The articulation of this plan is clearly designed to address concerns (such as ours) that Carl has no plan (see: : "Sorry, Carl, We're Not Voting For Your Proxy Slate"). It is also designed to test the waters with Microsoft and Yahoo shareholders.

Carl's 5 Point Plan:

• Scrap severance "poison pill." [old news]
• Fire Jerry, hire real CEO. [old news]
  
• Tell Microsoft there will be no "alternative deal"--i.e., no sale of the search business. This is new.
• Offer to sell Yahoo to Microsoft for $34.75.
• If Microsoft says "No," do a search deal with Google.

Lastly, Carl tells Roy to offer the company publicly to Microsoft for $34.75.

CONCLUSION

Carl is running out of bullets. The clear articulation of a plan is good, but we still doubt we will vote for his slate if it comes to that. If Carl takes control and fires Jerry, Microsoft will have no incentive to pay $33+. Carl's use of a Google search threat as a club is smart, but Yahoo's already doing that now, and it doesn't seem to be working. Bottom line, other than "publicly offering the company to Microsoft"--which we feel Yahoo has already done--there's not much new here.

See Also:
Sorry, Carl Icahn, We're Not Voting For Your Yahoo Director Slate
Carl Icahn: I Talk To Yahoo Management, And They Drive Me Nuts
Icahn Calls Yahoo "Deceitful," Demands Yang Rescind $2.4B Severance Bonus Plan

LETTER

Dear Roy:

While you may take issue with the content of my letter, I take issue with your oversight of Yahoo! Again, I stand by my characterization of your "poison pill" severance plan and I find it humorous to see you attempt to defend it.

Roy, it is you who "misrepresents and misstates the details" of the plan. Much like the rhetoric in many well known political campaigns, you keep repeating misstatements in the hopes that by repeating misstatements enough times it will convince your shareholders that these misstatements are valid. For example, you repeated, "the plan was fully disclosed at the time of its adoption and should be no surprise to anyone at this point." This is simply not true. The egregious magnitude of the dollar amount cost of the plan was never fully disclosed, nor was the email from your compensation advisor calling the plan "nuts."

While you keep repeating that the severance plan was in the "best interests of shareholders," you neglect to mention that the financial cost of the plan could be immense. The documents obtained during discovery and released in the shareholder complaint show that Yahoo! estimates the maximum change in control severance expenses to be a staggering $2.4 billion if Microsoft bids $35 per share for Yahoo! You neglected to mention that the true cost to an acquirer may be even higher as the perverse change in control severance incentives may diminish the work effort of Yahoo! employees. In case you do not understand the plan, in addition to the $2.4 billion of severance expenses, I believe the plan will negatively impact employee behavior and degrade the ability of an acquirer to successfully integrate the acquisition. In the event of a change of control, the employee may decide not to work as hard in the hopes of cashing in on a robust severance package that awards up to two years salary and benefits, $15,000 of outplacement expenses, and accelerated vesting of stock options and restricted stock units. To make matters worse, it is not just the acquirer firing the employee that can trigger the severance package but the employee who may decide on his or her own to resign for "good reason" at any point within two years of a change in control. It is quite obvious to me that this plan impacts the price an acquirer would pay. Is it any wonder than an acquirer, once fully comprehending this plan, might not wish to negotiate any further? I again call upon you to honor your fiduciary duty to your shareholders and rescind this "poison pill" severance plan.

You asked, "what exactly would happen to our Company if you and your nominees were to take control of Yahoo!" I will give you my perspective on that.

-- First, I would work to have the board replace your "poison pill" severance plan with an acceptable alternative.

-- Second, I intend to ask our new board to hire a talented and experienced CEO (attempting to replicate Google's success with Eric Schmidt) to replace Jerry Yang and return Jerry to his role as "Chief Yahoo." Indeed, it was much speculated that Jerry would serve in the CEO role temporarily until a permanent CEO was hired after the board asked Terry Semel to resign.

-- Third, I intend to ask our new board to inform Microsoft that unless any alternative transaction can insure a $33 or higher stock price (of which I am skeptical) all talks of alternative transactions are over.

-- Fourth, I will ask our new board to offer publicly to sell Yahoo! to Microsoft in a friendly and cooperative transaction.

-- Fifth, to the extent Microsoft does not want to make a proposal, I will ask our new board do a deal on search with Google, but only if it contains termination provisions that would in no way impede a subsequent acquisition by Microsoft.

Now let me ask you a couple of questions, Roy:

-- Why don't you, now that you have the opportunity, remove the "poison pill" severance plan that I find to be ridiculous and thereby remove a major obstacle to a Microsoft acquisition?

-- In my opinion, Microsoft does not believe you will ever sell the entire company on a friendly basis. So why don't you stop dancing around the subject and publicly offer to sell the company to Microsoft for $34.375 per share and promise to cooperate completely?

-- Why are you still giving hope to Microsoft that there is a possible "alternative deal"? As long as there is the possibility of an "alternative deal," isn't it obvious that Microsoft will not make a bid for the whole company?

Sincerely yours,

CARL C. ICAHN

Billionaire Investor Carl Icahn is now totally focused upon doing with Yahoo, what he has done with plenty of companies before it i.e toppling their board, making them competitive for an acquisition or just competitive to stay alive on their own. Icahn has earned a legendry reputation while doing so and off course a lot of money in the process. His latest overture was with Motorolla.

