Icahn's Risky Gamble for Yahoo!
SAN FRANCISCO -- Expect a fierce battle for shareholder votes now that Carl Icahn is attempting to wrestle for control of
Yahoo!
(YHOO)
.
The billionaire investor has
of 10 candidates to unseat Yahoo!'s own board of directors come July 3 at the company's annual shareholder meeting. Icahn is looking to win the hearts and minds of disgruntled investors still steamed over failed merger negotiations with
Microsoft
(MSFT) - Get Report
.
Christopher Young, director of M&A research for RiskMetrics Group, likens the upcoming proxy fight to a political campaign, with both Icahn and Yahoo! going on road shows and putting in some serious face time with investors. The two sides will also likely exchange combative letters filed through the Securities and Exchange Commission.
Young expects Icahn to come down hard on Yahoo! CEO Jerry Yang, arguing that as the company's cofounder, he was too emotionally attached to be able to negotiate in good faith with Microsoft, and that Yahoo!'s board may have shown him too much deference.
Icahn offered a preview of his campaign in a letter to Yahoo! Chairman Roy Bostock on Thursday, in which he named his own slate and also took shots at the way the board has run the company.
"It is clear to me that the board of Yahoo! has acted irrationally and lost the faith of shareholders and Microsoft," he wrote.
Whether Icahn can steer shareholders to his side will largely depend on his ability to reopen talks with Microsoft, which on May 3 withdrew its $47.5 billion bid to buy Yahoo!
Microsoft declined to comment. But in the days following its retreat from the deal, the company seemed to have washed its hands of Yahoo!, instead planning to grow its lagging Internet business on its own.
In his letter to Bostock, Icahn wrote: "During the past week, a number of shareholders have asked me to lead a proxy fight to attempt to remove the current board and to establish a new board which would attempt to negotiate a successful merger with Microsoft, something that in my opinion the current board has completely botched."
Icahn had reportedly been deliberating over whether to launch the proxy fight after he failed to receive a response from Microsoft about revisiting the possibility of a merger. Shareholders on July 3 will have to take that into account when they decide if they should vote for Icahn's slate of directors.
"That's the elephant in the corner," Young says. "That was the reason for Icahn's delay. The uncertainty over Microsoft is still there."
At the same time, Young says it would be difficult for Microsoft Chief Executive Steve Ballmer not to seriously consider a renewed deal under a different Yahoo! board, assuming one is elected.
Ballmer had aggressively pursued Yahoo!, bumping up his original offer of $31 a share to $33 a share. The deal broke down when Yahoo! stood firm at $37, but Icahn's board might be more amenable to Microsoft's price, Young says. And nothing has changed with Yahoo!'s fundamentals since May 3 that would make it less attractive to Microsoft.
But even if Icahn can't get Microsoft back to the table, all is not lost. Analyst Rob Sanderson of American Technology Research says that a new board could still force Yahoo! to change its ways.
"Fresh eyes will make different decisions," he says.
In the event that the board gets split between current members and those on Icahn's slate, there could be a clash in philosophies. After all, if Icahn's candidates want a deal with Microsoft and the existing board doesn't, it will only lead to more distractions, which Yahoo! can ill afford right now as it tries to catch up with its main rival,
(GOOG) - Get Report
.
But Shirley Westcott, managing director of policy for Proxy Governance, says it is unclear how Yahoo!'s current board members feel about the Microsoft deal, because Yang and Bostock were the two main people negotiating on the company's behalf.
"It's hard to know without being in the boardroom whether any directors might have come around," Westcott says.
Young notes that Icahn's decision to go after all 10 of Yahoo!'s board seats is fairly aggressive, because most proxy fights look for just a minority representation.
"It's rare to see a full slate contest," he says. "To me, it indicates that he believes he needs control and without control, he doesn't think he can convince Yahoo! to negotiate with Microsoft."
Paulson & Co., a $30 billion hedge fund that recently built up a stake of 50 million shares of Yahoo!, reportedly intends to vote for Icahn's candidates, according to
Reuters
.
But winning a full slate will be much harder than gaining only a portion of the board, because shareholders must then question how well a new board could function. By electing a handful of replacements, change at a company might come slower, but it would be considered a less risky proposition.
Young says Icahn might reconsider how many seats he seeks on the board after he gets a better read on how shareholders might vote.
"If he gets a lot of negative feedback, he might retreat and look for a minimum board," Young says. "But I think he wants control of the board."
Bob Profusek, head of M&A for Jones Day, points out that a large amount of Yahoo! shares -- by some accounts, 25% to 35% -- are held by Yahoo! executives and employees, which could add another layer of difficultly for Icahn.
"No matter how angry some shareholders seem to be on the outside, there are a lot of shareholders on the inside," Profusek says.
That said, Yahoo! will have its work cut out for it as well. For all the time spent earlier this year trying to convince shareholders that a deal with Microsoft was not its best option, the company must now mount an even bigger campaign to keep its current board in place.
That means laying out -- and defending -- in greater detail why the deal with Microsoft fell apart, especially when Icahn is likely to be undercutting all of Yahoo!'s arguments.
Profusek says that Yahoo! did itself no favors by failing to make any moves after the Microsoft deal collapsed. In most instances, companies in Yahoo!'s position try to make peace with shareholders by creating short-term value through, for example, a buyback program.
"Yahoo! just went back to the old plan, and that's why shareholders have been so critical of them," he says. "A lot of shareholders have come into the company for a short-term bump, and now they're underwater."
The one player to emerge intact so far is Microsoft. Even though it had threatened Yahoo! with a proxy fight, it ultimately walked away from it, deciding that the nasty ordeal wasn't worth it. But now, Icahn is fighting Microsoft's battle, and all Microsoft has to do is watch the drama unfold from the sidelines.
"Microsoft is now sitting there like a Cheshire cat," Profusek says.