Microsoft is open to Yahoo deal with Icahn's board, not Yang's
Sometimes it takes a grown-up's help to cut a steak into easily digestible, bite-sized pieces. This morning, it looks like Microsoft wouldn't be ashamed to have Carl Icahn do the honors, if it means getting Yahoo out of its way.
In an open letter to Yahoo shareholders this morning, the facts of which Microsoft subsequently acknowledged, investor Carl Icahn stated he has recently met with Microsoft CEO Steve Ballmer, and that Ballmer expressed interest in a partial or whole transaction with Yahoo should Icahn be successful in replacing its current board of directors with his alternate slate.
In a strangely similar vein to Yahoo CEO Jerry Yang's characterization last week of his team being open and the alternate side being unresponsive, Icahn conveyed Ballmer's description of his negotiating team struggling for a settlement and Yang's group being unresponsive. Icahn also noted Ballmer's principal sticking point to getting a deal consummated: Microsoft would have to put up substantial sums of cash as guarantees, during a nine-month period or longer while the deal undergoes regulatory scrutiny. During that time, he worried that Yahoo would mismanage the company somehow, destroying the value of the deal and forcing Microsoft to lose money on its guarantees.
"Microsoft perceives this risk may be quite high with the current board and management in place," Icahn wrote (entire letter available here). "However, 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."
Last week, in a filing with the Securities and Exchange Commission, Yahoo previewed a shareholders' presentation draft which makes the case that a deal to purchase just the search functionality of Yahoo isn't technologically viable, since its search technology is now irrevocably tied into its contextual and display advertising technology in which Microsoft has expressed no serious interest.
Icahn said he intends to be speaking more with Ballmer over the next few weeks about a possible deal, discussing perhaps every detail except price (at least not openly) -- a subject which Icahn has no authority to speak about just yet. A probable topic of discussion that he did not mention in his open letter was just how much of Icahn's alternate slate of directors would actually remain on the board following a Microsoft transaction; in other words, how many directors would Microsoft replace with its own. Only one of Icahn's slate was a member of Microsoft's proposed alternate slate during the originally proposed transaction last February.
For every day such an offer remains uncompleted, Icahn pointed out, the gap between Yahoo and Google in search queries handled and advertising reach widens.
Microsoft's response this morning appears to spotlight purchasing Yahoo's search properties as the most preferable deal, with a wholesale buyout as the "alternative." "We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo," the company's statement reads (entire statement available here), "such as either a transaction to purchase the 'Search' function with large financial guarantees or, in the alternative, purchasing the whole company."
12:46 pm EDT July 7, 2008 - In a single-paragraph response to both Carl Icahn and Microsoft, Yahoo made clear it remains interested in making a deal with Microsoft, or maybe with Icahn Partners, though not necessarily in a deal with Icahn acting as Microsoft's proxy.
Referring to Microsoft's now-preferred acquisition of just Yahoo's search properties, the company stated, "As recently as June, Yahoo's independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo into selling to Microsoft its Search business at a price to be determined in a future 'negotiation' between Mr. Icahn's directors and Microsoft's management.
"We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo's stockholders," the statement continues. "If Microsoft and Mr. Ballmer really want to purchase Yahoo, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it."