Can Icahn Yahoo?

Carl Icahn has notified the Yahoo board that he'll be leading a takeover of the company. The letter below was his notification to Yahoo, and included his intention to buy 2.5 billion in stock. Presumably Icahn has already confirmed that Microsoft is still interested in a takeover, and given Steve Ballmer's legendary temperament I'm guessing that he is giddy at the prospect of ultimately winning the battle he walked away from a few weeks ago.

I think Icahns prospects of losing this are small, and would guess he's in for one of the biggest paydays in corporate history. While Yahoo's board obsessed over the Microsoft takeover many shareholders simply wanted the best return on their Yahoo investment. Given that no dramatic new strategic proposals have come from Yahoo in (over a decade?), few shareholders are going to be willing to hold their breath while the current board pretends to be making major changes at the company that would justify a stock price in the ballpark of what Microsoft has already offered.

The fat lady is singing, and her name is .... Carl Icahn.

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Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153
May 15, 2008

Roy Bostock
Chairman
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Mr. Bostock:

It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft. It is quite obvious that Microsoft's bid of $33 per share is a superior alternative to Yahoo's prospects on a standalone basis. I am perplexed by the board's actions. It is irresponsible to hide behind management's more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer. I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet.

During the past week, a number of shareholders have asked me to lead a proxy fight to attempt to remove the current board and to establish a new board which would attempt to negotiate a successful merger with Microsoft, something that in my opinion the current board has completely botched. I believe that a combination between Microsoft and Yahoo is by far the most sensible path for both companies. I have therefore taken the following actions: (1) during the last 10 days, I have purchased approximately 59 million shares and share-equivalents of Yahoo; (2) I have formed a 10-person slate which will stand for election against the current board; and (3) I have sought antitrust clearance from the Federal Trade Commission to acquire up to approximately $2.5 billion worth of Yahoo stock. The biographies of the members of our slate are attached to this letter. A more formal notification is being delivered today to Yahoo under separate cover.

While it is my understanding that you do not intend to enter into any transaction that would impede a Microsoft-Yahoo merger, I am concerned that in several recent press releases you stated that you intend to pursue certain "strategic alternatives". I therefore hope and trust that if there is any question that these "strategic alternatives" might in any way impede a future Microsoft merger you will at the very least allow shareholders to opine on them before embarking on such a transaction.

I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.

Sincerely yours,

CARL C. ICAHN
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Disclosure: Long on YHOO

Icahn Eyes Yahoo for Possible Takeover

Billionaire takeover strategist Carl Icahn is looking at a possible play to force Yahoo back to the table with Microsoft to sell the company at a big profit. The news today sent Yahoo up about 1.30 and YHOO is still rising in after market trading.

Given that the prevailing stock price of Yahoo is well below Microsoft's top offer of $33 per share, this play has only one key challenge - making sure you can get Microsoft back to the table. Frankly I think that is not much of a hurdle to overcome as I think Microsoft Steve Ballmer's decision to drop the bid was 1) Mostly strategic to force the issue and 2) Will be quicly overcome if Icahn can seat a more sympathetic board of directors.

I'm guessing that Ballmer will have two basic requirements to return to the Yahoo table:
No Google deals and no more Jerry Yang. Although it would be sad to see a founder of Yang's vision leave the company one does not need to feel too sorry for him. A Microsoft merger would value his stock close to 100% higher than the lows of a few months back, netting Yang in the neighborhood of an extra half billion over that low price.

Of course Yang has seen Yahoo trading at over $100 and I think part of his malaise over the deal is a longing for the good old pre-Google days where Yahoo was the high flyer in terms of value and buzz. Sorry Jerry, but despite Yahoo's suberb ongoing work in many aspects of the online experience, those days ... are ... gone.

Most analysts do not feel Yahoo can sustain even the current price levels without the "threat" of a takeover looming, which is propping up a share price that will likely drop to $20 or below if Yahoo had no serious takeover suitors. In fact YHOO was trading at about $18 per share a few months ago just before Microsoft bid which valued the internet empire at about 60% more than the market. Yet Yahoo argued this was not enough and the board, especially in the form of CEO Jerry Yang, went to great lengths to prevent the Microsoft Merger.

Icahn is no stranger to this takeover strategy and the graph above shows how successful it has been for him.

Image Credit: Fortune Magazine
Disclosure: Long on Yahoo

Yahoo Shares Drop as Microsoft Merger Melts

Yahoo shares opened this morning at $23.02, down $5.65 from yesterday's close. However Yahoo has bounced back a bit to just under $25 per share at 1pm, perhaps reflecting investor's optimism that a deal will still be struck with Microsoft after what some - including me - think was a case of MS CEO Ballmer calling Yahoo's high price bluff.

