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How Carl Icahn Screwed Up a Perfectly Good Search Deal

Posted Jul 15, 2008 11:31am EDT by Henry Blodget in Investing, Internet, Venture Capital, M and A, IPOs

From Silicon Alley Insider, July 15, 2008:

A source close to Yahoo, a source close to Microsoft, and Carl Icahn disagree about a critical part of the search proposal that Yahoo rejected over the weekend: whether or not it required that Carl Icahn be given control of Yahoo.

This is important because this condition was an obvious deal-killer. Absent such a condition, Microsoft's new search proposal is actually reasonable (or at least worth serious consideration).

The source close to Yahoo says:

  • The proposal made Friday was a "joint proposal" made by Steve Ballmer and Carl Icahn.
  • The proposal required "an immediate replacement of the Board with Mr. Icahn’s nominees and removal of the top management team at Yahoo!" The latter language is included in a document Yahoo filed with the SEC today.

The source close to Microsoft says:

  • There was never a "joint proposal." Carl Icahn and Steve Ballmer delivered the proposal together, so it could have been interpreted as a joint proposal, but it was not a joint proposal. (Hmmm...)
  • Microsoft's proposal does NOT require a change in control at Yahoo.

Carl Icahn says:

  • The proposal was a joint proposal (Carl refers to a "we").
  • The proposal DID require the removal of Yahoo management, but not necessarily their expulsion from the company: "We were willing to discuss keeping a number of the current board members and Jerry Yang as Chief Yahoo!"

We asked the source close to Microsoft whether Microsoft had changed its proposal since Friday. The answer was no. We asked the source close to Yahoo whether Yahoo might have been wrong about the change-in-control provision. The answer was, approximately, 'Yahoo just filed a statement with the SEC saying the proposal included a change-in-control requirement and Yahoo did not commit fraud.'

So here's what we think happened: We think Carl Icahn's personal agenda screwed up what otherwise might have been a reasonable search offer from Microsoft. (This is one hazard of having a deal-broker who also has major skin in the game.) We think Microsoft has since recognized this and is running as far from Carl as it can.

Microsoft does not care about anything but Yahoo's search business. All of the other terms in the convoluted proposal--dividends, tender offers, Asian assets, loans, etc.--are just a sop to Carl Icahn and other Yahoo shareholders still annoyed about the blown merger deal. These terms are obscuring a Microsoft search offer that is starting to get interesting.

With a revenue guarantee of $2.3 billion a year for five years that is only dependent on Yahoo maintaining its current home page traffic, we think Microsoft's latest search proposal at least merits a close look and, possibly, a counter-offer from Yahoo. Thanks to the baggage of all those other terms, however, we understand why Yahoo rejected the proposal out of hand. And we suspect the majority of Yahoo's shareholders would have rejected it, too.

Tomorrow, we start brokering a peace...

19 Comments

__A_YAHOO_USER__
__A_YAHOO_USER__ - Tuesday July 15, 2008 11:43AM EDT

Damm, why is Msft so interested in getting out of the way, this is sick

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 15, 2008 11:46AM EDT

Icahn could've taken over the whole GM for $5 billion instead of bothering compaies he knows nothing about. What a loser.

S Saravanan GAMMA
S Saravanan GAMMA - Tuesday July 15, 2008 11:53AM EDT

Yahoo will live forever, now matter what!!

Rocky
Rocky - Tuesday July 15, 2008 11:56AM EDT

Microsoft needs to realize that without Yahoo's search engine they can't compete. They should be negotiating not bullying.

Rocky
Rocky - Tuesday July 15, 2008 11:57AM EDT

Microsoft needs to realize that without Yahoo's search engine they can't compete. They should be negotiating not bullying.

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 15, 2008 11:58AM EDT

HENRY. yesterday it was crazy crazy crazy!!! now Henry's onboard? what's up? buy yourself some options yesterday after the close?

JohnH
JohnH - Tuesday July 15, 2008 12:21PM EDT

I agree with Yahoo finance user. Ichan is too big for his britches and it will be interesting to see just how well Ballmar does without Gates holding his hand.Go Jerry, go!!

