Microsoft Signals It Would Rather Talk to an Icahn-Controlled Yahoo

Dissident Yahoo (YHOO) shareholder Carl Icahn and Microsoft (MSFT) have been talking to each other (as has everyone else involved in a possible Yahoo deal, including Yahoo and AOL over the weekend). In a letter to shareholders, reproduced below, Icahn notes that he and Microsoft CEO Steve Ballmer have been discussing possible transactions over the past week, and that Ballmer ” made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo! . . . immediately.”

Microsoft is throwing its weight behind Icahn’s proxy battle, going so far as to signal that an Icahn-controlled Yahoo is the only one that it is willing to restart negotiations with. Icahn says Microsoft won’t enter into any deal with the current Yahoo board because of the risk that the company will be “mismanaged” in the nine months or more it could take to finalize a deal of this size. He states:

 

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.

 

In a coordinated statement it just released, Microsoft confirms that while it has “concluded that we cannot reach an agreement” with the current board and management at Yahoo, and that “after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!”

Microsoft is basically telling the market that the only way a Microsoft deal can be revived is by voting the current board out. Yahoo’s stock is up 10 percent this morning on the news to $23.50, last time I checked.

Icahn makes it sound like he and Ballmer are closer than two teenage Best Friends Forever, talking on the phone for “as long as an hour,” gossiping about what they plan to do to Yahoo. But Microsoft is not guaranteeing anything, just that it would talk to Yahoo again if a new board is elected that is more open to a deal than the current one. It would be Microsoft’s fiduciary duty to do so anyway. Ballmer just likes slapping Yahoo around. He is not really committing to anything.

Yahoo, for its part, plans on arguing at its shareholder meeting that selling its search business to Microsoft makes no sense. But one of its counterpoints to Icahn’s original five-point plan, that Microsoft is no longer interested in a full acquisition of Yahoo, is now officially invalid.

Read both Microsoft’s and Icahn’s coordinated statements after the break:

Here is Microsoft’s statement:

 

In the past week we have had the opportunity to discuss with Carl Icahn the prospects for a possible agreement between Microsoft and Yahoo!.

Despite working since January 31 of this year, as well as in the early part of last year, we have never been able to reach an agreement in a timely way on acceptable terms with the current management and Board of Directors at Yahoo!. We have concluded that we cannot reach an agreement with them. We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.

As Mr. Icahn notes in his statement today, it would be premature to discuss at this time important details such as the price or other terms of a possible transaction. We respect the right of Yahoo!’s shareholders to determine the destiny of their company, and we do not intend to engage in ongoing commentary on these issues in advance of Yahoo!’s shareholder meeting.

As we explained on June 12 when Yahoo! announced an agreement with Google, we believe that our proposed search acquisition and partnership would have delivered superior value to Yahoo!’s shareholders and the marketplace as a whole. We have not changed our position, even as we continue to move forward with our own online search and advertising offerings. We therefore welcome interest by Mr. Icahn in pursuing this and other discussions.

While of course there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo!’s shareholder meeting if a new board is elected.

 

Here is Carl Icahn’s letter to Yahoo shareholders that Microsoft is responding to:

 

Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153

July 7, 2008

Dear Yahoo! Shareholders:

During the past week I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated. Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together. 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.

For example, in a transaction to purchase the whole company, a very large amount of capital would be due at closing. Even in an “alternate” transaction, where just the “Search” assets were purchased, large guarantees would have to be made and, again, large sums could be lost if the company was mismanaged.

Microsoft perceives this risk may be quite high with the current board and management in place. However, Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. 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. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

Much has been said about how badly the Yahoo! board has “botched up” negotiations with Microsoft over the past months. There is no need to keep pointing out the mistakes I believe Yahoo! made by not immediately taking a $33 offer made by Microsoft. But one thing is clear — Jerry Yang and the current board of Yahoo! will not be able to “botch up” a negotiation with Microsoft again, simply because they will not have the opportunity.

Our company is now moving toward a precipice. It is currently losing
market share in its “Search” function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google’s income from operations grew 59% per year over the last two years while Yahoo!’s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.

If elected, I have little doubt that the new board, subject to its
fiduciary duties, will do what the current board will not do, i.e.,

— Immediately start negotiation with Microsoft to sell the whole company or, in the alternative, sell “Search” with large guarantees.

— Move expeditiously to replace Jerry Yang with a new CEO with operating experience.

Sincerely yours,

CARL C. ICAHN

 

(Photo by Sam Lustgarten).

Original post

Comments

[yahoo share...:]

I'm waiting for Icahn's proxy mail out so I can help vote out the current board. With the shareholder meeting less than a month away I hope it comes soon.

2008 Jul 07 01:02 PM

[Alex Filonov:]

Why didn't MSFT try proxy fight by itself? Maybe they didn't want to pay full price? Expect an offer in range $25-27.50 if Icahn wins. Forget about $31, never mind $33.

2008 Jul 07 01:06 PM

[Tom B:]

"I'm waiting for Icahn's proxy mail out so I can help vote out the current board. With the shareholder meeting less than a month away I hope it comes soon."

Don't be stupid. Yahoo's BoD may not be "rocket scientists, but they are geniuses compared to any Board that allows Ballmer a role above the level of janitor. The "Vista" bureaucracy would be wholly incapable of managing a content company; they can't even show a profit in most of their own divisions.

2008 Jul 07 01:52 PM

[Alex_60187:]

As both a college girl and an aspiring financial journalist, let me just say:

Who needs Gossip Girl when you have Microsoft and Yahoo?

2008 Jul 07 04:26 PM

[User 86999:]

This is excellent drama, much better than any of those tired soaps. The way MSFT is handling this case is awesome! I can bet someone is already writing the script for a TV movie, like the Barbarians At The Gate. It's just such a rich cat-and-mouse play. Hmmm, only if MSFT had a Tom instead of Steve; then I could have called it Tom and Jerry show. :-D

2008 Jul 07 06:49 PM

[Mit:]

Indeed, toMicrosoft and jerrYahoo :)

If a merge between Microsoft and Yahoo will be done (with or without AOL in this business), the whole world will lose one or two big players in the internet services market, but this thing will create a gap that must be filled by another company, may be even a non-US company (I see below something related to China :), that will have the mission to replace all the services offered now by Yahoo or AOL with similar (old ideas as social network, webmail, news, blogging, web-page-maker) but original services (new ideas, new features).

If this happen, then a suicidal Microsoft-Google merge will be the next step!

2008 Jul 08 03:49 PM