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Tuesday, July 08, 2008

Icahn's Twelve (now with special guest star Steve Ballmer)

Carl Icahn's crusade against the Yahoo board has taken another bold step forward with his release of a letter yesterday to Yahoo shareholders in support of his slate.  In the letter, Icahn reveals that he has "spoken frequently with Steve Ballmer, CEO of Microsoft," and that "[s]everal of our conversations have lasted as long as an hour."  (Gulp.)  The upshot is that Ballmer & co. are unwilling to deal with the current Yahoo board, and thus the only way to the land of Microsoft and honey is through an Icahn victory.  Microsoft has backed this up with a press release of its own (waiting at the ready?), stating that "[w]e have concluded that we cannot reach an agreement" with the current Yahoo board but that "after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!."

Icahn could not have planned this any better -- for Microsoft.  Part of me thinks he must have a huge hidden position in the Borg.  At every turn, his machinations have worked in Microsoft's favor:

  • Icahn only got into the mix after Yahoo had successfully killed the Microsoft offer.
  • He immediately made it clear that selling the company to Microsoft was the only viable opportunity.
  • He trumpeted that Yahoo's board had "botched" the Microsoft opportunity, and he set about undermining the board at every opportunity.
  • He proposed a full board slate with a somewhat hodge-podge collection of directors, including a man who had been humiliated when Icahn proposed him as a potential Time Warner CEO.
  • He claimed that Yahoo shares were worth $34.75 -- a number seemingly picked out of thin air.
  • In a surprising reversal, Icahn claimed that Yahoo's proposed deal with Google "might have some merit" before apparently changing his mind once again.
  • In the two months Icahn has been waging his battle, Yahoo shares have dropped from the $28 range to the $20-24 range.

And now comes the worst part -- he is buddying up to the person that he will be negotiating against should his proxy battle prove successful.

I just don't understand how Icahn can think that prostrating Yahoo before Microsoft helps Yahoo shareholders.  Here are the possibilities -- the fruits, as it were, of Icahn's laboring in the Yahoo vineyards:

  1. Icahn's proxy slate fails.  If this happens, the Yahoo board has been sufficiently bloodied that the stock will probably drop even further.  And who has done the bloodying?  Yahoo will then limp along, hoping for some change in its public perception, or it will be taken over (de facto or de jure) by Google, Microsoft, News Corp., or some other entity for 50 cents on the dollar.
  2. Icahn's proxy slate wins!  Then what happens?  Apparently, Icahn's plan is to immediately start negotiating with Microsoft.  (From his letter: "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.")  But what will Microsoft do?  Ballmer knows that Icahn is backed into a corner -- Yahoo would have to accept whatever Microsoft offers.  Microsoft would probably try to buy the search engine on the cheap.  Will Icahn see anything close to his $34.75 per share?  As Henry Blodget put it: "[D]on't think for a minute, of course, that even if Microsoft is persuaded to buy Yahoo outright, that it will do it for $33. Microsoft refused to speculate about price, but at this point, there's no reason in the world they should pay more than $25-$27."

Common sense compels me to acknowledge that, hey, he is Carl Icahn and I'm a professor.  But for the life of me, I can't understand why Icahn continues to get good press.  One recent article explains "Why Yahoos [sic] shouldn't underestimate Icahn".  I would agree, if the meaning is underestimate the damage Icahn can do to the company.

One final note.  Oddly enough, Icahn's big argument for his proxy slate is that it can get a deal done with Microsoft.  But -- according to Icahn -- this is the reason why Microsoft won't deal with the Yahoo board:

Steve [!] made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board. His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months and perhaps longer to obtain regulatory clearance in the U.S., Europe, and elsewhere. During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost.

So here's my question for Yahoo shareholders.  Suppose Icahn's slate wins.  Are you prepared to live with the Icahn board for at least nine months?  Nine months in which Microsoft may well be looking to chip down the price as much as possible?  (You can bet Microsoft wouldn't repeat the Time Warner "no collar" mistake.) And that's assuming a deal is struck immediately.  Nine months?

Well, I guess Yahoo shareholders could look forward to this, from potential Icahn director Mark Cuban: "Is there anything more fun than sitting around, growing your hair, drinking a Bud while listening to Jethro Tull and pondering how to change the balance of power in the search world and unseat Google?"

Posted by Matt Bodie on July 8, 2008 at 05:21 PM in Corporate | Permalink


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