Before we go on to discuss the after effects of a Yahoo acquisition by Microsoft, lets first see as to what Icahn has to say about Yahoo. Icahn argues that Yahoo’s board and specifically co-founder Yang have acted against the interests of the shareholders by implementing a severance plan that has entrenched Yahoo against Microsoft’s bid. The plan allows Yahoo employees to walk away with hefty amounts if and when Microsoft acquires it, sighting any stupid reason. Once the employees are gone Yahoo would be as good as dead meat for Microsoft. In the presence of this plan Microsoft will never sit on the negotiation table with Yahoo.

Other than this, according to Icahn this is not the first time that Yahoo has fended off an acquisition offer from Microsoft, it has done so in the past when it rejected the $40 per share offer from Microsoft in Jan 2007. This is not the first time that Yahoo has committed a blunder when it comes to mergers and acquisitions. On April 5, 2007 I wrote a post titled "Yahoo blunders continue unabated". In that post I shed some light on how Yahoo at one time got the chance to acquire Google in the late nineties when the Google founders themselves went to their Stanford seniors who happened to be the founders of Yahoo. Yahoo rejected their request for acquisition asking them to try it on their own. Its the same company that has now become the sole reason for Yahoo’s current pains. However the article was written hot on the heals of a failed acquisition effort of Facebook by Yahoo. Yahoo insisted upon buying Facebook for $1 billion or less where as Facebook was demanding $2 billion. The deal went into tartars and we all know what happened to Facebook afterwards.

I can fully understand why Yang is so resilient to a Microsoft buyout. It kills your ego to accept that once a Internet Powerhouse is being swallowed up by the Desktop Giant of the past. But all this is Yahoo’s own doing. They have had enough chances to achieve immortality but they failed whenever it mattered. Yang needs to understand that Yahoo must be salvaged and must be salvaged right now or else it would be eaten up by Google one bit at a time. This happened to Netscape and they accepted the AOL acquisition offer. There is nothing wrong in accepting defeat and calling it quits at the right time. You can always live to fight another day, although this has seldom happened. Except for Steve Jobs, I have not seen a fellow who created an empire in the form of Apple, was thrown out of it and went on to create two more companies in the form of NeXT and Pixar Studios. His return to Apple once again was a result of Apple’s acquisition of NeXT. The rest is history. Andreesen, Netscape founder, also tried one or two things (he is currently co-founder of Ning a company that lets you create your own social network) but couldn’t create the next Netscape. May be that was all there was in Andreesen and may be that’s all there is in Yang.

On the Microsoft side, lets assume that Microsoft wins this bidding war and manages to acquire what was once Yahoo. Even if this happens I am really skeptical about the outcome of this acquisition. There are plenty of reasons for this, the first being that I have rarely seen such big acquisitions pay off. eBay has yet to get something meaningful out of its $4.1 billion acquisition of Skype. There would be lots of issues like getting through with anti-trust lawsuits and becoming a monopoly related issues (specially given Microsoft’s reputation). Google will surely cash on this opportunity of beating about this bush to delay the deal for as long as possible in order to gain as much time and hence Search market share in the process. Furthermore when a company grows so big, it develops a certain culture that gets implanted in its DNA, it would be immensely hard for Microsoft to merge these two disparate specifies. Atleast biologists have not come up with anything that could do so. The clash in civilizations would create a rift within the merged company that would apply breaks to any effort that Microsoft would undertake to catch up with the Ferrari that we have come to know by the name of Google. In addition to all this there would be a lot of positions that would become redundant and would have to get rid off. This would be another problem for Microsoft, since it wont be possible for them to fire so many employees so quickly specially given what Yang and co have already done at Yahoo.

All in all, a non deal would surely be disastrous for both Microsoft and Yahoo but than even a deal wont be a bed of roses. Now the question arises, Is Icahn worried about Microsoft shareholders due to the adverse effects of this deal. Perhaps not because its not the horse on which he has placed his bet. Having said all this I really sincerely wish to have a little more competition in the Search space, as that is what’s best for all of us.

You can read Icahn’s letter below (the emphasis is mine).

Roy Bostock
Chairman
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Mr. Bostock:

I have long been cynical about the effectiveness of many of the boards and CEOs in this country and as a result the inability of our companies to compete. (I have been involved in many board topples and shakeups so don’t take me lightly) I have constantly complained about how far CEOs and boards will go in order to retain their jobs, yet even I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft.

Carl Icahn argues that Yahoo has been "insulting" and "deceitful" regarding its severance plan and should see if a deal with Microsoft can be salvaged.

According to details in a complaint that I became aware of yesterday (details Yahoo fought to keep under seal), Jerry Yang and a majority of the board went to inordinate lengths to sabotage a Microsoft bid. The complaint states: "Viewing employee retention as Microsoft’s Achilles heel, Yang engineered an ingenious defense creating huge incentives for a massive employee walkout in the aftermath of a change in control. The plan gives each of Yahoo’s 14,000 full-time employees the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover, by claiming a "substantive adverse alteration" in job duties or responsibilities." The damage to Microsoft "is compounded by the fact that Yahoo’s thousands of engineers, known as "Technical Yahoos!," have detailed job responsibilities and qualifications."

