Our comments and trackback policy You Link We Follow, You Comment We Promote

Billionaire Investor Carl Icahn is now totally focused upon doing with Yahoo, what he has done with plenty of companies before it i.e toppling their board, making them competitive for an acquisition or just competitive to stay alive on their own. Icahn has earned a legendry reputation while doing so and off course a lot of money in the process. His latest overture was with Motorolla.

Before we go on to discuss the after effects of a Yahoo acquisition by Microsoft, lets first see as to what Icahn has to say about Yahoo. Icahn argues that Yahoo’s board and specifically co-founder Yang have acted against the interests of the shareholders by implementing a severance plan that has entrenched Yahoo against Microsoft’s bid. The plan allows Yahoo employees to walk away with hefty amounts if and when Microsoft acquires it, sighting any stupid reason. Once the employees are gone Yahoo would be as good as dead meat for Microsoft. In the presence of this plan Microsoft will never sit on the negotiation table with Yahoo.

Other than this, according to Icahn this is not the first time that Yahoo has fended off an acquisition offer from Microsoft, it has done so in the past when it rejected the $40 per share offer from Microsoft in Jan 2007. This is not the first time that Yahoo has committed a blunder when it comes to mergers and acquisitions. On April 5, 2007 I wrote a post titled "Yahoo blunders continue unabated". In that post I shed some light on how Yahoo at one time got the chance to acquire Google in the late nineties when the Google founders themselves went to their Stanford seniors who happened to be the founders of Yahoo. Yahoo rejected their request for acquisition asking them to try it on their own. Its the same company that has now become the sole reason for Yahoo’s current pains. However the article was written hot on the heals of a failed acquisition effort of Facebook by Yahoo. Yahoo insisted upon buying Facebook for $1 billion or less where as Facebook was demanding $2 billion. The deal went into tartars and we all know what happened to Facebook afterwards.

I can fully understand why Yang is so resilient to a Microsoft buyout. It kills your ego to accept that once a Internet Powerhouse is being swallowed up by the Desktop Giant of the past. But all this is Yahoo’s own doing. They have had enough chances to achieve immortality but they failed whenever it mattered. Yang needs to understand that Yahoo must be salvaged and must be salvaged right now or else it would be eaten up by Google one bit at a time. This happened to Netscape and they accepted the AOL acquisition offer. There is nothing wrong in accepting defeat and calling it quits at the right time. You can always live to fight another day, although this has seldom happened. Except for Steve Jobs, I have not seen a fellow who created an empire in the form of Apple, was thrown out of it and went on to create two more companies in the form of NeXT and Pixar Studios. His return to Apple once again was a result of Apple’s acquisition of NeXT. The rest is history. Andreesen, Netscape founder, also tried one or two things (he is currently co-founder of Ning a company that lets you create your own social network) but couldn’t create the next Netscape. May be that was all there was in Andreesen and may be that’s all there is in Yang.

On the Microsoft side, lets assume that Microsoft wins this bidding war and manages to acquire what was once Yahoo. Even if this happens I am really skeptical about the outcome of this acquisition. There are plenty of reasons for this, the first being that I have rarely seen such big acquisitions pay off. eBay has yet to get something meaningful out of its $4.1 billion acquisition of Skype. There would be lots of issues like getting through with anti-trust lawsuits and becoming a monopoly related issues (specially given Microsoft’s reputation). Google will surely cash on this opportunity of beating about this bush to delay the deal for as long as possible in order to gain as much time and hence Search market share in the process. Furthermore when a company grows so big, it develops a certain culture that gets implanted in its DNA, it would be immensely hard for Microsoft to merge these two disparate specifies. Atleast biologists have not come up with anything that could do so. The clash in civilizations would create a rift within the merged company that would apply breaks to any effort that Microsoft would undertake to catch up with the Ferrari that we have come to know by the name of Google. In addition to all this there would be a lot of positions that would become redundant and would have to get rid off. This would be another problem for Microsoft, since it wont be possible for them to fire so many employees so quickly specially given what Yang and co have already done at Yahoo.

All in all, a non deal would surely be disastrous for both Microsoft and Yahoo but than even a deal wont be a bed of roses. Now the question arises, Is Icahn worried about Microsoft shareholders due to the adverse effects of this deal. Perhaps not because its not the horse on which he has placed his bet. Having said all this I really sincerely wish to have a little more competition in the Search space, as that is what’s best for all of us.

You can read Icahn’s letter below (the emphasis is mine).

Roy Bostock
Chairman
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Mr. Bostock:

I have long been cynical about the effectiveness of many of the boards and CEOs in this country and as a result the inability of our companies to compete. (I have been involved in many board topples and shakeups so don’t take me lightly) I have constantly complained about how far CEOs and boards will go in order to retain their jobs, yet even I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft.

Carl Icahn argues that Yahoo has been "insulting" and "deceitful" regarding its severance plan and should see if a deal with Microsoft can be salvaged.

