Outline of Yahoo! Break Up Takes Shape

Includes: AABA, MSFT
by: The Deal Economy

Hoping for closure in the ongoing Yahoo! Inc. (YHOO)-Microsoft Corp. (NASDAQ:MSFT) tussle? Forget it! Yahoo! late Saturday rejected an offer from Microsoft to acquire its search business along with turning over the rest of the business to activist investor Carl Icahn.

Yahoo! was down more than 3% early in Monday's session as investors puzzled over the latest developments. In a research report, Stifel Nicolaus analyst George Askew says it provides the first outline of a possible negotiated break-up of Yahoo! should Icahn gain control of the company. He also contends that Yahoo!'s summary rejection of the proposal gives Icahn ammunition in his proxy fight for control of the board. But the analyst also believes Icahn may have undermined his future negotiating leverage with Microsoft by agreeing to the break-up structure, limiting his ability to push for a sale of the entire company should he gain board control.

Also assessing the current state of the deal, Collins Stewart analyst Sandeep Aggarwal says in a research note that Icahn likely has enough support to either change the full board or have a controlling number of seats. Though it appears as if Microsoft is most interested in Yahoo!'s search business, he still thinks the software maker will move to buy the entire company, but at 10% to 15% below the $33 share price it previously offered, albeit with a higher cash component.

The latest news obviously muddies the waters. Icahn may have lost some momentum in his quest to take over the board given that an outright sale of Yahoo! appears to be less likely. Shareholders will be more reluctant to vote for his slate of candidates if they think he will assume responsibility for the day-to-day operations of the company.

Icahn did file his final proxy statement on Monday, indicating that should he gain control of Yahoo! he would not discuss an alternative transaction with Microsoft unless he believes the transaction would result in a $33 or higher stock price. He also would try to sell Yahoo! to Microsoft in a "friendly and cooperative transaction."

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