Most importantly, Microsoft might never be able to trust a CEO and board who, while claiming to be negotiating in good faith, went behind their back and adopted a "plan" which not only sabotages any Microsoft acquisition but went so far as to completely disable its own ability to rescind the "plan" as long as Microsoft’s offer remains pending. Until now I naively believed that self-destructive doomsday machines were fictional devices found only in James Bond movies. I never believed that anyone would actually create and activate one in real life. I guess I never knew about Yang and the Yahoo Board. In my opinion, it will be extremely difficult for Microsoft or other companies to trust, work with and negotiate with a company that would go to these lengths.

It is insulting to shareholders that Yahoo for the last month has told us that they are quite willing to negotiate a sale of the company to Microsoft and cannot understand why Microsoft has walked away. However, the board conveniently neglected to inform shareholders about the magnitude of the plan it installed which made it practically impossible for Microsoft to stay at the bargaining table. Could this have been the problem?

Even more deceitful are Yahoo’s actions toward its own employees, for whom you claimed to have set up the "plan". Management neglected to mention to these same employees that Microsoft in its proposals had earmarked $1.5 billion of retention incentives (representing over $100,000 per employee) meant to allay any employee concerns.

Ironically, according to the complaint, this is not the first time that Yahoo has denied shareholders the opportunity of selling to Microsoft at a large premium. According to the complaint, in January 2007 Microsoft offered to purchase Yahoo at $40 per share but the company rejected that proposal. On January 31, 2008, Steve Ballmer emailed a letter to Jerry Yang and Roy Bostock making a new proposal of $31 per share. The letter recounts Microsoft’s prior efforts to acquire Yahoo and noted that Microsoft had given Yahoo time to implement business strategies designed to turn the company around. These strategies obviously didn’t work. The letter went on to state: "Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008." Yahoo not only turned down this proposal but sabotaged it. An article in CNET News cited in the complaint sums it up by stating, "Yahoo may indeed agree to Microsoft’s [offer], but it will be over Jerry Yang’s dead body".

I and many of your shareholders believe that the only way to salvage Yahoo in the long if not short run is to merge with Microsoft. However, because of HSR considerations, to complete a merger of this magnitude will take a period of time. Even if by some stretch of the imagination the Yahoo board finally determines to do the rational thing and sell the company, I fear that, in light of Yang and the board’s recent actions in response to Microsoft’s overtures, it may be too late to convince Microsoft to trust Yang and the current board to run the company during that period while Microsoft sits on the sidelines with $45 billion at risk. Therefore, the best chance to bring Microsoft and Yahoo together is to replace Yang and the current Yahoo board with a board that will negotiate in good faith with Microsoft and in whom Microsoft will have trust to operate the company during the long period between signing and closing.

You stated in a press release yesterday that, "Yahoo’s board of directors including Jerry Yang has been crystal clear that it would consider any proposal by Microsoft that was in the best interests of its shareholders." However this is not crystal clear to me. You have allegedly turned down a $40 offer. You have turned down and sabotaged a $33 offer. Instead, you appear willing to negotiate an "alternative" deal that in my opinion will be worth less than $33 but will entrench the board and Jerry Yang. I understand how these actions are in the best interests of management and a board whose members each receive $40,000 per month for several days work, but it is hard for me to understand how these actions are in the "best interests of the shareholders."

However, despite your actions to date, there is still some possibility that you can resuscitate a Microsoft offer for the company. The board can rescind the "severance plan" that is the largest impediment to a Microsoft deal. You currently can do this because Microsoft withdrew their bid 30 days ago. It is time for you to stop misleading your shareholders with respect to Microsoft. It has been reported today that when asked to talk about the Microsoft bid, Sue Decker indicated that Microsoft made an offer which Yahoo’s board didn’t feel was at an attractive enough price. However, one doesn’t have to be a rocket scientist to realize there is a simple method to possibly achieve a higher price. Simply rescind the poison pill "severance plan", which would free up approximately $2.4 billion and possibly even more which could be added to the bid. It is also time to admit to your shareholders that the severance plan was not done for your employees (who you conveniently neglected to inform that Microsoft had earmarked $1.5 billion in retention incentives for), but rather was done simply as an entrenchment device and to impede a Microsoft bid. If you are not completely disingenuous in your protestations concerning doing "the right thing" for shareholders, you should rescind the severance plan expeditiously and determine if Microsoft is still willing to purchase our company and thereby create a true competitor for Google. I can only hope that you will finally do what is in the "best interests of the shareholders."

Sincerely yours,

CARL C. ICAHN

---
Related Articles at Startup Meme:

More jawboning than anything else here: Carl is appalled by the $2.4 billion severance package/poison pill; Carl demands that Yahoo sell to Microsoft, and thinks Microsoft has no choice but to buy; Carl says that Microsoft hasn't technically pulled their bid off the table (which is news to us - can someone confirm?); Carl isn't really talking to Microsoft, but he is sort of talking to Yahoo -- but it doesn't matter because there's no point in talking to Yahoo, because they really don't want to sell.

That last one is our favorite quote, because we can just imagine the condescension dripping from Carl's voice here (apologies for the all-caps):

WE'VE BEEN ABLE TO TALK. THAT'S NOT THE ISSUE. THE ISSUE IS WHAT DOES THAT GET YOU. I MEAN, IT'S ONE THING TO TALK AND EVERYBODY SAYS, OH, YOU KNOW, WE'LL DO THE RIGHT THING FOR SHAREHOLDERS, WE REALLY WOULD SELL THE COMPANY AT THE RIGHT PRICE. I MEAN, THAT'S PRETTY MUCH THE MANTRA. BUT IT'S NOT WHAT'S REALLY HAPPENING.

