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Volume 6, Number 28 -- July 23, 2008

Micro-Hoo Dead Again as Yahoo Settles with Icahn

Published: July 23, 2008

by Alex Woodie

The Micro-Hoo saga continued its unpredictable course this week, as Yahoo came to an agreement with corporate raider (and Microsoft ally just last week) Carl Icahn to avoid a damaging proxy battle at next week's Yahoo shareholder meeting. Meanwhile, Microsoft is reportedly in talks once again with America Online to buy the aging Internet property should it be unable to buy Yahoo's coveted search business.

Yahoo on Monday announced an agreement with Icahn that will see the activist investor gain control of part of Yahoo's board of directors in exchange for ending his campaign to convince Yahoo shareholders to replace all Yahoo directors with his hand-picked slate of candidates at the August 1 annual shareholder meeting in Silicon Valley.

Here are the terms of the deal: Yahoo will give Icahn a seat on the board and control of two other seats in exchange for ending his proxy fight.

Eight existing Yahoo directors will stand essentially unopposed for re-election; one existing director, Robert Kotick, will step down.

Currently, the board is composed of 9 directors (it had been 10 before Yahoo reduced it in May following Microsoft's unsolicited bid), and following the election, Yahoo will expand the board by two seats, to 11 members, to accommodate Icahn's hand-picked candidates and Icahn himself. Yahoo's board will pick two directors from Icahn's existing slate. One additional person has been added to the slate: Jonathan Miller, former CEO and chairman of AOL, and now a partner in a venture group.

Yahoo executives were pleased to have won-over Icahn, who had been cooperating with Microsoft and supporting Microsoft's bid to buy all or part of Yahoo. "We look forward to working productively with Carl and the new members of the board on continuing to improve the company's performance and enhancing stockholder value," said Yahoo chairman Roy Bostock in Yahoo's official announcement.

It was a victory of sorts for Icahn, the billionaire who has made himself a gadfly to Yahoo by buying up about 5 percent of the company, demanding it deal with Microsoft, and launching the proxy battle. In a statement that accompanied Yahoo's official announcement Monday, Icahn held out hope that a deal with Microsoft could still be done.

"While I continue to believe that the sale of the whole company or the sale of its search business in the right transaction must be given full consideration, I share the view that Yahoo's valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders," Icahn says.

The chances of a deal with Microsoft now look very slim. Icahn relinquished his leverage by taking the seats on Yahoo's board and ending his proxy battle. Without a majority voting block on the board, Yahoo's momentum as an independent company will continue mostly unopposed. That momentum was bolstered last week when Legg Mason Capital Management, which owns about 4.4 percent of Yahoo, came out in support of the current board, and called on Icahn to end his proxy battle.

Meanwhile, as the chances of a Micro-Hoo deal head south, Microsoft is reportedly in talks--again--to buy AOL. According to stories in the Wall Street Journal and Reuters, the two companies are exploring possible deals with the goal of using AOL's still-extensive Web presence to bolster Microsoft's stagnant Online Services Business, which lost $1.2 billion in the most recent fiscal year (see "Microsoft Financial Results Disappoint Wall Street").

However, Microsoft is not AOL's only suitor. Yahoo is also reportedly in the running, and with the probable addition of Jonathan Miller, AOL's ex-CEO, to the Yahoo board, that possibility looks intriguing. Not to be overlooked is the fact that Google--the 800-pound gorilla in the online room--already owns about five percent of AOL. It, too, could snap up the aging Internet property's still considerable online presence.


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