Icahn Has Two Days to Breathe Life into Micro-hoo

With a stock price down to the mid 20s and Microsoft (MSFT) saying they’ve “been there, done that” and aren’t coming back, there are more than a few Yahoo (YHOO) shareholders second guessing whether Yahoo management overplayed their hand. They’re wondering if holding out was a mistake. For billionaire investor Carl Icahn, their mistake may be his opportunity.

Reports are circulating that Icahn has bought as much as 50 million shares of Yahoo stock in the past week, an amount equal to about 3.5% of the company. There are rumors he’s buying more too. CNBC, in fact, reported Tuesday that Icahn may be gearing up for a proxy fight aimed at seating a new board and resuscitating Microsoft’s now scuttled takeover bid.

The prospect brings to mind the old adage that “it takes money to make money.” It also triggers the unspoken tenet behind that turn of phrase: if you have enough money you don’t have to wait for deals to happen, you can actively create them.

If Icahn is buying, it’s safe to bet he’s not following a passive strategy. There’s no wait and see. He’s a shareholder known to bring the fight. This would be a move right out of the playbook of Oracle (ORCL) vs. BEA, another deal Icahn left his fingerprints on. It would be a move to buy at $25 and then with a new board, sell to Microsoft for the previously offered $31 to $33. Not a bad spread, if it can be arranged.

The key is, for such an Icahn gambit to work, he’ll have to build a support group of other dissident shareholders. It will take the sum of their votes, and his, to nominate and elect enough new board members to shift the majority vote to their favor.

It’s not an impossible scenario. Major shareholder Capital Research has publicly expressed disappointment in the outcome of the Microsoft negotiations. Other institutional shareholders, including Legg Mason, have taken a diplomatic and cautious stance but hinted at possible dissatisfaction. Rumor has it, activist fund Firebrand Partners, fresh from fighting over the New York Times (NYT), is sniffing around with similar interest too.

The catch is, if this is happening, it’s on the clock. Due to Bylaw issues, Icahn has only until May 15th to nominate a slate of directors or he’ll miss the window. That’s not a lot of time to lobby and build a consensus.

So far, nobody is talking but this will be a situation to watch for the next two days.