July 13, 2008
San Jose Mercury News, Calif., Chris O’Brien Column: Icahn Will Prevail in Yahoo Struggle
By Chris O'Brien, San Jose Mercury News, Calif.
Jul. 13--The standoff is over. Shareholder activist Carl Icahn is going to win his proxy fight with Jerry Yang and seize control of Yahoo.All that happens between now and Aug. 1, when shareholders will vote to throw out the current board and management, or even before then if the companies reach a deal, is just theater. The players will posture, they'll try to spin, but the conclusion is inevitable.
Yahoo's fate was sealed last week when activist shareholder Carl Icahn disclosed that Microsoft Chief Executive Steve Ballmer said he'd be willing to reopen talks to acquire Yahoo if a new management team was in place. The pair ramped up their assault by apparently offering Yahoo a complex deal to sell its search business to Yahoo -- something Icahn had previously ridiculed -- and sell the leftovers to Icahn. In a statement issued Saturday night, Yahoo's board flatly rejected the offer.
Yahoo Chairman Roy Boystock referred to Icahn's and Ballmer's partnership an "odd and opportunistic alliance" and called Microsoft's strategy "erratic and unpredictable."
Despite this rejection, by teaming up with Icahn in a marriage of convenience, Ballmer has essentially grabbed Yang around the neck, given him a huge noogie, then shoved him out the door.
Icahn has been waging what's known to corporate takeover warriors as a "proxy battle," in which the company and an antagonist fight over control of the company's board of directors. The proxy fight will culminate Aug.
1 at Yahoo's annual meeting when shareholders vote either to retain the current board or to replace it with an alternative slate of directors nominated by Icahn. The name for this type of fight comes from the fact that shareholders are appointing a "proxy" to vote for them.
How it should happen
While we know the outcome, we don't know how the two companies will get there. And how they come to terms matters quite a bit.
Here's how I'd like to see it happen. Yang and Ballmer should set their personal differences aside and strike a deal before the shareholder meeting. Make nice, hold hands, sing "Kumbaya." That would be the best scenario for everybody. The take-it-or-leave-it nature of the latest bid doesn't count. This should be a negotiation, not a showdown.
And here's why I'd like to see them work together to reach a deal. If they instead go to the mat, all three players -- Icahn, Ballmer and Yang -- have a lot to lose, as do shareholders and employees of both companies.
For Yang, his reputation and legacy will be shaped by these next few weeks.
For shareholders like Icahn, who are looking to maximize the sale price, they will find their interests aren't necessarily the same as Microsoft's, which will be trying to acquire Yahoo as cheaply as possible.
Further conflict will only magnify Ballmer's challenge of integrating Microsoft and Yahoo without destroying both companies in the process.
Here's why a deal now makes sense for everybody:
The right price
Icahn and Microsoft are not BFFs: At first glance, it would seem natural to see some sort of alliance between Icahn and Microsoft. After all, both in theory would like to see Microsoft make a deal with Yahoo, right? In the short term, that means both Icahn and Ballmer have the same goal: chucking Yang and his board out the door.
But after that, their interests diverge. Ballmer, who publicly offered $33 a share, wants to get Yahoo for as little as possible. Icahn, who reportedly paid $25 a share, wants to make as much as possible.
After Icahn's board takes over next month, will $33 a share be back on the table? If so, no problem. Icahn has made it clear he thinks Yang was nuts for not taking it before.
But if Ballmer wants to push that lower and argue that Yang and his board destroyed value during the past few months, then talks between him and Icahn might get a little frosty.
I think Icahn knows he'd be dealing from a position of weakness. After his numerous direct conversations with Ballmer, he may have realized that Microsoft was serious when it said it didn't want all of Yahoo. So now he appears willing to settle for a breakup of Yahoo, though this will complicate his ability to make a tidy buck off the sale.
Plus, if he's serious about owning what's left of Yahoo, he's going to be buying a lot of employees who are going to resent the heck out of him for humiliating their founder and cleaving their company in two. Even if this is the form an ultimate deal takes, Icahn is better served by getting there in a deal that Yang publicly embraces and can help promote to employees of both halves.
Doing a deal now is the easiest way to get a price and structure everyone can accept.
Ballmer must take two wrongs and make a right: Eventually, a deal will get done. And then Ballmer's real nightmare begins.
Even under the friendliest of terms, closing a deal would take months, if not more than a year. A merger most likely would trigger a lengthy federal antitrust review that will add paperwork and distractions. Having Yang, Ballmer and Icahn working in harmony can only speed the process.
That's important because any deal will place both Microsoft and Yahoo in a limbo that leaves them further behind Google. The longer it takes to close, the better for Google.
Even under the best of circumstances, Microsoft's Internet and search teams may be scratching their heads and wondering what their boss has in mind for them. At Microsoft South, er, Yahoo, Ballmer needs Yang as an ally to help stem the flow of Yahoo employees and sell the deal to his troops.
Integration will be tough under the best of circumstances. A deal now might -- might -- make it less difficult.
Yang's future: Yahoo's tremendous run over the years has made Yang fantastically rich. And ironically, he probably stands to make millions of dollars more from a deal with Microsoft.
But live by the stock, die by the stock. For all the great things Yahoo and Yang have done -- and they are numerous -- taking the fight to the shareholders meeting means the first paragraph on his obit one day will simply describe him as the man who lost his company in a fight with shareholders. Yang deserves better.
Striking a friendly deal will allow Yang to make a graceful exit. Microsoft could give him a ceremonial executive job (maybe even a seat on the board?), a public relations staff to help fluff his bruised image and ego, and trot him around the globe to sing the praises of Microsoft's vision to employees and customers.
Sort of like AOL did with Marc Andreessen after it acquired Netscape. Andreessen provided AOL with some geek cred before slipping out the back door after a few months.
In fact, Andreessen is a great role model for Yang, demonstrating how a onetime Web wunderkind can have a second act even after suffering a humiliating defeat in the browser wars with Microsoft.
Yang can become a major philanthropist, work on his golf game and begin to invest in the companies that will become the heart of Web 3.0.
And perhaps everything he's learned from the last days of Yahoo will help him build a new legacy.
Contact Chris O'Brien at [email protected] or (415) 298-0207 or follow him on Twitter at sjcobrien.
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