Yahoo!'s Upside: Only Angry Shareholders

With activist investor Carl Icahn playing nice, the company faces investors who wonder where the upside has gone.
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SAN FRANCISCO -- What once had the makings of a high-stakes drama -- featuring a sharp-tongued billionaire and a CEO fighting to save his job -- now looks more like a routine gathering stripped of any surprises.

Yahoo!'s

(YHOO)

once much-anticipated shareholder meeting takes place in San Jose, Calif., on Friday, but the company's board composition has been largely decided already after activist investor Carl Icahn backed down from his proxy fight, agreeing to three board seats instead of gunning for all nine.

And if Icahn's announced decision not to make an appearance on Friday is any indication of what to expect, then shareholders are in for a tame meeting -- or at least one much tamer than it could have been.

"The proxy fight is over and it will not do shareholders or Yahoo! any good to have the annual meeting turn into a media event for no purpose," Icahn said in a statement Thursday to explain why he planned to not appear on Friday.

Icahn also struck a conciliatory tone that sharply contrasted his usual barbed comments directed at Yahoo! CEO Jerry Yang and the board since May, when he waged his battle to oust all nine directors in a bid to seal a merger with

Microsoft

(MSFT) - Get Report

.

"A few days ago, I met with both Jerry Yang and

Chairman Roy Bostock and I believe both gentlemen genuinely wish that we will be able to work together to enhance value," Icahn said. "While we still disagree on many points, I have great hope 'this will be the beginning of a beautiful friendship.'"

Compare that to his comments about two weeks earlier, when he accused Yahoo! of distorting the truth about a search deal that he and Microsoft had jointly presented (in lieu of an all-out merger), only to be rebuffed. Previous open letters to shareholders from Icahn portrayed Yang as incompetent and accused the board of botching a merger deal with Microsoft.

Now, because of a

compromise reached with Icahn

last week, the board will make room for his candidates by expanding the total number of seats to 11, but that will happen only after Friday's meeting and shareholders will get no say.

Icahn will occupy one seat while the board's nominating and governance committee will fill the remaining two by picking from a list of eight candidates from his original slate as well as Jonathan Miller, former Chairman and CEO of AOL, which is now owned by

Time Warner

(TWX)

.

Although shareholders will still get a chance to cast their votes for the current board members -- all except for Robert Kotick, who recently stepped down as part of the compromise -- it's unlikely to change anything. Even if a majority withholds votes for a candidate, thus forcing him to submit a letter of resignation, it's still up to the board to decide whether or not to accept it.

At best, shareholders will be able to express their disenchantment with Yahoo! and its handling of the merger with Microsoft, which ultimately fell apart and drove down the company's stock price. Before Microsoft made its proposal on Jan. 31, Yahoo!'s shares traded at $19.18. They skyrocketed to nearly $30 after the proposal, then plummeted back to $20 once the deal was killed.

Shareholders may also call Yahoo! to task on disappointing second quarter results from last week, in which profit tumbled 18.6% vs. a year ago.

"The focus this year for a lot of shareholders will be what's going to happen now with the settlement and the expansion of the board -- where is the company going?" says Warren Chen, a managing director at Glass Lewis, a proxy advisory firm.

Glass Lewis is recommending that shareholders withhold votes for three of the board's current members: Bostock, Ronald Burkle and Arthur Kern, all of whom received the most "withhold" votes at last year's shareholder meeting. The firm noted that each of the men sat on Yahoo!'s compensation committee last year, "during which time the company paid more compensation to its top executives but performed worse than its peers."

Activist shareholder Eric Jackson also is calling for withhold votes for the same three members, as well as Eric Hippeau, because he, like Kern, has served on the board for over 12 years, which Jackson said is too long given Yahoo!'s poor performance these last four years.

Indeed, Yahoo!'s yearly revenue grew 22% from 2005 to 2006, but only grew 8.5% from 2006 to 2007. Meanwhile, the company's shares have slid 15% from a year ago, and 27% from two years ago.

Yahoo's second-largest shareholder, Capital Research Global Investors, which owns a 6.5% stake, is rumored to be considering withholding votes for Bostock and Yang. A spokesman for the company declined to comment.

Legg Mason, Yahoo's third-largest shareholder, has already said that it will support the company's current board, which may have influenced Icahn's decision to abandon his proxy fight.

Icahn admitted on Thursday that he realized he didn't have enough votes from institutional investors to win his battle, leading him to work out a compromise with Yahoo!.

"In today's corporate governance system where large mutual funds control so much of the stock, it is extremely difficult to oust an entire board, no matter how strongly a large number of shareholders feel about the board's previous actions," he said in a statement. "Realizing I could not gain control, I saw no point in spending the final two weeks in a debilitating fight, where little would be accomplished except to build animosity between both camps and the end result would be no better than the compromise that was reached."