The Yahoo!-Microsoft merger saga has taken a new twist with the revelation that the activist investor Carl Icahn has built up a major stake in Yahoo. <\/p>\n
Mr. <\/p>\n
<\/p>\n
Icahn owns about 50 million shares of Yahoo, investing more than a Billion dollars of his own money. <\/p>\n
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Proxy Fight: Complete Slate of Directors
\nMr. Icahn will try to replace the entire board of directors at Yahoo with his nominees. The Wall Street Journal reports that Mr. Icahn has hired D.F. King a proxy company, to facilitate the solicitation. <\/p>\n
The move to seek a complete slate came as some surprise since typically activists investors have a much easier time getting shareholder support for a partial slate of directors.<\/p>\n
Since the Yahoo Microsoft takeover saga has been going on for more than three months now, it is likely that a significant number of Yahoo shares are now held by merger arbitrage funds that will be eager to see the deal <\/p>\n
closed. Further given the premium Microsoft was willing to play, and the deterioration in Yahoo\u2019s competitive situation, even non-activist shareholders are likely to press for the consummation of the deal.<\/p>\n
Yahoo\u2019s Competitive Situation
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\nYahoo has pinned its hope on the Panama Ad System to improve the profitability of its search advertising business. The launch on the Panama was used as a justification by Yahoo to decline Microsoft\u2019s overtures at $40\/share a couple of years ago. However, Yahoo has been losing share to Google and its search advertisements generate significantly less revenue than what Google does. Comscore today reported that Google has overtaken Yahoo as the most popular web destination in the US.
\nDuring the takeover battle, Yahoo had set up a trial with Google, where it outsources the advertisements generated in response to search queries to Google\u2019s ad engine. The results of this trial were considered positive and there are whispers that Yahoo will sign a longer term deal with Google.
\nThough a deal with Google will help Yahoo\u2019s bottom-line in the short to medium term, it will be an admission of defeat by Yahoo. Over time, it is likely that Yahoo\u2019s role as a search engine will diminish, and this will further strengthen Google\u2019s grip over the market.
\nGoogle\u2019s Perspective: Not a Done Deal
\nFrom Google\u2019s perspective, a deal like this will not only attract unwanted anti-trust scrutiny but will also expose its trade secrets to Yahoo. Since Yahoo will not shut down its own ad platform, it can use the information it gathers from Google to improve the quality of its own products. There are reports that such concerns are being raised within Google, especially since Yahoo\u2019s fate is uncertain and the secrets might end up in Microsoft\u2019s hands.
\nGoogle did act as a good neighbor to help fend off Microsoft with the trial. However, they need to weigh the risk of exposing their trade-secrets, and possible anti-Trust investigation, against the prospect of competing against a combined Microsoft-Yahoo. Google has beaten these well funded competitors before and in the short term the merger related distractions between Microsoft-Yahoo will help Google to strengthen its position even further. S ince the entire onl <\/p>\n
ine advertisement space is very dynamic, there is no guarantee that any prospective synergies which evolve out of Microsoft-Yahoo will hurt Google more in the long- run. <\/p>\n
<\/p>\n
\nGoogle is going to be a reluctant partner in any comprehensive deal with Yahoo. They might do enough to provide Yahoo\u2019s management with the fig leaf to rebuff Microsoft\u2019s advances and ward off unhappy shareholders. But it is unlikely that they will lay bare their bag of secrets to Yahoo, in the long run. <\/p>\n
\nMr. Icahn\u2019s Strategy: Put Pressure on Yahoo\u2019s Board?
\nMr. Icahn\u2019s decision to go for the full slate of directors suggests that he wants a quick resolution to the merger saga. Mr. Icahn knows that he has to strike before Microsoft decides to overpay for another web firm, while rebounding from Yahoo\u2019s rebuff. On the other side, he cannot give Mr. Yang to find other suitors to complicate the Microsoft bid.
\nMr. Icahn\u2019s proxy bid put Yahoo\u2019s current board in a tricky situation. Their role in this entire saga has been under immense scrutiny. <\/p>\n
Getting voted out in such a high profile proxy fight, will not do any good to their reputation as senior business leaders.
\nHowever, it is also clear that Yahoo\u2019s biggest shareholders, the co-founders Mr. David Filo and Mr. <\/p>\n
Jerry Yang (CEO) did not inform the board of Microsoft\u2019s revised offer of $33. Further though they were authorized by the board to accept an offer of $37, they asked Microsoft for at least $38. There have been whispers about dissent within Yahoo\u2019s board regarding Yahoo\u2019s handling of Microsoft\u2019s offer. Mr. Icahn\u2019s proxy bid might provide the spark needed for Yahoo\u2019s current board to become more assertive and force a new dialogue with Microsoft. <\/p>\n
\nMicrosoft\u2019 s Strategy
\nDuring the pa <\/p>\n
st two weeks, Microsoft has not made any new statements about their interest in Yahoo. Officially, they claim to have moved on, with Mr. <\/p>\n
Ballmer having given up on Mr. Yang. The Wall Street Journal reported that Mr. Icahn has not received any response from Microsoft to his overtures but has still decided to proceed with the proxy fight. <\/p>\n
\nHowever, the business case for the merger remains as strong as ever. Microsoft\u2019s last quarter\u2019s earnings exposed the cracks in their armor and they need Yahoo to have any hope of being a viable competitor to Google. <\/p>\n
Microsoft will keep quiet since they do not want to encourage any discussions on price. Further, by distancing themselves from the proxy battle, they are less likely to alienate the rank and file of Yahoo.
\nHowever, if Microsoft sees that Yahoo is indeed serious about the merger, they are likely to return to the table, and perhaps offer even more than the $33 they verbally communicated to Mr. Yang.
\nMr. Icahn: The Counselor<\/p>\n
Business observers have noted that both Microsoft and Yahoo mishandled the merger negotiations quite badly. Mr. Ballmer\u2019s threat to withdraw the offer and Mr. Yang\u2019s efforts to undermine the board did not show the level of maturity expected from powerful business leaders.
\nMr. Icahn might just be the right pre-nuptial counselor for both Mr. Ballmer (who needs lessons in the art of courtship), and the Mr. Yang (who needs to be reminded about his fiduciary responsibilities). My bet is that Yahoo\u2019 s exi <\/p>\n
sting board will work with Mr. <\/p>\n
Icahn to reopen negotiations with Microsoft and a deal will be struck in the mid $30s.<\/p>\n","protected":false},"excerpt":{"rendered":"
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