Carl Icahn Keeps Yahoo in Play

Ten days after escaping a bear hug from Microsoft, Yahoo hasn’t completely won its independence yet. Billionaire financier Carl Icahn is looking at launching a proxy fight against Yahoo’s board, according to a CNBC report. That’s a fight that Microsoft, which dropped its unsolicited bid for Yahoo on May 3, was unwilling to take on.

Icahn reportedly has been accumulating as many as 50 million shares, or 2.5% of Yahoo’s stock, which helps explain why Yahoo’s stock has remained well above its pre-Microsoft bid of about $19 a share. Icahn could nominate a full slate or a “short slate” of three or four directors, which would be a minority of Yahoo’s 10-member board. According to the Wall Street Journal, other investors, including Scott Galloway, founder of investment firm Firebrand Partners, also could get involved.

The sources are saying the notorious corporate raider’s aim would not be to make a run at the company himself, but instead to try to force a sale to Microsoft. It’s unclear whether Microsoft is still interested, however. Investors took the bait anyway, as Yahoo’s stock rose 5% today, to $26.56 a share.

If not Microsoft, who? Icahn wouldn’t appear to have many other ways to extract further value from a Yahoo stake. Various other possible deals, such as Yahoo alliances with Google on search ads or with Time Warner’s AOL unit or News Corp.’s MySpace unit, haven’t materialized yet. And analysts have indicated that none of those options would likely hike Yahoo’s value to the $33-a-share level that Microsoft said was its last offer.

Although Microsoft CEO Steve Ballmer appeared to become less enamored of a Yahoo deal over his three-month-long pursuit, a number of analysts and others close to the companies think a deal still could happen. Some high-profile shareholders such as Capital Research’s Gordon Crawford have expressed unusually public criticisms of Yahoo’s failure, or unwillingness, to seal a deal with Microsoft.

Some shareholders are unhappy in particular with Yahoo CEO and cofounder Jerry Yang, whose apparent opposition to a deal was believed to be a key factor in Microsoft’s decision to walk away. Although replacing Yang on the board might be seen by some shareholders as a drastic step, his board position presumably could be one of those targeted by Icahn. Potentially, the replacement of Yang, whose stake in Yahoo is only 3.9%, and other board members believed to be close to him, such as longtime Yahoo director Eric Hippeau, could help clear the way for a deal.

Icahn would have to act fast, however. The deadline for nominating Yahoo directors is end of day Thursday for shareholders to be able to vote on the board slate by the July 3 Yahoo board meeting.

Even then, a proxy fight wouldn’t be an easy task to pull off successfully. According to one source close to the situation, Microsoft may have decided not to mount a proxy fight partly because it wasn’t apparent that the majority of voting Yahoo shareholders would go along with its $33 bid.

One activist investor, Eric Jackson, has just ditched plans to mount a full alternate board. He told me Friday that the expense of up to $1 million likely would prove too much, and at the time, he didn’t think any other groups would step up. “Even though some people are so upset and irate,” he said, “to translate that anger into getting a group organized and a slate proposed is tough.”

Icahn can be persuasive. He managed to get Oracle to come back to the bargaining table to buy BEA Systems after talks broke down. That deal, sealed in January, is expected to close later this year.

However, it’s less clear how much of a success Icahn’s investment in Motorola last year was, since Motorola’s shares have dropped sharply since last November, so his record is mixed. If Icahn persuaded Microsoft and Yahoo to agree to a $33-a-share deal, that would represent a 24% premium to today’s closing price.

Whatever happens, this saga clearly isn’t over yet.

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