Icahn Pushes Micro-Hoo in a Series of Letters

Published: June 11, 2008

by Alex Woodie

The battle of words this week continued between Yahoo's leadership and Carl Icahn, the billionaire activist investor who's inserted himself between Microsoft and Yahoo. In his most recent open letter to Yahoo's chairman, Roy Bostock, Icahn ridiculed Bostock's strategy for improving Yahoo's business, ripped into Yahoo's compensation plan and its "poison pill" defense against acquisition, and repeated his demand that Yahoo sell itself to Microsoft immediately, for $34.75 per share.

Ever since Icahn started buying up Yahoo shares last month in hopes of revitalizing Microsoft's ambitions of buying Yahoo and initiating a proxy battle for control of Yahoo, the high-stakes drama has taken a turn for the bizarre. Now, Icahn has taken his case to the public through a series of open letters lambasting Yahoo's leadership and its plans for growing the business as an independent entity.

In his first letter of June 4, Icahn questioned the motives of Yahoo's leadership, in particular chief executive Jerry Yang. "I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft," he wrote, referring to a Yahoo plan that would give employees the right to quit and receive generous compensation in the two years following any acquisition.

"Until now I naively believed that self-destructive doomsday machines were fictional devices found only in James Bond movies," Icahn wrote. "I never believed that anyone would actually create and activate one in real life."

Yahoo's Bostock shot back with an response, posted to Yahoo's Web site the same day. "You make reference to our employee retention plan but you significantly mischaracterize its purpose and its effect," he writes to Icahn. "The plan was adopted in order to protect the value of Yahoo in anticipation of a possible acquisition by Microsoft which would have resulted in a lengthy regulatory review and a significant period of uncertainty for our employees."

Icahn waited two days before launching his next attack, on Friday.

"While you keep repeating that the severance plan was in the 'best interests of shareholders,' you neglect to mention that the financial cost of the plan could be immense," Icahn writes. "The documents obtained during discovery and released in the shareholder complaint show that Yahoo estimates the maximum change in control severance expenses to be a staggering $2.4 billion if Microsoft bids $35 per share for Yahoo."

Icahn then listed five steps for Yahoo to take, including replacing the severance package; hiring a new CEO to replace Yang; telling Microsoft any alternative deal must be $33 per share or higher; implementing a new board that would offer to sell the company to Microsoft "in a friendly and cooperative transaction"; and moving forward with the plan to outsource ads to Google, but only if it didn't impede a potential deal with Microsoft.

Bostock responded to Icahn's demands the dame day. He called Icahn's portrayal of the retention plan "inaccurate," asserted that Icahn "has no credible plan to operate Yahoo," and said it would be "ill-advised" to publicly put a price on any potential deal with Microsoft.

Icahn hit the typewriter over the weekend, and published his next letter Monday morning.

"Dear Roy," the letter begins. "Did you even bother to read my letter . . . ? While you keep inquiring about my plans, it is interesting to note that Yahoo's board has been busy reaping great compensation benefits. Indeed, you made approximately $10,000 per week last year--not bad for a board member. I believe most of your shareholders would be interested in seeing your timesheets--especially in light of the fact that, in my estimation, most of your so-called 'plans' over the last few years have been failures."

Yahoo didn't respond directly to Icahn's Monday letter--his third in a week. Instead, on Monday it filed its definitive proxy notice for the board of directors' election that will be held at the company's annual meeting, scheduled for August 1.

But Yahoo did address Icahn's words in its proxy statement. "You are probably aware that Carl Icahn proposes to replace our entire board of directors with his hand-picked slate," the proxy states. "Icahn has no credible plan except to sell the company to Microsoft--despite the fact that Microsoft has publicly indicated that it has no current interest in such a transaction. Given Microsoft's stated position of not wanting to acquire Yahoo, the election of Icahn's slate could result in substantial erosion of stockholder value."

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