Yahoo! Sale Murky After Settlement

Icahn's addition to the Yahoo!'s board adds uncertainty to the sale of the company, analysts say.
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compromise with billionaire investor Carl Icahn may have allowed it to avoid an ugly showdown at its annual shareholder meeting, but it also added even more uncertainty to a potential deal with


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The new arrangement will end Icahn's battle to replace Yahoo!'s entire board, which he had waged since May after he accused them of botching a merger deal with Microsoft.

"This agreement will not only allow Yahoo! to put the distraction of the proxy battle behind us, it will allow the company to continue pursuing its strategy of being the starting point for Internet users and a must buy for advertisers," Yahoo! CEO Jerry Yang said in a statement.

Icahn said that he continues to believe that the sale of Yahoo! -- whether in its entirety or just its search business -- should remain in consideration.

"I am very pleased that this settlement will allow me to work in partnership with Yahoo! Board and management team to help the company achieve its full potential," he said in a statement.

But now it seems even more unclear if a deal with Microsoft will ever come to being. Microsoft had previously indicated that it cannot work with Yahoo!'s current board and the replacement of only three of them may not make enough of a difference.

Investors reacted to the Icahn-Yahoo! compromise by sending the company's shares down 3% to $21.76 in recent trading.

Throughout his fight with Yahoo!, Icahn had been highly critical of Yahoo!'s management team as well as Yang, who he wanted to see removed as CEO. Icahn had also argued that his own slate would have been better able to negotiate a deal with Microsoft.

As part of Monday's compromise, Icahn will gain a seat on Yahoo!'s board, which will expand from nine members to 11. Two other seats will be filled based on the recommendation of the board's nominating and governance committee from a list of nine candidates proposed by Icahn. They include eight nominees who were part of his original dissident slate as well as Jonathan Miller, currently a partner in Velocity Interactive Group and former chairman and CEO of AOL.

Yahoo! will get to keep eight of its current board members, including Yang. Board member Robert Kotick will not stand for reelection.

As part of the settlement, Icahn has agreed to withdraw his nominees from consideration at the annual meeting on Aug. 1 and vote his shares - which represent 4.98% of the company's outstanding shares - in favor of Yahoo!'s current board.

Youseff Squali, an analyst with Jeffries and Company, said that while Yahoo!'s agreement with Icahn eliminates a protracted proxy battle, it also means that an imminent Microsoft deal is unlikely.

"As part of the settlement, the board has agreed to fully disclose any meaningful transaction, including the strategy in dealing with that transaction, with the entire board before the final decision has been made," Squali wrote in his research. "This implies that any decision on a transaction is likely to take longer than expected."

He added that Icahn's nomination of Miller to Yahoo!'s board positions him to take over as CEO should the company fail to reach a deal with Microsoft and Yahoo! neglects to carry out its promised growth plans.

"This is an insurance policy for Icahn as Miller would get aggressive about extracting shareholder value through business dealings and assets spin off," Squali said.

Jeffrey Lindsay, an analyst for Sanford Bernstein, says he expects there to be residual friction between the old board members and the new ones, resulting in "a compromised return to status quo."

Indeed, Icahn and Yahoo! have spent the last two months firing off nasty letters declaring each other incompetent to run the company and questioning whether they truly had the interests of shareholders at heart.

At best, Lindsay says the new board might be able to shed more staff at Yahoo!, divest the company's Asian assets, and used the money to buy back shares.

But, he adds, "the chances of Microsoft deal are more remote than before."

Not all has been lost, however. Lindsay points to the recent deal between Yahoo! and


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, in which Yahoo! agreed to outsource some of its search ads to its rival - something that might never have happened if Icahn and Microsoft hadn't shown up.

Activist shareholder Eric Jackson says the compromise between Icahn and Yahoo! is good for shareholders but it does not go far enough. He is still pushing for the removal of four of Yahoo's board members: Chairman Roy Bostock, Ronald Burkle Arthur Kern and Eric Hippeau.

Jackson suspects that Icahn reached a compromise with Yahoo! because he knew his slate could not win on Aug. 1. Just last week, Legg Mason - one of Yahoo!'s largest shareholders - said it would vote in favor of Yahoo!'s current board, dealing a blow to Icahn.

"I think he knew he was going to lose, and he basically wanted to get whatever he could," Jackson says. "I think that with Yahoo, they hope that this noise goes away."

Lindsay says Icahn might have had a better chance of getting his full slate elected had he come up with a new management team to replace the one he was seeking to oust at Yahoo!. Lindsay further notes that Icahn never put together a convincing strategy to operate the rest of the company in the event that he could sell off the search business to Microsoft.

"It was becoming clear to him that he didn't have the backing of the big institutional investors because he hadn't produced a credible plan," Lindsay says. "They on balance would prefer to keep the status quo."