Magazine article Risk Management

Takedown Artist: In the Wake of the Unsuccessful Yahoo/Microsoft Merger, Yahoo Shareholders Are Venting Their Anger against an Executive Leadership They Feel Has Failed Them. Foremost among Them Is Corporate Raider Carl Icahn. This Is Going to Be Ugly

Magazine article Risk Management

Takedown Artist: In the Wake of the Unsuccessful Yahoo/Microsoft Merger, Yahoo Shareholders Are Venting Their Anger against an Executive Leadership They Feel Has Failed Them. Foremost among Them Is Corporate Raider Carl Icahn. This Is Going to Be Ugly

Article excerpt

By the time you read this, Yahoo will be preparing for its most dramatic annual shareholder meeting in recent years. The meeting, originally scheduled for July 3, was pushed back after a Yahoo board rejection of Microsoft's buyout offer prompted a proxy war against the board by investor Carl Icahn.

The troubles began in February when Microsoft offered an unsolicited $44.6 billion bid to buy Yahoo and merge their search engine capabilities to compete with Google. (Although many industry analysts doubt that even a joint effort by Microsoft and Yahoo, which hold 18% and 14% of search engine market share respectively, could really threaten Google's 56% market share dominance.)

Yahoo rebuffed Microsoft's offer, stating that a $31-per-share bid was too low. Microsoft raised the total to $33 per share (a $47.5 billion total), but when Yahoo demanded $37 per share, Microsoft walked away from the deal, taking with it what would have been a 70% boost in value to any Yahoo investment.

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When the deal fell apart, many angry Yahoo stakeholders questioned the board and co-founder CEO Jeffrey Yang in particular. After all, Yahoo's share price jumped 7% when news broke that Microsoft was increasing its offer. When the deal fell through, Yahoo shares dropped 15%. But more than that, the company's stock has been relatively flat in recent years while Google's has risen by some 400%. A study last August also showed that Google was getting 4.5 times as many searches per month as Yahoo, and Yahoo posted a loss every quarter in 2007, prompting layoffs. The merger with Microsoft could have turned all of that around.

Not surprisingly shareholder legal action ensued. Plan B, a group of 140 Yahoo shareholders, including activist investment firm Ironfire Capital, used its two million shares to back a bid for a board seat. But this challenge became a mere footnote when billionaire financier Carl Icahn announced his intentions to buy a 7% stake in Yahoo in order to launch a proxy war that would remove the entire Yahoo board.

Icahn took particular interest in a severance plan Yahoo would offer to all employees in the event of a merger that could cost the firm as much as $2.1 billion. Icahn derided the plan as both a "golden parachute" for every one of Yahoo's 14,000+ employees, as well as a "poison pill" designed to derail merger talks with Microsoft.

Yahoo rebuffed Icahn's claims that poor management had hurt the firm, but as other institutional investors lined up behind Icahn, it became clear that the Yahoo board and its CEO were looking at a major battle for the control of the firm.

Efforts to create major partnerships with AOL and Google have fallen through. While Microsoft has said it might pursue other ventures with Yahoo, a fresh buyout offer is out of the question. So, as the Yahoo shareholder meeting looms, its senior management must discern a strategy that will better its enterprise.

While wounded, the firm is hardly down for the count. It has tens of millions of e-mail customers, a substantial chunk of the search engine market, and viable brands such as del.icio.us and Flickr. Critics like Icahn suggest that those assets have not been used properly to maximize the firm's value, and that a board hand-picked by him could do better. When the shareholders come together to vote later this month, they will decide the proper path. …

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