Full transcript follows:

DYLAN RATIGAN: ...CARL ICAHN JOINS US ON THE FAST LINE. WELCOME BACK TO THE PROGRAM. WALK US THROUGH, IF YOU COULD WALK US THROUGH -- WHAT IS THE LIKELY SERIES OF EVENTS BETWEEN NOW AND AUGUST AT THIS ANNUAL MEETING?

CARL ICAHN: YEAH. I THINK THAT WE'RE GOING TO BE IN A BIT OF A TIFF. IT'S GOING TO BE SORT OF INTERESTING.

RATIGAN: YOU'VE DONE THIS A NUMBER OF TIMES.PUT YOUR TACTICS FROM PAST BATTLES IN THE CONTEXT OF THIS ONE. HOW DO YOU FEEL ABOUT YOUR ODDS ON THIS ONE, FOR INSTANCE?

ICAHN: WELL, I THINK WE HAVE GOOD ODDS. I TELL YOU I'VE RARELY SEEN ONE WHERE THE COMPANY HAS GONE TO SUCH LENGTHS TO ENTRENCH THEMSELVES. AND IT'S A SAD COMMENTARY. I KNOW A PROSELYTIZE THIS ON CORPORATE GOVERNANCE, ACCOUNTABILITY, YOU HAVE A -- YOU WONDER WHY THE SHELL IS GENERALLY DON'T STAND UP MORE. THIS ONE IS SORT OF INTERESTING THAT A FEW OF THOSE LARGE MONEY MANAGERS HAVE REALLY COME FORWARD AND HAVE SHOWN THEIR IRE AND WELL THEY SHOULD.

RATIGAN: WHAT DO YOU VIEW AS YOUR BEST ALTERNATIVES?

ICAHN: WELL, YOU SAY "ALTERNATIVES." I CERTAINLY DON'T WANT TO SEE AN ALTERNATIVE DEAL WITH MICROSOFT. THEY'RE TALKING ABOUT, WHICH WOULD BE SOME HIGH-BRED WHICH WOULD DEVALUE NO MATTER WHAT THEY SAY AT A LOT LESS THAN THE 33 OR 34 THAT THEY WERE TALKING ABOUT.AND, OF COURSE, THAT WOULD ENTRENCH THE BOARD AND WOULD ENTRENCH JERRY YANG BUT WOULD BE TERRIBLE FOR SHAREHOLDERS.

SO, I DO BELIEVE THE FOLLOWING -- THAT THIS COMPANY, YAHOO!, IS A VERY STRATEGIC AND IMPORTANT ACQUISITION FOR MICROSOFT, AND EVENTUALLY I HAVE TO BELIEVE THAT THAT'S GOING TO HAPPEN. YOU KNOW, I NOTICE THAT BARRY DILLER, WHO I THINK IS A REAL SMART GUY, SAID INCOMPREHENSIBLE WHAT'S GOING ON HERE. SO, I DO BELIEVE SOONER OR LATER THE DEAL HAPPENED. WHAT MIGHT HAVE OCCURRED AND WHY -- I MEAN, YOU REALLY MIGHT NEED A NEW BOARD AND A NEW CEO BECAUSE OF ALL THE -- THIS ENTRENCHMENT THAT -- THE SHENANIGANS THAT HAVE GONE ON HERE. MICROSOFT NOT BE WILLING TO HAVE THE FAITH IN THE CURRENT BOARD AND JERRY YANG TO BE THE STEWARD OF THE COMPANY FOR CLOSE TO A YEAR WHEN HSV GOING AND WORKED OUT. AND THAT MIGHT BE ONE OF THE REASONS THAT THEY THEORETICALLY WALKED AWAY. AND ANOTHER REASON, WHICH IS UNCONSCIONABLE IN MY OPINION IS $2.5 BILLION SEVERANCE PACKAGE THAT THIS LAWSUIT SPEAKS ABOUT. AND TO ME, THAT IS A REASON THEY MIGHT NOT WANT TO DO IT. NOW, INTERESTINGLY, THE 30 DAYS ARE UP THAT MICROSOFT HAD TO PULL THE BID, SO THE IF THE COMPANY HAS ANY DECENCY ABOUT ITS SHAREHOLDERS, IT SHOULD NOW RESCIND THAT AND LEAVE IT OPEN FOR A SUITOR TO COME IN. BUT WE'LL SEE IF THEY DO THAT.

KAREN FINERMAN: HI, CARL.IT'S KAREN.

ICAHN: HI, KAREN.HOW YOU DOING?

FINERMAN: GOOD.HOW ARE YOU IN I'M A BIG FAN.

ICAHN: KEEP GOING.KEEP WORKING.

FINERMAN: SO, THE PACKAGE THAT THEY PUT TOGETHER, THE SEVERANCE PACKAGE PACKAGE, A BUCK SIXTY A SHARE, FIRST OF ALL, IT SEEMS AN EGREGIOUSLY LARGE PACKAGE AND I HOPE YOU CAN DO SOMETHING ABOUT IT, BUT REALISTICALLY, I DON'T KNOW IF YOU CAN. DO YOU THINK THAT MICROSOFT SHOULD TAKE THAT OUT OF ANY PURCHASE PRICE OR THAT THEY WOULD PLAN TO TAKE THAT OUT OF ANY PURCHASE PRICE?

