Making peace
Yahoo offers compromise to investor Ichan
Yahoo offers compromise to investor Ichan

By Michael Liedtke

Published: July 22, 2008

SAN FRANCISCO — Yahoo Inc. averted a showdown with rabble-rousing investor Carl Icahn on Monday by giving him three seats on its board of directors in a truce that still leaves the door open for a possible sale to Microsoft Corp.

The compromise spares Yahoo from more bickering with Icahn, an acerbic billionaire who had spent the past two months spearheading a rebellion to replace the Internet company's entire board in retaliation for its rejection of Microsoft's $47.5 billion takeover bid in May.

The duel had been scheduled to culminate in a shareholder vote at Yahoo's upcoming Aug. 1 annual meeting.

It now appears there will be fewer fireworks at that gathering, although some Yahoo shareholders still are expected to vent about the board's inability to get a deal done with Microsoft after six months of wrangling.

The main order of business will be the cease-fire giving Icahn three of the 11 seats on Yahoo's board, which will be expanded to make the deal possible. Eight of Yahoo's current nine directors will be retained, leaving the company's current regime — headed by Chairman Roy Bostock and Chief Executive Jerry Yang — in the driver's seat.

Yahoo shares fell 78 cents Monday to finish at $21.67 — well below the $33 a share that Microsoft Chief Executive Steve Ballmer dangled in early May before withdrawing the bid after Yang sought $37 per share.

Icahn's involvement on corporate boards hasn't always paid off. For instance, he won three board seats at Blockbuster Inc. in May 2005 and, since then, the movie rental chain's stock price has plunged by about 75 percent.

Microsoft didn't respond to requests for comment Monday, but previously has indicated it remains interested in exploring a deal with Yahoo, especially if the negotiations were handled by a new board.

Having been repeatedly rebuffed by Yahoo so far, Microsoft has been reported to be discussing a possible acquisition of Time Warner Inc.'s AOL. Microsoft wants to strengthen its Internet business to challenge Google Inc.'s dominance of the online search and advertising market.

Standard and Poor's Internet analyst Scott Kessler doubts Microsoft will buy Yahoo, but interpreted the Icahn agreement as a sign that the current board realizes it needs to shake things up even more than Yang has already done since he became chief executive 13 months ago.

The shareholder angst could intensify if Yahoo's second-quarter earnings, due today, disappoint Wall Street. Analysts are bracing for a letdown after Google and Microsoft indicated last week that the deteriorating economy is hurting the online ad market.

After spending weeks ridiculing Yang and the rest of Yahoo's board, Icahn apparently realized he had little hope of gaining control of the company.

Besides taking a board seat himself, Icahn will be able to recommend two additional directors who also must be accepted by Yahoo's nominating committee.

To fill those spots, Icahn will choose from the eight men he had already nominated and one new candidate — Jonathan Miller, the former chief executive of Yahoo rival AOL. Miller is the kind of seasoned chief executive that Icahn envisioned for Yahoo.

But throwing Miller into the mix of Yahoo's new directors was Yang's idea, according to a person familiar with the discussions who asked not to be identified because the talks were considered confidential.

While sparring with Icahn and Microsoft, Yang also had been talking to Miller — a partner at the technology investment firm Velocity Interactive Group — and decided he would be a valuable addition to the board, this person said.

Icahn didn't return a call seeking comment Monday.

Yang, who co-founded Yahoo at Stanford University in 1994, has been trying to steer a turnaround. He believes Yahoo can accelerate dramatically its revenue growth in the next two years by extending the reach of its ad network and relying on Google's superior technology to sell some ads for Yahoo's site.

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