Yahoo's Future: Carl Icahn Reveals His Hand (and Ballmer's Support)

Just after the three-day long week-end, Carl Icahn revealed his hand and his purpose is crystal clear--to get the shareholders to support his slate of directors. He does not want to lose his proxy fight and he does not want his billion dollar investment to tank. So, he revealed that he has the support of Steve Ballmer as long as his slate of directors are elected. In his letter to shareholders he boldly states that:

Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board.

So, Carl Icahn's message is clear: It's time for Yahoo shareholders to reject the current Board.
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He goes on even more persuasively to make a case to get his slate elected.

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. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase "Search" with large guarantees. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

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Carl Icahn's intent is blatantly obvious: get rid of the current Board, engage Microsoft and engineer a transaction that maximizes shareholder value. I have always maintained that a deal with Microsoft (with some decent premium over the current share price) is good from the point of view of Yahoo shareholders (except Yang, Filo, Decker and other senior managers). I have also maintained that Microsoft should not spend in the vicinity of $40 + billion for Yahoo. However, Steve Ballmer's explicit support for Carl Icahn is a clear signal that he wants Yahoo (minus the current leadership team that he accuses of mismanaging Yahoo!).
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David Kirkpatrick writing in Fortune is convinced that Yahoo will finally end up with Microsoft. He is basing it on the fact that Microsoft needs to create a credible alternative marketplace for search-linked-advertising to compete against Google. My interpretation is that Microsoft needs Yahoo's scale (share of the search market--currently a distant #2 to Google but above its own Live.com). Steve Ballmer does not want anything to do with the leadership team and he gets Carl Icahn to do the tough job of ousting the current board. If Icahn gets a price higher than whate he paid for Yahoo, he wins. If Ballmer gets Yahoo on his terms that serves as a catalyst for Microsoft to seriously take on Google, he wins. So, how will the proxy battle turn out? I do not think that we have to wait till August 1. I expect to see hints, leaks and more memos and letters in the coming months.
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Microsoft has made its position clear in its statement released today.

We respect the right of Yahoo!'s shareholders to determine the destiny of their company, and we do not intend to engage in ongoing commentary on these issues in advance of Yahoo!'s shareholder meeting......While of course there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo!'s shareholder meeting if a new board is elected.

Yahoo's statement reiterates that the current management is still committed to negotiating with Ballmer.

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.

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Score (following from yesterday's epic Wimbledon 2008 Finals): Advantage Ballmer and Icahn against Yang and Decker.

Meanwhile, Google waits for the winner to emerge.