Icahn, Microsoft team up for action on Yahoo

Investor activist Carl Icahn and Microsoft on Monday asked Yahoo investors to oust Yahoo's board and in its place elect Icahn's dissident slate, potentially paving the way for a purchase of Yahoo in its entirety or just its search assets.

Here is part of a statement from Icahn, who is running a dissident slate of directors to unseat Yahoo's entire board, that cites discussions with Microsoft CEO Steve Ballmer:

"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," he added. "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."

And for good measure, confirmation came just a few minutes later from Microsoft on those discussions with Icahn. Microsoft has been frustrated so far in its months-long pursuit of Yahoo and not long ago said it was giving up the chase--though apparently not all interest.

"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," Microsoft said.

Shares of Yahoo jumped about 9 percent in early morning trading to US$23.35 a share.

While Microsoft's announcement in support for Icahn's efforts to unseat Yahoo's board of directors, potentially gives his proxy battle a bigger stick, it is far from offering any guarantees.

It has yet to be seen whether Microsoft's public statement will be enough to sway investors, absent of any specific price, terms or other details prior to Yahoo's annual shareholders meeting on August 1. Microsoft stated it does not plan to make such information available prior to the annual meeting.

Advisory services to institutional investors, for example, may be reluctant to recommend support for Icahn's proxy slate, in absence of any details of what Microsoft plans to offer, according to one source with such an advisory service. Institutional advisory services can be influential in proxy battles, given some mutual funds, pension funds and asset management companies rely on their recommendations to vote on proxy matters.

Microsoft could lend a greater hand to Icahn's proxy battle if it were to go directly to Yahoo's investors with a tender offer and work in tandem with Icahn's proxy battle.

A tender offer could include all the details of a buyout offer and be set to expire sometime after Yahoo's annual shareholders meeting. That would give investors a guarantee a deal was waiting to be done at the end of the day.

Both Microsoft and Icahn note in their statements that there is no guarantee a transaction of any kind will definitely occur, should Icahn's slate be elected.

Meanwhile, one source close to Yahoo said, "If Microsoft was interested in purchasing the company, they should make their proposal public. As recent as a few weeks ago, they weren't willing to enter into discussions at the same price range that they had previously proposed."

Microsoft announced a deal back in February that initially valued Yahoo at US$31 a share, and then later bumped it up to US$33 a share in May, before walking away after Yahoo countered with US$37 a share.

While the statements by both Icahn and Microsoft point to a strong interest in ousting Yahoo's entire board, Icahn has yet to file his definitive proxy, which had been expected to occur before July 4.

The definitive proxy allows him to hit the road with his investor presentation, which would include wooing the institutional investor advisory services.

As a result, it raises questions whether Icahn is keeping his options open, despite a rapidly narrowing window of time where he has to choose between running a dissident slate with enough candidates to gain control of Yahoo's board, or go for a partial slate that would not constitute a majority on Yahoo's board.

The public statements by both Icahn and Microsoft may yet serve as a cattle prod to Yahoo to get it to enter into negotiations to sell just its search business to the software giant at terms both can live with.

A source close to Yahoo said the two companies have previously talked about doing a search-only deal, but that the terms and price Microsoft was offering was not acceptable.

This article was first published as a blog on CNET News.com.