Yahoo! turns down Microsoft's latest offer; Icahn seeks to replace Yahoo! board, CEO

By Lisa Kerner

Charlotte, N.C., July 14 - Yahoo! Inc. said it rejected a joint proposal from Microsoft Corp. and Carl Icahn for a restructuring of Yahoo! that would include Microsoft's acquisition of Yahoo!'s search business.

The proposal was made on the evening of July 11, and Yahoo! was given less than 24 hours to respond to the "take it or leave it" proposal, according to a Yahoo! news release.

Yahoo!'s board believes a whole company transaction could be negotiated and executed before Aug. 1. Yahoo! said that while it repeated its offer to sell the entire company to Microsoft for at least $33 per share or to negotiate an improved search only transaction, Microsoft rejected both offers.

In June, Yahoo! rejected Microsoft's $33-per-share offer for all of Yahoo! by countering at $37.

According to Yahoo!'s board of directors, Microsoft and Icahn are "overstating the value their search and restructuring proposal would deliver to Yahoo! stockholders and are substantially understating the risks."

In rejecting the proposal, Yahoo!'s board of directors said that:

• Yahoo!'s existing business, plus its recently signed commercial agreement with Google, has superior financial value and less complexity and risk than the Microsoft/Icahn proposal;

• The Microsoft/Icahn proposal would preclude a potential sale of all of Yahoo! for a full and fair price;

• The Microsoft/Icahn proposal would require the immediate replacement of the current board and removal of the top management team at Yahoo!

Yahoo! chairman Roy Bostock called the Icahn/Microsoft alliance "odd and opportunistic."

Bostock said Microsoft's refusal to deal with Yahoo!'s management to reach an agreement is "completely absurd and irresponsible given the complexity of the deal - one that requires the removal of half of Yahoo!'s business from Yahoo! and then the integration of it into Microsoft."

In a letter to fellow Yahoo! shareholders, Icahn said shareholders would have received $16.25 per share in the proposed search only deal with Microsoft that was rejected by the Sunnyvale, Calif., internet services company.

The deal would have also guaranteed Yahoo! a minimum of $2.3 billion per year of search revenue from Microsoft in addition to cost-saving synergies, the letter said.

According to Icahn, Yahoo! would have had longer than 24 hours to decide on the Redmond, Wash., software company's offer if it had agreed to postpone the annual meeting "for a short period."

In his letter, Icahn denied being on Microsoft's side.

"Since Yahoo! failed to consummate a transaction with Microsoft this year, I have spent hours and hours attempting to get the parties together because I believe that it is beneficial to Yahoo! shareholders to have a deal with Microsoft and I have worked hard trying to make it happen," Icahn said in the letter.

According to Icahn, his funds and affiliates own 70 million shares of Yahoo! and own no shares of Microsoft or Google.

Microsoft chief executive officer Steve Ballmer is willing to negotiate with Yahoo! if a new Yahoo! board consisting of Icahn's nominees is elected, Icahn said.

Microsoft responds

In a statement released on Monday, Microsoft denied that its proposal was a take it or leave it ultimatum; rather, it was a timetable to move forward to "intensive negotiations."

According to Microsoft, Bostock told Ballmer that "with substantial guarantees on the table and an increase in the TAC (traffic acquisition cost) rate, there are the pillars of a search only deal to be done" and encouraged Ballmer to submit a new proposal to Yahoo! for a search only deal reflecting these terms.

Microsoft proposed an enhanced search transaction that included significant revenue guarantees, higher TAC rates, an equity investment and an option for Yahoo! to extend the agreement over a 10-year period. The proposal did not include changes to Yahoo!'s governance, the Microsoft statement said.

Icahn nominates slate

Icahn filed a schedule 14A with the Securities and Exchange Commission to solicit proxies for the election of his director nominees at Yahoo!'s annual meeting on Aug. 1.

In addition to himself, Icahn's candidates are: Lucian A. Bebchuk, Frank J. Biondi Jr., John H. Chapple, Mark Cuban, Adam Dell, Keith A. Meister, Edward H. Meyer and Brian S. Posner.

If his nominees are elected, Icahn said he intends to ask the new board to consider taking one or more of the following actions:

• Eliminate the change-in-control severance plan;

• Replace Jerry Yang as CEO and return Yang to his role as "chief Yahoo";

• Inform Microsoft that unless Yahoo! believes any "alternative transaction" will result in a $33 or higher stock price, all talks of alternative transactions will cease; and

• Offer publicly to sell Yahoo to Microsoft in a "friendly and cooperative" transaction.

The background of each Icahn nominee was included in the filing. Bebchuk is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and director of the program on corporate governance at Harvard Law School.

Since March 1999, Biondi has been senior managing director of WaterView Advisors LLC, an investment adviser organization.

Chapple is president of Hawkeye Investments LLC, a privately owned equity firm.

Cuban is the majority and controlling owner of National Basketball Association franchise the Dallas Mavericks and co-founder of HDNet.

Dell has been the managing general partner of Impact Venture Partners since January 2000.

Meister is principal executive officer and vice chairman of the board of Icahn Enterprises G.P. Inc., the general partner of Icahn Enterprises LP.

Meyer has been chairman, CEO and chief investment officer of Ocean Road Advisors, Inc. since January 2007.

Brian S. Posner is a private investor and former CEO of ClearBridge Advisors LLC.

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