Jerry Yang wrote investors and the public today at the Yahoo Andecdotal blog in a post titled "OK, so now what? There he writes:

We’ll continue to execute on our plan — making your Internet experience as personal, relevant, open and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo! in a way that developers dream of. And, we’ll also continue to pursue strategic opportunities that position us for long-term success.

Jerry also appeared to be doing a bit of covering Yahoo's butt in what is likely to be a spate of shareholder lawsuits suggesting Yahoo should have sold the company at the price offered:

Frankly, there’s a lot of nonsense and misinformation in what’s being reported. Just so we are all clear, here’s what happened. The board took its mission very seriously. We clearly indicated to Microsoft that we were open to a transaction but only if it were on terms that fully recognized the value of Yahoo! and was in the best interests of our stockholders.
No one is celebrating about the outcome of these past three months… and no one should.

But wait ... didn't somebody hear a champagne cork pop at Jerry's house? His statement does not really jive with the open letter from Steve Ballmer or the rumor mill where it has been strongly suggested that Yahoo was a lot more interested in killing this deal at all costs than compromising in any reasonable way.

Disclosure: I am (still!) long on YHOO

Ballmer's Letter to Jerry Yang Withdrawing Microsoft's Offer

Following is the verbatim text of the letter from Microsoft's Steve Ballmer to Yahoo's Jerry Yang. The source of this letter is Microsoft.

May 3, 2008

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:

After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.

I first want to convey my personal thanks to you, your management team, and Yahoo!’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:

• First, it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth.

• Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.

• In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

• This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.

• It could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.

Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.

We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.

I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.

But clearly a deal is not to be.

Thank you again for the time we have spent together discussing this.

Sincerely yours,

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

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Analysis:

As we noted in the previous post there is good reason to believe that Microsoft is still in this to win Yahoo. Ballmer even uses the word "remains the only alternative", suggesting that the offer is still informally on the table. Ballmer somewhat ominously says:

.... our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.

The Yahoo board is likely to have significant concerns already about shareholder lawsuits if the stock tanks following Microsoft's withdrawl, and this statement seems designed to drive that board vs shareholder wedge even further.

Of great concern to Ballmer in the letter are Yahoo's negotiations with Google to have Google take over Yahoo advertising. Ballmer implies that Microsoft was very concerned about the ability to compete with Google using online advertising tools. Yahoo is now refining the adwords-like "Panama" but may diminish that project if Google starts handling Yahoo monetization of advertising. Ballmer also suggests that Yahoo negotiators were using this Google alliance as something of a "poison pill" to kill the deal.

So, has the fat lady sung yet? I think not, and we are in for more fun as the high stakes game for the control of the internet ... continues.

Disclosure: Long on YHOO

Microsoft Walks Away From Yahoo

Microsoft has walked away from the merger talks with Yahoo after the two companies failed to reach agreement on price per share. Microsoft had increased their original offer of $31 per share in cash and stock exchanges to $33 per share (I'm not clear if that $33 took into account Microsoft's lower price since the initial offer or did not factor that in). Most reports said that Yahoo eventually indicated they would sell for $37 per share.

My take on this is that this is a clever strategic move by Ballmer and Microsoft who I think still plan to acquire Yahoo. Yahoo's share price is likely to be hit fairly hard by this development effective at Monday's open, probably sending Yahoo down significantly though it would seem unlikely Yahoo will approach former lows.

The degree of the share price drop will depend on whether the market thinks Microsoft is out or just bluffing, but either way this is likely to create a lot of downward pressure on Yahoo's share price. Microsoft will likely start buying shares on the open market at these reduced prices.

In the next post we'll take a look at today's letter sent by Microsoft CEO Ballmer to Yahoo CEO Yang, which suggests it is lucky for Jerry that Steve didn't have any chairs handy.

CNET Reports
Disclosure: Long on YHOO

Microsoft Yahoo Merger: The Four Dollar Divide

The Wall Street Journal is following Microsoft and Yahoo closely and via Google news you can read part of the WSJ report here but for the full WSJ go to Google News and select the story from there.

Microsoft has indicated that they will raise their offer to $32 or even $33 to avoid a hostile takeover fight, and Yahoo appears to be willing to settle in the neighborhood of $37. With only four dollars per share standing between a huge black eye for Ballmer and a collapse in Yahoo's price how long can this go on?

Not long at all.

I'd suggest a decision will be made by next Monday, and both companies will settle in at very close to $34 per share. Microsoft now appears almost certain to win a proxy battle given Yahoo's share price weakness with no real prospects for a big upswing in YHOO's price. The Yahoo board still has some negotiating power in that a hostile battle is probably an undesirable prospect for all parties and they can force that to happen, but by this time everybody knows Yahoo would lose that fight.