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 15, 2008 12:31PM EDT

The only one who loses in this deal is Yahoo. Seriously. Microsoft has lost billions on MSN over the last 15+ years and those losses show no sign of abating. Microsoft is a distant third in search even though they have the number one operating system and the number one Web Browser. How is that even possible to fail that badly? Yahoo is far better off alone than as a division of Microsoft.

Paul L
Paul L - Tuesday July 15, 2008 12:31PM EDT

Is it the search engine that got Google ahead? Hell, no! Google success is based on its abilities to display sponsors ads through their adwords and adsenses programs. Yahoo! Search and Microsoft poor management don't got a chance against Google!

john
john - Tuesday July 15, 2008 12:33PM EDT

Henry Blodget? Shouldn't this slimeball be in jail?

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 15, 2008 12:45PM EDT

yahoo get your head out of your behind and make a deal with MSN. We don't need one search engine controling the web search results we need this deal to go through PLEASE make it happen

Ditto
Ditto - Tuesday July 15, 2008 12:45PM EDT

If Microsoft would think about spending that kind of money it would be better off getting its act together making investments internally and buying smaller companies that have good potential and need capital instead of chasing Yahoo that is only going downhill.

Indiana John
Indiana John - Tuesday July 15, 2008 12:53PM EDT

This Blodget sure speaks and gestures like he would be valuable in jail. Did I mention looks ?

Billy
Billy - Tuesday July 15, 2008 12:55PM EDT

Why is Yahoo so afraid of selling search to MSFT? That is no use for yahoo now. No business sense here!

Yahoo! Finance User
Yahoo! Finance User - Tuesday July 15, 2008 02:21PM EDT

Yahoo worth more than $33 a share? You're dam% skippy, so lets hang in there!!!!!!

__A_YAHOO_USER__
__A_YAHOO_USER__ - Tuesday July 15, 2008 06:35PM EDT

Wow, we have two Yahoo employees supposedly giving unbiased opinions about a buyout that could potentially effect their jobs. It's funny how Aaron says Yang is his boss as he talks. I seem to find out more information about how Yahoo thinks on Tech Ticker. I see how Yahoo is communicating with shareholders and others their views on the deal and what should happen through Tech Ticker. It's obvious at this point that you guys want to ditch Carl Icahn and talk directly with Microsoft about a deal that doesn't involved firing all of the management and possibly affecting the premium severance plan that you would get even if you or some of your co-workers were fired (The severance plan that Mr. Icahn wants to throw out). I understand both of you, Henry and Aaron; if I was a Yahoo employee myself it would be hard for me to say anything that would not be in my best interests concerning my job (not necessarily the best interests of the shareholders). In addition, from the looks at Capitol Hill, it looks like the only people that like the idea of consolidating 90% of the seard ad market is Yahoo and Google. With not even knowing if that Yahoo-Google deal

Joe Duck
Joe Duck - Tuesday July 15, 2008 07:52PM EDT

C'mon, this is excellent gamesmanship by the guy who is holding a good hand. Icahn started with this proposal that he wanted Yahoo to reject. Over the coming weeks we'll see better proposals that will seek to either do the deal in the $31 range OR establish for most shareholders that the Yahoo board is the stubborn party in all this and force a board change. Yahoo is worth a lot more to MS with a compliant board, and their price will reflect this. I wouldn't even be surprise to see MS state soon that with Icahn's board in power they'll pay $33+ per share, but with current board no higher than, say $29. How many share

- Wednesday July 16, 2008 12:10AM EDT

Henry Blodget: (from wikipedia) settled without admitting or denying the allegations and was subsequently banned from the securities industry for life.

Tony
Tony - Wednesday July 16, 2008 04:04AM EDT

I see this YHOO/MSFT like a man (Steve ballmer), who can afford to buy himself a dinner that can help him make even much more to pay for. Just go home eat a bag of economic instant noodle that he can pay for as little as 15 cents per meal. Keep up Jerry!!!

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