Yahoowill appoint activist investor Carl Icahn and two of his nominees to its board, settling a proxy battle and making an immediate transaction with Microsoft less likely.
The settlement, announced on Monday, came just 11 days before Yahoo's Aug. 1 annual shareholders meeting, at which Icahn had originally sought to replace the entire board with his own nominees and oust Yahoo Chief Executive Jerry Yang.
But Icahn did not appear to have the backing of prominent Yahoo shareholders such as Legg Mason fund manager Bill Miller, who said on Friday that he would support Yahoo's board. Legg owned 4.4 percent of Yahoo according to a regulatory filing.
Their concern had been that besides a sale to Microsoft -- which has indicated it was presently only interested in buying Yahoo search and not the whole company -- Icahn has not shown concrete plans to turn around the company, which has been losing Web search market share to Google.
"It may be possible it does generate some positive change. Perhaps Icahn can drive some more staff reductions, persuade it to divest its Asia investments," Jeffrey Lindsay, analyst at Sanford C. Bernstein, said of the settlement.
"Overall it seems much less likely that there will be a transaction with Microsoft. The market is already reading it that way," he added. "This looks like a compromise and in general most of these compromises, certainly with ones with Icahn in the past, have reinforced the status quo."
Yahoo shares fell 20 cents, or nearly 1 percent, to $22.25 in pre-market trading.
The stock is far below Microsoft's last offer price of $33 per share, a bid that was withdrawn in May.
After six months of on-again, off-again talks with Microsoft that have undermined Yang and his management team's credibility with Wall Street, the settlement with Icahn could shore up Yahoo's position in the near term.
"Yahoo's current management is much better suited for Yahoo shareholders throughout this transition period. It's not like a vote of confidence, it's just they're the right people to get us through the disaster that we're in," said RBC Capital Markets analyst Ross Sandler.
"They've done a poor job but unfortunately there isn't a whole lineup of really good Internet executives who are pounding down the door to take on this challenge." Yahoo reports quarterly results on Thursday.
Icahn, who owned 4.98 percent of Yahoo, was quoted in a Yahoo statement as saying the settlement was a "good outcome" and that he continued to believe a transaction to sell Yahoo or its search business should be given full consideration.
"I am happy that the board has agreed in the settlement agreement that any meaningful transaction, including the strategy in dealing with that transaction, will be fully discussed with the entire board before any final decision is made," Icahn said in the statement.
Yahoo said it will expand its board to 11 members from nine, with eight of its existing directors standing for reelection. Icahn will be appointed and the remaining two board seats will be chosen from a list that includes Icahn's original slate of candidates and Jonathan Miller, former chairman and CEO of Time Warner's AOL, Yahoo said.
Yahoo said Roy Bostock, Ronald Burkle, Eric Hippeau, Vyomesh Joshi, Arthur Kern, Mary Agnes Wilderotter, Gary Wilson and Jerry Yang would stand for reelection. Activision Blizzard CEO Robert Kotick will not.