The union will threaten Google's dominance and shake up the internet for years to come, though the merger will only be the beginning of a very complex melding of different corporate cultures and company vision.

Disclosure: Long on YHOO

Microsoft and Yahoo: What Will Ballmer Do?

The "deadline" imposed by Microsoft on Yahoo expired yesterday, which makes it likely that Microsoft is either preparing to drop their bid or - and this appears a more likely scenario - preparing for a hostile takeover where they'll try to get a new slate of directors approved for Yahoo who would view the takeover favorably, leading to a probable merge this summer.

Yahoo's board meets today and although it would be interesting to be there I'm certainly not envious of the Yahoo board right now. If Microsoft drops their current offer Yahoo stock is likely to drop severely - perhaps even below the 52 week low into the high teens. Shareholders will be understandably upset if fighting Microsoft has led to nothing more than a 30%+ drop in share price. Some have suggested a Google advertising partnership may help matters but I'm skeptical that the broad market views Yahoo as favorably as Yahoo seems to think. If they did one would expect Microsoft's share price to be faring much better than it has while people await the takeover verdict. In fact most stock watchers are convinced that if Microsoft announces they are dropping the quest for Yahoo MSFT will see a significant jump in share price.

Larry at CNET has noted some interesting alternative scenarios to a Microsoft Yahoo merger, even including a CNET option.

I think my prediction is the same as it has been for some time: Microsoft will start the hostilities but will also let Yahoo know they can get about $34 per share if Yahoo does not put up a fight. Yahoo will (finally) give in to avoid a potential price meltdown, lawsuits, and a fight that is only going to misdirect energy while both companies watch Google scoop up the increasing online advertising revenues.

Disclosure: Long on YHOO

Microsoft: Despite Record Earnings Stock Falls in After Hours Trading

Microsoft (MSFT) reported record earnings for the quarter but recent stock price increases appear to have anticipated a stronger report as the stock has fallen about 1.38 per share in after hours trading as of 4:34 pm EST.

Still, very favorable earnings reports are now in from Tech giants like Google, Yahoo, Apple, and Microsoft. Could all the talk of severe recession problems be overblown when applied to the tech sector?

Over at Yahoo Tech Aaron Task reports:

A funny thing is happening amid all the recession talk: Most big tech companies are reporting spectacular earnings and revenue growth, especially those with significant overseas business.

Disclosure: Long on YHOO

Yahoo Earnings Out Today

Despite some breathless pronouncements that Yahoo's earnings report will be a watershed moment in the company's long history, I would strongly suggest that Yahoo's earnings are unlikely to have much if any impact on the fate of the company - a fate that is very likely squarely in the hands of Microsoft.

Obviously if the Q1 earnings come in way above the modest analyst expectations it is possible that Yahoo will escape a Microsoft merger by "earning" in the eyes of the market a much higher valuation. However the most likely scenario has Yahoo coming in with earnings that are in line with or only modestly above analyst expectations. Given how hard Yahoo is now working to improve the company's prospects and fend off a Microsoft takeover even a modest improvement is unlikely to be viewed all that favorably by investors. A few dollar increase in the share price might up Microsoft's bid for Yahoo, but it is unlikely to change the game much.

Assuming today's after close earnings are pretty much in line with analyst expectations of about .09 per share you can expect Microsoft to proceed with a proxy fight to takeover Yahoo, and you can expect Microsoft to win this battle. Investors - apparently even some major investors on the Yahoo board - have tired of Yahoo's failure to capitalize on their many strengths to challenge Google's online dominance.

Barring spectacular YHOO Q1 earnings, the fat lady sings today, and she's singing a Microsoft tune.

Disclosure: Long on YHOO

Wall Street Journal: Yahoo and Google May Become Search Bedfellows

The Wall Street Journal is reporting that Yahoo and Google are closer than ever to a deal where Yahoo would outsource their search monetization to Google. Google continues to do a much better job of producing revenue from searches - some estimates suggest that Google gets more than twice Yahoo's revenue per search click.

Yahoo also is continuing to negotiate with AOL as part of Yahoo's efforts to stave off a takeover by Microsoft.

The Journal suggests that Yahoo's April 22 earnings report may play a key role in the Microsoft takeover argument. If Yahoo comes in with strong earnings it will strengthen the idea that the Microsoft bid is too low, but if earnings are weak it will support Microsoft's efforts to force a Yahoo merger against the will of the current Yahoo board.

Disclosure: Long on YHOO