ICAHN: WELL, IT'S COMPLETELY DISINGENUOUS.SUE DECKER SAYS TODAY WE'RE DOING EVERYTHING WE CAN BUT THE PRICE ISN'T HIGH ENOUGH.IT'S NOT HIGH ENOUGH BECAUSE OF THAT PACKAGE. AND IT'S A BIT WORSE THAN YOU'RE ALLUDING TO BECAUSE ONE OF THE THINGS THAT MICROSOFT, I WOULD IMAGINE, NEEDS HERE IS THE WORKFORCE. AND HOW DO YOU THEN GO IN AND TELL THEM THEY'RE PAYING $45 BILLION BUT WE'RE INCENTIVIZING THIS WORKFORCE THAT YOU WANT TO LEAVE? I MEAN, IT'S SORT OF -- IT IS SORT OF INCOMPREHENSIBLE WHAT THEY'RE DOING HERE.

JEFF MACKE: CARL, WHAT'S PLAN "B" ON THIS? I'M CONFIDENT YOU COULD BEAT THE SNOT OUT OF THE YAHOO! BOARD RIGHT NOW BECAUSE THEY DON'T HAVE A DEFENSE. I DON'T KNOW HOW YOU COULD MAKE MICROSOFT TAKE THE BAIT, IS ONE PROBLEM, AND YAHOO! IS DESTROYING VALUE EVERY SINGLE DAY.EVEN WITH THE AUGUST 1st DEADLINE, HOW DO YOU MAKE MICROSOFT TAKE THE BAIT AND HOW DO YOU KEEP YAHOO! INTACT--

ICAHN: I BELIEVE VERY STRONGLY, AND I'M NOT THE ONLY ONE WHO BELIEVES THIS. A LOT OF PROS IN THE TECHNOLOGY AREA WE TALKED TO BELIEVE THAT THE ONLY WAY, YOU KNOW, THAT MICROSOFT CAN COMPETE IN THE LONG RUN WITH GOOGLE IS TO HAVE YAHOO!, IS TO HAVE -- IS TO HAVE A PRESENCE IN THE SEARCH AREA, BECAUSE EVENTUALLY -- AND IT'S HAPPENING RIGHT NOW IN THE OFFICE -- YOU KNOW, WITH OFFICE STOCKS THAT GOOGLE IS PUTTING OUT, BUT YOU'RE GOING TO BE DOWNLOADING A LOT OF THESE OPERATION SOPERATIONS OR YOU'RE GOING TO BE -- OR APPLICATIONS, ACTUALLY.YOU'RE GOING TO BE DOWNLOADING EVEN IN THE HOME THROUGH THE INTERNET.AND OBVIOUSLY, THE MORE YOU CAN ADVERTISE ON THE INTERNET, YOU'LL BE DOWNLOADING THOSE AND DOWNLOADING THEM POSSIBLY FREE.SO, YOU WANT TO BE ABLE TO COMPETE WITH GOOGLE IN THE SEARCH AREA. AND, I MEAN, IT'S NOT ME SAYING THAT. I MEAN, IT'S OBVIOUS ALMOST WHEN YOU'VE SEEN THE -- HOW LONG MICROSOFT HAS BEEN TRYING TO ACQUIRE YAHOO! SO, I REALLY DO BELIEVE -- I MEAN, SOMETIMES YOU HAVE TO HAVE PATIENCE, BUT I BELIEVE IF IT'S NOT THIS MONTH, IT'LL BE SIX MONTHS FROM NOW. BUT IT'S CRAZY FOR THIS COMPANY NOW TO DO THIS ALTERNATIVE DEAL AND GIVE THE STORE AWAY, BECAUSE OBVIOUSLY, AN ALTERNATIVE DEAL IS A POISON PILL, BECAUSE ONCE YOU'VE DON AN ALTERNATIVE DEAL AND GIVEN THE SEARCH TO MICROSOFT, YOU DON'T NEED MICROSOFT TO BUY YOU ANYMORE. SO, THAT WOULD BE A POISON PILL, AS BAD AS THIS, IN QUOTES, INGENIOUS CONTRAPTION THAT JERRY YANG PUT TOGETHER AND CALLED IT A SEVERANCE PACKAGE, WHICH IS NOTHING MORE THAN AN IMPEDIMENT. AND HE NEGLECTED TO SAY THAT MICROSOFT EVEN PUT ASIDE $1.5 BILLION FOR THE EMPLOYEES.

RATIGAN: HOW CLOSELY ARE YOU IN COMMUNICATION, CARL, WITH MICROSOFT'S MANAGEMENT?

ICAHN: WELL, YOU KNOW, I REALLY -- I WOULDN'T SAY CLOSELY AND I WOULDN'T WANT TO TALK ABOUT IT ANYWAY, YOU KNOW? I WOULD JUST TELL YOU THAT I DO BELIEVE THAT MICROSOFT REALLY EVENTUALLY WOULD WANT AND WOULD NEED THIS COMPANY. SO, YOU SAY, WELL, YOU KNOW, YOU CAN'T SAY THAT THERE WILL BE A DEAL NEXT WEEK, BUT HOPEFULLY THERE MIGHT BE SOMETHING. AND WHAT I THINK THE SHAREHOLDERS HAVE TO DO HERE IS MAKE THEIR WILL KNOWN AND TELL THESE GUYS THAT THEY'RE NOT GOING TO ACCEPT SOME ALTERNATIVE DEAL AND THEY'RE GOING TO OUST THEM, THEY'RE GOING TO OUST THEM IF THEY DON'T GET SOMETHING DONE HERE.

