Icahn: Yahoo will rue rejecting Microsoft

Yahoo Inc. directors made a “grave mistake” in rejecting Microsoft Corp.'s latest advances, billionaire investor Carl Icahn said as he pressed shareholders to oust the Internet company's board.

Yahoo rejected a breakup proposal from Icahn and Microsoft over the weekend, saying it would be “ludicrous” to sell the search business to Microsoft and leave the rest of the company in Icahn's hands. Icahn on Monday accused Yahoo of distorting the terms of the offer, telling investors not to be “fooled.”

Both sides are preparing ammunition for the shareholder vote Aug. 1 to decide who controls the board. Compromise between 72-year-old Icahn and chief executive Jerry Yang is probably impossible now, and investors may vote to throw out the current team, analyst Jeffrey Lindsay said.

“Investors have made their minds up,” said Lindsay, at Sanford C. Bernstein & Co. in New York. Yahoo doesn't have “any realistic alternative” to boost the stock as high as a buyout from Microsoft would have, he said.

Yahoo, based in Sunnyvale, Calif., dropped $1, or 4.2 percent, to $22.57 at the close of Nasdaq Stock Market trading. Microsoft, the world's biggest software maker, declined 10 cents to $25.15.

Microsoft disputed Yahoo's account of the talks, saying it only asked for a quick response on whether the terms of the offer could form a foundation for negotiations.

Yahoo spokeswoman Tracy Schmaler and Icahn representative Sue Gordon didn't return phone messages seeking comment.

Terms of agreement

Yahoo would get at least $2.3 billion in shared revenue from the search assets annually over five years. The Microsoft offer would have generated about $300 million a year in cash, Yahoo said. That compares with the maximum of $450 million annually that Yahoo expects to get from its search advertising partnership with Google Inc., owner of the most popular Web search engine.

“I actually for the first time feel that the Yahoo board was on strong grounds for rejecting this offer the way it did,” said Gamco Investors Inc. associate portfolio manager Larry Haverty in Rye, New York. “The only thing that really makes sense here is for Microsoft to buy the whole company.”

The deal would have helped Yahoo cut research costs by billions of dollars, Icahn said. He disputed Yahoo's claim that directors received only 24 hours to decide on the deal, saying they would have had more time had they agreed to delay the Aug. 1 meeting. Icahn and Microsoft also were willing to discuss keeping some board members, he said, countering Yahoo's claim that the deal was conditioned on replacing the board.

Distorting the facts

“I have yet to see a company distort, omit and twist events and facts in the manner that Yahoo has done,” Icahn said in a statement. He filed a definitive proxy statement Monday, seeking to replace Yahoo's nine-member board with his own nominees, including himself.

Yahoo Chairman Roy Bostock encouraged Microsoft CEO Steve Ballmer on a July 10 phone call to make an offer for the search unit, Microsoft said Monday in a statement. The plan was meant to be a starting point for negotiations, not a take-it-or-leave-it proposition, the company said.

Microsoft initially offered $44.6 billion, or $31 a share, for all of Yahoo on Jan. 31. The deal would have combined the second and third largest Web search engines in the U.S., helping the merged company compete with market leader Google.

Ballmer's strategy

Microsoft wants Yahoo's search business to go after Google's share of Internet advertising, a market that may reach $65 billion this year, according to researcher IDC. Google had 62 percent of U.S. Internet queries in May, topping Yahoo's 21 percent and Microsoft's 9.1 percent, according to research firm ComScore Inc.

Redmond, Wash.-based Microsoft later boosted its offer to $33 a share, only to walk away when Yang asked for $37. Since then, the software maker has attempted to take over Yahoo's search unit, with Yang's latest rejection this weekend.

Ballmer had agreed to put $7.7 billion toward the transaction, comprising $1 billion for search, a $2.8 billion loan and a $3.9 billion tender offer to Yahoo shareholders. Investors would have received $16.25 a share in payouts, Icahn said.

“Just like the $33 per share offer that was refused by Yahoo in early June, refusing the Microsoft offer for the Yahoo search business is also another grave mistake that will be deeply regretted,” Icahn said.

Yang is encouraging employees to ignore the fracas and focus on their day-to-day jobs, according to the text of an e-mail included in a corporate filing Monday.