements that there is no guarantee a transaction of any kind will definitely occur, should Icahn's slate be elected.

Meanwhile, one source close to Yahoo said, "If Microsoft was interested in purchasing the company, they should make their proposal public. As recent as a few weeks ago, they weren't willing to enter into discussions at the same price range that they had previously proposed."

Microsoft announced a deal back in February that initially valued Yahoo at US$31 a share, and then later bumped it up to US$33 a share in May, before walking away after Yahoo countered with US$37 a share.

Yahoo responded to comments made by Icahn and Microsoft in a statement:

Yahoo's Board of Directors continues to stand ready to enter into negotiations with Microsoft Corporation for an acquisition of Yahoo. Indeed, as recently as June, Yahoo's independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo into selling to Microsoft its Search business at a price to be determined in a future "negotiation" between Mr. Icahn's directors and Microsoft's management. We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo's stockholders. If Microsoft and Mr. Ballmer really want to purchase Yahoo, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.

While the statements by both Icahn and Microsoft point to a strong interest in ousting Yahoo's entire board, Icahn has yet to file his definitive proxy, which had been expected to occur before 4 July.

The definitive proxy allows him to begin mailing out proxy cards to Yahoo's investors and hit the road with his investor presentation, which would include wooing the institutional investor advisory services.

As a result, it raises questions on whether Icahn is keeping his options open, despite a rapidly narrowing window of time when he has to choose between running a dissident slate with enough candidates to gain control of Yahoo's board, or go for a partial slate that would not constitute a majority on Yahoo's board.

For now, Icahn is planning to run a full slate, according to an interview he gave to the Los Angeles Times.

He noted he expects to make his final decision within days. Said Icahn in the interview with the Los Angeles Times:

We really only have a few days, so probably this will take care of itself.

Nonetheless, the public statements by both Icahn and Microsoft may yet serve as a cattle prod to Yahoo to get it to enter into negotiations to sell just its search business to the software giant at terms both can live with.