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Microsoft-Icahn vs. Yahoo: Girding for Aug. 1 Meeting

Shareholders searching for détente in the battle between Yahoo and Microsoft are unlikely to find it in Microsoft’s new proposal to buy Yahoo’s search business, one the Internet company swiftly rejected on Saturday.

CNBC.com

The proposal made late last week represents a formal alliance between Microsoft, whose takeover efforts Yahoo had rebuffed for months, and the billionaire investor Carl C. Icahn, who is seeking to unseat Yahoo’s board. It also represents a newer, more hostile approach by Microsoft, in which the software giant is willing to team up with one of the most aggressive activist shareholders today. Among its requirements were the replacement of Yahoo’s board — and a response within 24 hours.

Microsoft’s muscular approach and Yahoo’s strong and quick rejection suggest that investors can expect a showdown at Yahoo’s annual shareholder meeting on Aug. 1.

“Microsoft and Mr. Icahn are trying to dismantle the company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo stockholders,” Roy Bostock, Yahoo’s chairman, said in a statement. “We are prepared to let our stockholders, not Microsoft and Carl Icahn, decide what is in their best interests and we look forward to the upcoming vote.”

Yahoo’s board indicated to Microsoft on Saturday, however, that it was willing to sell the whole company at $33 a share — a price Microsoft offered in May, but which Yahoo had rejected.

Yahoo had begun settlement talks with Mr. Icahn several weeks ago, with Mr. Icahn seeking four seats on the board, people briefed on the matter said. But those talks are unlikely to resume.

What has emerged in the two months since Microsoft withdrew its $47.5 billion bid for all of Yahoo is a complicated dance between the two companies, longtime rivals that have unsuccessfully battled Google’s dominance in the Internet search.

Yahoo has since signed a search advertising pact with Google, one it says would generate $250 million to $450 million in operating cash flow in its first year. But Yahoo has indicated that it is willing to discuss a sale of the entire company at a lower price than the $37 a share it had once demanded.

As previously reported, Microsoft unveiled a more aggressive and hostile approach last Monday when it implicitly backed Mr. Icahn’s efforts to remove Yahoo’s board. While the software company said it would be willing to make another offer for the search business or the whole company — in that order — it would not negotiate with Yahoo’s current board.

But it was superseded by the Microsoft-Icahn offer. The talks began on Thursday with a series of phone calls, including one from Mr. Icahn to Mr. Bostock, in which the activist investor claimed to speak for Microsoft, according to people briefed on the matter who refused to be identified because the negotiations are confidential.

The offer on the table was a revision of Microsoft’s previous bid for Yahoo’s search business, in which Yahoo would effectively outsource the advertising that runs alongside search results. This time, however, Microsoft would shorten the 10-year agreement to five years, while guaranteeing that Yahoo would earn $2.3 billion in annual revenue for five years, up from the three-year guarantee of the original proposal. The contract could be renewed for another five years.

Microsoft also proposed having Yahoo sell its Asian assets. It also proposed making an equity investment of $3.9 billion and a preferred debt investment of $2.8 billion.

But the offer proved tough for Yahoo to swallow, these people said. It would have effectively led to the sale of Yahoo’s search advertising business to Microsoft, leaving the remaining operations in Mr. Icahn’s hands. Yahoo also believed that the promised revenue of the latest offer was less than it would earn through the Google partnership.

On Friday, Steven A. Ballmer, Microsoft’s chief executive, made his own phone call to Mr. Bostock, in what one person briefed on the matter said was a curt conversation. Mr. Bostock asked Mr. Ballmer for more time to evaluate the offer, citing the complexity of separating Yahoo’s search business from the rest of the business.

Mr. Ballmer refused, giving him 24 hours. “There is no more gas in the tank,” he told Mr. Bostock, according to this person.

Yahoo’s board convened with its advisers on Saturday in a meeting that lasted more than four hours before informing Microsoft that it had rejected the bid. It then reiterated its willingness to sell the whole company at $33 a share.

“While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders,” Mr. Bostock said in a statement.

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