FINERMAN: CARL, I THINK YOU SENT A REALLY STRONG MESSAGE TO THEM. THIS IS PROBABLY THEIR WORST NIGHTMARE TO WAKE UP SEEING YOU LAUNCHING A PROXY FIGHT AND ALL YOUR FRIENDS BILING IN, BOONE, PICKENS AND PAULSON. I'M SURE YANG DOESNT WANT TO BE OUT FROM THE COMPANY, WHICH COULD HAPPEN AUGUST 1st. WOULD YOU BE INTERESTED IN HAVING ANY CONVERSATIONS WITH THEM PRIOR TO THE ANNUAL MEETING TO SEE IF YOU COULD WORK SOMETHING OUT?

ICAHN: CERTAINLY. I DO TALK TO THEM, YOU KNOW, OCCASIONALLY AND MAYBE MORE THAN OCCASIONALLY ON THE YAHOO! SIDE.YOU CERTAINLY WANT TO SETTLE THESE THINGS. AND -- HOWEVER, I REALLY BELIEVE THAT THE ONLY ALTERNATIVE IS NOT AN ALTERNATIVE, IT'S A SALE. AND THAT IS SOMETHING THAT I THINK, IF WE DON'T DO IT AND WE DON'T CHANGE THIS BOARD OR CHANGE IT IMPORTANTLY, I BELIEVE THAT THAT WOULD BE A PROBLEM DOWN THE ROAD BECAUSE I AM NOT SURE. EVEN THOUGH I THINK MICROSOFT REALLY WANTS THIS, I'M NOT QUITE SURE THAT THEY'LL DO IT WITH THIS BOARD, BUT WE'LL SEE.

RATIGAN: HOW OFTEN ARE YOU FINDING, IF AT ALL, CARL, YOU'RE ABLE TO TALK DIRECTORY WITH YAHOO! MANAGEMENT AWAY FROM THE PUBLIC THEATER OF SUE DECKER ON CNBC OR TALKING WITH US HERE OR ANOTHER PUBLIC VENUE? HOW FREQUENTLY ARE YOU ABLE TO ACCESS YAHOO! MANAGEMENT IN A PRIVATE CAPACITY?

ICAHN: WE'VE BEEN ABLE TO TALK. THAT'S NOT THE ISSUE. THE ISSUE IS WHAT DOES THAT GET YOU. I MEAN, IT'S ONE THING TO TALK AND EVERYBODY SAYS, OH, YOU KNOW, WE'LL DO THE RIGHT THING FOR SHAREHOLDERS, WE REALLY WOULD SELL THE COMPANY AT THE RIGHT PRICE. I MEAN, THAT'S PRETTY MUCH THE MANTRA. BUT IT'S NOT WHAT'S REALLY HAPPENING. AND AFTER REALLY THIS FILING THAT LAWSUIT, I SORT OF REALIZED WHAT LENGTH THIS COMPANY AND BOARD WOULD GO TO TO ENTRENCH THEMSELVES. AND IT'S A SAD COMMENTARY, I REALLY BELIEVE, BECAUSE YOU DO HAVE A FIDUCIARY OBLIGATION TO YOUR SHAREHOLDERS.THE SHAREHOLDERS DON'T WANT THIS. OBVIOUSLY, THEY WANT TO SEE A SALE TO MICROSOFT, WHICH I THINK IS GOOD FOR OUR WHOLE BUSINESS SOCIETY. I MEAN, TO DO SOMETHING LIKE THIS AND HAVE A REAL COMPETITOR FOR GOOGLE.

RATIGAN: TO THAT END, I'M CURIOUS BECAUSE YOU KEEP BRINGING THAT UP, THE NATURAL BENEFIT TO BOTH MICROSOFT AND YAHOO! OF DOING THIS TRANSACTION BECAUSE OF THE STRENGTH OF GOOGLE RIGHT NOW. IF A TRANSACTION WAS TO COME TO BE, CARL, THAT WAS FINANCIALLY SUITABLE TO ALL PARTIES AND ALL THE REST OF IT, WOULD YOU BE INCLINED -- AND THIS IS A HARD QUESTION I SUPPOSE TO ANSWER -- BUT WOULD YOU BE INCLINED TO STAY WITH IT, COMBINE MICROSOFT/YAHOO! HAS A COMPETITOR TO GOOGLE.

ICAHN: WHEN YOU SAY "STAY WITH IT," YOU MEAN CONTINUE TO HOLD THE STOCK?

RATIGAN: YES

ICAHN: I MEAN, IT WOULD BE A DEAL FOR CASH AND FOR STOCK OF A COMBINED COMPANY, YOU KNOW, WHETHER I WOULD OWN THE STOCK OR NOT WOULD BE SOMETHING TO BE SEEN. I'M NOT GENERALLY A FUND THAT JUST HAS POSITIONS. WE'RE AN ACTIVIST FUND, BASICALLY.

BUT I DO THINK IT WOULD BE A VERY POWERFUL COMPANY.WELL, MICROSOFT IS POWERFUL TO BEGIN WITH.

RATIGAN: SURE.

ICAHN: BUT I THINK THIS WOULD MAKE THEM A LOT MORE POWERFUL. JERRY YANG HAS SAID IT WOULD BE A POWERFUL THING.

RATIGAN: IS THERE A MINIMUM PRICE AT WHICH YOU FEEL YOU WOULD NEED TO SEE IN A TRANSACTION IN ORDER TO FEEL COMFORTABLE WITH THE SALE?