According to details in a complaint that I became aware of yesterday (details Yahoo fought to keep under seal), Jerry Yang and a majority of the board went to inordinate lengths to sabotage a Microsoft bid. The complaint states: "Viewing employee retention as Microsoft’s Achilles heel, Yang engineered an ingenious defense creating huge incentives for a massive employee walkout in the aftermath of a change in control. The plan gives each of Yahoo’s 14,000 full-time employees the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover, by claiming a "substantive adverse alteration" in job duties or responsibilities." The damage to Microsoft "is compounded by the fact that Yahoo’s thousands of engineers, known as "Technical Yahoos!," have detailed job responsibilities and qualifications."

Most importantly, Microsoft might never be able to trust a CEO and board who, while claiming to be negotiating in good faith, went behind their back and adopted a "plan" which not only sabotages any Microsoft acquisition but went so far as to completely disable its own ability to rescind the "plan" as long as Microsoft’s offer remains pending. Until now I naively believed that self-destructive doomsday machines were fictional devices found only in James Bond movies. I never believed that anyone would actually create and activate one in real life. I guess I never knew about Yang and the Yahoo Board. In my opinion, it will be extremely difficult for Microsoft or other companies to trust, work with and negotiate with a company that would go to these lengths.

It is insulting to shareholders that Yahoo for the last month has told us that they are quite willing to negotiate a sale of the company to Microsoft and cannot understand why Microsoft has walked away. However, the board conveniently neglected to inform shareholders about the magnitude of the plan it installed which made it practically impossible for Microsoft to stay at the bargaining table. Could this have been the problem?

Even more deceitful are Yahoo’s actions toward its own employees, for whom you claimed to have set up the "plan". Management neglected to mention to these same employees that Microsoft in its proposals had earmarked $1.5 billion of retention incentives (representing over $100,000 per employee) meant to allay any employee concerns.

Ironically, according to the complaint, this is not the first time that Yahoo has denied shareholders the opportunity of selling to Microsoft at a large premium. According to the complaint, in January 2007 Microsoft offered to purchase Yahoo at $40 per share but the company rejected that proposal. On January 31, 2008, Steve Ballmer emailed a letter to Jerry Yang and Roy Bostock making a new proposal of $31 per share. The letter recounts Microsoft’s prior efforts to acquire Yahoo and noted that Microsoft had given Yahoo time to implement business strategies designed to turn the company around. These strategies obviously didn’t work. The letter went on to state: "Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008." Yahoo not only turned down this proposal but sabotaged it. An article in CNET News cited in the complaint sums it up by stating, "Yahoo may indeed agree to Microsoft’s [offer], but it will be over Jerry Yang’s dead body".

I and many of your shareholders believe that the only way to salvage Yahoo in the long if not short run is to merge with Microsoft. However, because of HSR considerations, to complete a merger of this magnitude will take a period of time. Even if by some stretch of the imagination the Yahoo board finally determines to do the rational thing and sell the company, I fear that, in light of Yang and the board’s recent actions in response to Microsoft’s overtures, it may be too late to convince Microsoft to trust Yang and the current board to run the company during that period while Microsoft sits on the sidelines with $45 billion at risk. Therefore, the best chance to bring Microsoft and Yahoo together is to replace Yang and the current Yahoo board with a board that will negotiate in good faith with Microsoft and in whom Microsoft will have trust to operate the company during the long period between signing and closing.

You stated in a press release yesterday that, "Yahoo’s board of directors including Jerry Yang has been crystal clear that it would consider any proposal by Microsoft that was in the best interests of its shareholders." However this is not crystal clear to me. You have allegedly turned down a $40 offer. You have turned down and sabotaged a $33 offer. Instead, you appear willing to negotiate an "alternative" deal that in my opinion will be worth less than $33 but will entrench the board and Jerry Yang. I understand how these actions are in the best interests of management and a board whose members each receive $40,000 per month for several days work, but it is hard for me to understand how these actions are in the "best interests of the shareholders."

However, despite your actions to date, there is still some possibility that you can resuscitate a Microsoft offer for the company. The board can rescind the "severance plan" that is the largest impediment to a Microsoft deal. You currently can do this because Microsoft withdrew their bid 30 days ago. It is time for you to stop misleading your shareholders with respect to Microsoft. It has been reported today that when asked to talk about the Microsoft bid, Sue Decker indicated that Microsoft made an offer which Yahoo’s board didn’t feel was at an attractive enough price. However, one doesn’t have to be a rocket scientist to realize there is a simple method to possibly achieve a higher price. Simply rescind the poison pill "severance plan", which would free up approximately $2.4 billion and possibly even more which could be added to the bid. It is also time to admit to your shareholders that the severance plan was not done for your employees (who you conveniently neglected to inform that Microsoft had earmarked $1.5 billion in retention incentives for), but rather was done simply as an entrenchment device and to impede a Microsoft bid. If you are not completely disingenuous in your protestations concerning doing "the right thing" for shareholders, you should rescind the severance plan expeditiously and determine if Microsoft is still willing to purchase our company and thereby create a true competitor for Google. I can only hope that you will finally do what is in the "best interests of the shareholders."

Sincerely yours,

CARL C. ICAHN