May 15, 2008 2:22 am by Kip Kniskern | 3 comments
Today, billionaire investor Carl Icahn sent a letter to the Yahoo! Board of Directors, announcing his intentions to force Yahoo! to work out a deal with Microsoft. He announced a slate of candidates who will be up for election at the annual meeting on July 3, and an aggressive plan to acquire enough stock to make sure they would be elected (and then to force a sale to Microsoft). In the letter, Icahn pulled no punches about his intentions:
It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft. It is quite obvious that Microsoft’s bid of $33 per share is a superior alternative to Yahoo’s prospects on a standalone basis. I am perplexed by the board’s actions. It is irresponsible to hide behind management’s more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer.
After Microsoft walked away from the deal, Yahoo! stock slid, but not nearly as far as the pre-offer price of $19.18. Clearly Yahoo! investors weren’t ready to walk away. First there were rumblings from large investors about ousting Jerry Yang, and now Icahn has stepped in. While some have said that the Microsoft pull-out was a ploy, there were clear indications that Ballmer had soured on the whole idea, and that the damaged goods Yang was offering was not what Microsoft was looking for.
In his letter to the board, Icahn addresses the issue:
While it is my understanding that you do not intend to enter into any transaction that would impede a Microsoft-Yahoo merger, I am concerned that in several recent press releases you stated that you intend to pursue certain “strategic alternatives”. 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 before embarking on such a transaction.
I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.
Now just to clarify, Carl Icahn doesn’t want Microsoft and Yahoo! to merge because he thinks that it will help Microsoft to compete with Google, or that it will help to guide the future of the internet. Carl Icahn stands to make a LOT of money on buying Yahoo! shares now, forcing a sale at a higher price, and profiting from that sale.
Yahoo! finds itself today in an even worse position than it was a few weeks ago. It can try to negotiate a sale with a newly reluctant Microsoft (who may very well see a crippled Yahoo! as a business advantage), it can try and fight and or wait out Icahn, or it can let Icahn tear the company apart in order to get the best value for shareholders (ahem, meaning Icahn).
As for Jerry Yang and the management team, really the only hope of continuing on with Yahoo! is to negotiate a sale, and to continue to lead Yahoo! from within Microsoft. Yang was probably gone already, facing angry investors at the annual meeting out for his head. Now, unless a deal is reached, it’s almost a certainty.
But after this latest smoke clears, even in a best case scenario where Yahoo! cuts the bs and offers its best self to Microsoft in a deal, is this a smart thing for Microsoft to do, to buy Yahoo!?
If Microsoft moves quickly (and Yang’s reluctance to deal was a major factor in the pull-out), the reasons that Microsoft made the offer in the first place still stand. MS would get increased search share, a valuable display advertising business, lots of traffic to Yahoo! websites, engineering talent, inroads into mobile and emerging markets, and the Yahoo! brand. These latest developments might put the acquisition in a different light, too. Instead of Big Bad Microsoft trying to destroy poor little Yahoo!, perception might shift more toward Benevolent Microsoft helping Yahoo! out of a jam (ok, maybe not).
Of course the same regulatory hurdles, questions about differences in cultures, and reluctance from the rank and file (on both sides) remain, as well. But if Yahoo! shareholders force it back to the table, expect Microsoft to be more than willing to listen.