ICAHN: YOU KNOW, I'M NOT GOING TO NEGOTIATE ON TELEVISION.BUT I THINK THAT THEY PRETTY WELL TALKED ABOUT THE PRICE THAT -- YOU KNOW, WHERE IT WOULD END UP, YOU KNOW.

RATIGAN: MEANING THAT --

ICAHN: SOMEWHERE IN THE MID-30s AREA, YOU KNOW.

FINERMAN: OH, COME ON, CARL.NEGOTIATE ON TELEVISION.I'M JUST KIDDING.

ICAHN: KAREN, YOU'RE TOO TOUGH. I CAN'T NEGOTIATE WITH YOU.

RATIGAN: USING OUR SECRET WEAPON. WE THOUGHT IF ANYBODY COULD GET IT OUT OF YOU, CARL, IT WOULD BE KAREN. THANKS FOR SPENDING TIME WITH US ON THE PHONE. OKAY. CARL ICAHN ON YAHOO! WE'LL TAKE A BREAK. BACK AFTER THIS.

Icahn suggests that, as a way of luring Microsoft back to the table, Yahoo rescind the $2.4 billion employee bonanza severance plan that Jerry & Co. implemented to create a roadblock to a Microsoft takeover.

Icahn goes to great lengths to feign shock at the outrageous details of this plan (some of which were revealed in scandalous color in the lawsuit that was unsealed two days ago). Most of the key details, of course, have been public knowledge since the plan was announced.

This said, Icahn's letter does mark the first constructive suggestion he makes for getting Microsoft back to the table without giving the company away. Striking the severance plan would make Yahoo less expensive. It would also demonstrate Yahoo's commitment to working with Microsoft during the regulatory approval process. In so doing, it would give Microsoft a way to save face but still pay $33 for Yahoo.

Importantly, even Icahn admits that a sale to Microsoft might now be a long shot:

despite your actions to date, there is still some possibility that you can resuscitate a Microsoft offer for the company.

"Some possibility." Even with the severance-plan recission, hardly sounds like a lay up.

Carl Quotes:

- I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft.

- Until now I naively believed that self-destructive doomsday machines were fictional devices found only in James Bond movies. I never believed that anyone would actually create and activate one in real life. I guess I never knew about Yang and the Yahoo Board.

- I and many of your shareholders believe that the only way to salvage Yahoo in the long if not short run is to merge with Microsoft. ["Salvage"--gotta like that]

Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153

June 4, 2008

Roy Bostock
Chairman
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Mr. Bostock:

I have long been cynical about the effectiveness of many of the boards and
CEOs in this country and as a result the inability of our companies to compete.
I have constantly complained about how far CEOs and boards will go in order to
retain their jobs, yet even I am amazed at the length Jerry Yang and the Yahoo
board have gone to in order to entrench their positions and keep shareholders
from deciding if they wished to sell to Microsoft.

According to details in a complaint that I became aware of yesterday
(details Yahoo fought to keep under seal), Jerry Yang and a majority of the
board went to inordinate lengths to sabotage a Microsoft bid. The complaint
states: "Viewing employee retention as Microsoft's Achilles heel, Yang
engineered an ingenious defense creating huge incentives for a massive employee
walkout in the aftermath of a change in control. The plan gives each of Yahoo's
14,000 full-time employees the right to quit his or her job and pocket generous
termination benefits at any time during the two years following a takeover, by
claiming a "substantive adverse alteration" in job duties or responsibilities."
The damage to Microsoft "is compounded by the fact that Yahoo's thousands of
engineers, known as "Technical Yahoos!," have detailed job responsibilities and
qualifications."

Most importantly, Microsoft might never be able to trust a CEO and board
who, while claiming to be negotiating in good faith, went behind their back and
adopted a "plan" which not only sabotages any Microsoft acquisition but went so
far as to completely disable its own ability to rescind the "plan" as long as
Microsoft's offer remains pending. Until now I naively believed that
self-destructive doomsday machines were fictional devices found only in James
Bond movies. I never believed that anyone would actually create and activate one
in real life. I guess I never knew about Yang and the Yahoo Board. In my
opinion, it will be extremely difficult for Microsoft or other companies to
trust, work with and negotiate with a company that would go to these lengths.

It is insulting to shareholders that Yahoo for the last month has told us
that they are quite willing to negotiate a sale of the company to Microsoft and
cannot understand why Microsoft has walked away. However, the board conveniently
neglected to inform shareholders about the magnitude of the plan it installed
which made it practically impossible for Microsoft to stay at the bargaining
table. Could this have been the problem?

Even more deceitful are Yahoo's actions toward its own employees, for whom
you claimed to have set up the "plan". Management neglected to mention to these
same employees that Microsoft in its proposals had earmarked $1.5 billion of
retention incentives (representing over $100,000 per employee) meant to allay
any employee concerns.

Ironically, according to the complaint, this is not the first time that
Yahoo has denied shareholders the opportunity of selling to Microsoft at a large
premium. According to the complaint, in January 2007 Microsoft offered to
purchase Yahoo at $40 per share but the company rejected that proposal. On
January 31, 2008, Steve Ballmer emailed a letter to Jerry Yang and Roy Bostock
making a new proposal of $31 per share. The letter recounts Microsoft's prior
efforts to acquire Yahoo and noted that Microsoft had given Yahoo time to
implement business strategies designed to turn the company around. These
strategies obviously didn't work. The letter went on to state: "Our proposal
represents a 62% premium above the closing price of Yahoo! common stock of
$19.18 on January 31, 2008." Yahoo not only turned down this proposal but
sabotaged it. An article in CNET News cited in the complaint sums it up by
stating, "Yahoo may indeed agree to Microsoft's [offer], but it will be over
Jerry Yang's dead body".

