Summary:

Carl Icahn has pulled a new card from the deck in his attempt to win seats on Yahoo’s (NSDQ: YHOO) board. In an open letter to Yahoo shareho…

imageCarl Icahn has pulled a new card from the deck in his attempt to win seats on Yahoo’s (NSDQ: YHOO) board. In an open letter to Yahoo shareholders, he says he has been in talks with Microsoft CEO Steve Ballmer, and other top execs, and that he is sure Ballmer still wants a major deal with the company. But, he claims, Ballmer will not negotiate with the existing board. His reason: there is too great a risk that Yahoo will be mis-managed between the time a deal is agreed upon and the deal’s closing. Says Icahn: “However, Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.” On this announcement, shares of Yahoo are up over 9 percent, rising past $23. Full letter.

The letter seeks to address a major hole in Icahn’s general argument: whether or not he’d be able to consummate a deal with Microsoft (NSDQ: MSFT). Previously, the impression had been that Icahn wouldn’t be able to get Microsoft back to the table, and that he lacked a serious plan B. Now he’s spelling it out. He and Microsoft have talked, and so a vote for the Icahn board is a vote for a deal with Microsoft. It still seems from the letter that Microsoft’s priority is for a deal for the search. Icahn, no doubt, would prefer an outright sale, so there may still be a gap on that front. On that question, Icahn says: “I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.”

Microsoft chimes in: Meanwhile, Microsoft has put out a release, which could basically be summed up as “what he said.” It won’t go into much detail, but, says the company: “We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.” Release.

As the August 1 shareholder meeting approaches (a little perspective: that’ll be six months to the day that Microsoft publicly announced its initial bid), this lays out the stakes in a pretty stark manner. And while Icahn’s chances had seemed slim, the assurance from Microsoft that it’s not gone for good should go over well by burned shareholders like Bill Miller, who is now sitting on a big pile of shares, trading back near their lows.

Icahn’s full letter after the jump.

Dear Yahoo! Shareholders:

During the past week I have spoken frequently with Steve Ballmer, CEO of
Microsoft. Several of our conversations have lasted as long as an hour. Also, a
few of our discussions have taken place while other top executives, such as
Kevin Johnson, participated. Our talks centered on the industry in general but,
more importantly, on how Yahoo! and Microsoft can do a transaction together.
Steve made it abundantly clear that, due to his experiences with Yahoo! during
the past several months, he cannot negotiate any transaction with the current
board. His logic is simple. If and when a transaction was consummated, Microsoft
would be guaranteeing a great deal of capital at closing. However, a transaction
could take at least nine months and perhaps longer to obtain regulatory
clearance in the U.S., Europe, and elsewhere. During that period, if the current
board and management team of Yahoo! mismanage the company (and their recent
track record is far from reassuring), Microsoft would be putting its money at
risk and a great deal could be lost.

For example, in a transaction to purchase the whole company, a very large
amount of capital would be due at closing. Even in an “alternate” transaction,
where just the “Search” assets were purchased, large guarantees would have to be
made and, again, large sums could be lost if the company was mismanaged.
Microsoft perceives this risk may be quite high with the current board and
management in place. However, Steve made it clear to me that if a new board were
elected, he would be interested in discussing a major transaction with Yahoo!,
such as either a transaction to purchase the “Search” function with large
financial guarantees or, in the alternative, purchasing the whole company. He
stated that Microsoft would be willing to enter into discussion immediately if
the new board that has been nominated were elected. While there can be no
assurance of a future transaction, as many of you know, I have negotiated
successfully a large number of transactions over the past years. If and when
elected, I strongly believe that in very short order the new board would,
subject to its fiduciary duties, be presenting to shareholders either a purchase
offer for the whole company or a very attractive offer to purchase “Search” with
large guarantees. I hope to continue to be speaking to Steve over the next few
weeks; however, since I do not as yet represent the Yahoo! board, both Steve and
I do not wish to get into details over price, or even which of these
transactions makes the most sense.

Much has been said about how badly the Yahoo! board has “botched up”
negotiations with Microsoft over the past months. There is no need to keep
pointing out the mistakes I believe Yahoo! made by not immediately taking a $33
offer made by Microsoft. But one thing is clear – Jerry Yang and the current
board of Yahoo! will not be able to “botch up” a negotiation with Microsoft
again, simply because they will not have the opportunity.

Our company is now moving toward a precipice. It is currently losing market
share in its “Search” function; our current Board has failed to bring in a
talented and experienced CEO to replace Jerry Yang and return Jerry to his role
as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent.
It is no secret that Google (NSDQ: GOOG) (which hired a great operator as CEO) continues to
dramatically outperform Yahoo!. According to publicly available information,
Google’s income from operations grew 59% per year over the last two years while
Yahoo!’s shrank 21% per year. However, none of the above has caused the Yahoo!
board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A
CHANGE.

If elected, I have little doubt that the new board, subject to its
fiduciary duties, will do what the current board will not do, i.e.,

o Immediately start negotiation with Microsoft to sell the whole company
or, in the alternative, sell “Search” with large guarantees.

o Move expeditiously to replace Jerry Yang with a new CEO with operating
experience.

Sincerely yours,

CARL C. ICAHN

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