Icahn's war of words forebodes an ugly August for Yahoo

Last month's shareholders lawsuit filed against Yahoo has revealed the existence of a poison pill to defend the company against hostile takeover -- one which investor Carl Icahn is now publicly working to have extricated.

There is little question that, over Microsoft's history, fortune has smiled upon it, and it's often ended up getting its way anyway, sometimes despite itself. If Microsoft's intention by even considering a Yahoo deal was to eliminate one major roadblock between it and Google in the online advertising and search space, walking away from the deal last month may end up achieving the same objective, if investor Carl Icahn has his way.

Yesterday, Icahn issued an open letter to Yahoo Chairman Roy Bostock, using newly unsealed evidence from the Yahoo shareholders' lawsuit as ammunition. If Yahoo's board truly believed Microsoft's amended offer of $33 per share undervalued the company's assets, Icahn's letter asked, then why would Yahoo have turned down an earlier offer of $40 mentioned in the lawsuit?

"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,"' cited Icahn in his letter yesterday. "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 [CEO] 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."'

The unsealed, un-redacted lawsuit makes direct reference to internal Yahoo documents that indicate Microsoft's long-rumored 2007 private offer to the company -- then led by CEO Terry Semel -- was both real and genuine.

"Microsoft has attempted since mid-2006 to court Yahoo and its top executives to support a friendly transaction," the May 12 lawsuit reads. "Internal Yahoo minutes and documents indicate that the Board received overtures in August 2006, October 2006, and early 2007. Internal documents also indicate approaches by an unnamed party, clearly Microsoft, in January and October 2007.

"Yahoo's reaction has been consistent, giving the back of the hand to Microsoft's efforts towards a consensual deal, including a January 2007 acquisition proposal offering about $40 per share," it continues. "The Board-authorized response to that approach was a letter from then-CEO Terry Semel rejecting 'a broader strategic transaction at [that] time,' but professing a willingness to discuss 'a commercial partnership arrangement.' Discovery obtained by Plaintiffs gives no indication of serious discussions about any such commercial relationship."

Exhibits attached to the lawsuit filing include what are stated to be internal communications between Yahoo executives and officials concerning ways to structure the company in order to avoid a hostile takeover, including what was called an "equity acceleration plan." Such a plan would enable executives and board members to exit the company at will -- presumably just prior to the success of a hostile takeover bid -- and receive tremendous compensation packages in so doing. Those packages would immediately dilute the value of the company as a takeover target, perhaps triggering competitive bids at lower values.

Icahn cited this plan in his call yesterday for Yahoo board members to get serious. "It has been reported today that when asked to talk about the Microsoft bid, [President] Sue Decker indicated that Microsoft made an offer which Yahoo's board didn't feel was at an attractive enough price," he wrote to Chairman Bostock. "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."

In his open response to Icahn late yesterday, Bostock acknowledged the existence of the severance plan, but defended its legality and practicality, saying it was put in place to enhance his company's value.

"You make reference to our employee retention plan but you significantly mischaracterize its purpose and its effect," Bostock wrote to Icahn. "In fact, you refer to it as a 'Poison Pill' which could not be further from the truth. To set the record straight, the employee retention program is designed to protect the Company's assets and value during a time of uncertainty. The claim that the plan gives each of Yahoo's employees 'the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover...' is just plain wrong. In fact, our plan has a 'double trigger' which means that in order for an employee to be eligible for benefits under our plan, there would need to be a change of control and the employee would need to be terminated 'Without Cause' or resign for 'Good Reason.' That means that in contrast to your assertions, an employee who simply quits his or her job would receive nothing under our plan."

The "double-trigger" to which Bostock referred was mentioned in exhibits attached to the shareholder lawsuit.

One exchange of e-mails dated last February 14 between Yahoo Vice President for Strategic Partnerships Jonathan Dillon and Senior Director of Corporate Development Greg Mrva, reveals where Dillon was asking Mrva about the details of a meeting. Mrva responded by filling Dillon in on this news: "Quick summary: Everything you own is now double-trigger. The entire company."

Dillon responds later that day, "Smart move. I wondered whether they wld [sic] do that. Will make things increasingly expensive for msft though."

A later response from Dillon during that same exchange includes the following: "...Double trigger also covers change of role, etc. You know that is tough to take a hard line on if not waived at Close. And to waive at Close, they need to effectively buy us out with more retention. Or even continue which wld [sic] be the best. Just like we do when in the buying position...If our execs really want to stay independent they wld make this a single trigger. Not sure re the legalities of that though at this stage in the process."

Yesterday evening, Icahn responded publicly to Bostock's most recent letter in an interview on CNBC's Fast Money program. There, he told host Dylan Ratigan, "You really might need a new board and a new CEO because of all this entrenchment and shenanigans that have gone on here. Microsoft might not have the faith in the current board and CEO Jerry Yang to be the steward of the company for a year (as the takeover is worked out). And that might be one of the reasons they walked away...Another reason which is unconscionable in my opinion is this $2.5 billion severance package that the lawsuit speaks about. To me that is another reason why they don't want to do it."

Yahoo's twice-delayed shareholders meeting is now scheduled for August 1.