I and many of your shareholders believe that the only way to salvage Yahoo
in the long if not short run is to merge with Microsoft. However, because of HSR
considerations, to complete a merger of this magnitude will take a period of
time. Even if by some stretch of the imagination the Yahoo board finally
determines to do the rational thing and sell the company, I fear that, in light
of Yang and the board's recent actions in response to Microsoft's overtures, it
may be too late to convince Microsoft to trust Yang and the current board to run
the company during that period while Microsoft sits on the sidelines with $45
billion at risk. Therefore, the best chance to bring Microsoft and Yahoo
together is to replace Yang and the current Yahoo board with a board that will
negotiate in good faith with Microsoft and in whom Microsoft will have trust to
operate the company during the long period between signing and closing.

You stated in a press release yesterday that, "Yahoo's board of directors
including Jerry Yang has been crystal clear that it would consider any proposal
by Microsoft that was in the best interests of its shareholders." However this
is not crystal clear to me. You have allegedly turned down a $40 offer. You have
turned down and sabotaged a $33 offer. Instead, you appear willing to negotiate
an "alternative" deal that in my opinion will be worth less than $33 but will
entrench the board and Jerry Yang. I understand how these actions are in the
best interests of management and a board whose members each receive $40,000 per
month for several days work, but it is hard for me to understand how these
actions are in the "best interests of the shareholders."

However, despite your actions to date, there is still some possibility that
you can resuscitate a Microsoft offer for the company. The board can rescind the
"severance plan" that is the largest impediment to a Microsoft deal. You
currently can do this because Microsoft withdrew their bid 30 days ago. It is
time for you to stop misleading your shareholders with respect to Microsoft. It
has been reported today that when asked to talk about the Microsoft bid, Sue
Decker indicated that Microsoft made an offer which Yahoo's board didn't feel
was at an attractive enough price. However, one doesn't have to be a rocket
scientist to realize there is a simple method to possibly achieve a higher
price. Simply rescind the poison pill "severance plan", which would free up
approximately $2.4 billion and possibly even more which could be added to the
bid. It is also time to admit to your shareholders that the severance plan was
not done for your employees (who you conveniently neglected to inform that
Microsoft had earmarked $1.5 billion in retention incentives for), but rather
was done simply as an entrenchment device and to impede a Microsoft bid. If you
are not completely disingenuous in your protestations concerning doing "the
right thing" for shareholders, you should rescind the severance plan
expeditiously and determine if Microsoft is still willing to purchase our
company and thereby create a true competitor for Google. I can only hope that
you will finally do what is in the "best interests of the shareholders."

Sincerely yours,


CARL C. ICAHN

• Microsoft (MSFT) can't just buy Yahoo by making a tender offer or buying stock on the open market because buying more than 15% of the company would trigger Yahoo's poison pill, making a full takeover prohibitively expensive. Thus, Microsoft needs to get Yahoo's board to rescind the poison pill, either by persuading the current board to do it--or by getting this board fired and hiring another one.

• If Microsoft were to make a tender offer, it would likely make it conditional on the board rescinding the poison pill. If it became clear that most Yahoo shareholders wanted to exchange their stock at the tender-offer price, the current board might cave and agree to the deal. Thus, Microsoft could effectively force Yahoo's board to kill the poison pill without actually getting the board fired.

• In a proxy fight, Microsoft does NOT need to win 50.1% of the total shares--it only has to win 50.1% of the shares that actually vote at the meeting. This is crucial. Many shareholders don't vote in proxy fights, no matter how dramatic the issues at hand. If Microsoft had to win 50.1% of the total vote, therefore, it would face an uphill fight even if a majority of Yahoo shareholders supported the deal. With the hurdle set at 50.1% of the voting shares, Microsoft has a much better chance of getting Yahoo's board fired.

• Whoever set up Yahoo's board election structure blew it (at least if the goal is to protect the jobs of existing management and board members). Most board elections are staggered, so an acquirer like Microsoft can't oust the whole board in one go. Yahoo's entire board is re-elected every year, however, which gives Microsoft the chance to get everyone sacked at once. (From the perspective of shareholders, this system is actually great--much more control).

• By law, Yahoo has to hold the shareholder meeting by July 12* (13 months from the last one), or Microsoft can sue to force it to hold one. This legal process, however, could still take 60-90 days, so if Yahoo really wants to stonewall, the meeting might not be held until September. *(This post originally said "June 12")
  

Going hostile would still be an ugly process, especially for Yahoo.

It is also not too early to start talking about Yahoo's financial performance in Q2: Yahoo narrowly made its first quarter, but reports from Microsoft, CNET, and even Yahoo suggest that the display market is deteriorating. It's not inconceivable that Yahoo could miss Q2, which would shift the balance of power strongly back to Microsoft. Even if Microsoft chooses not to go hostile but to walk away, therefore, it's possible Yahoo might be available later this year at a much lower price.

See Also:
Next Move in the Microsoft-Yahoo Battle? Wall Street and SAI Readers Place Their Bets
How Does a Hostile Takeover Work, Anyway?