Yahoo Rejects Microsoft, Icahn Bid to Split Company

Yahoo Rejects Microsoft, Icahn Bid to Split Company

July 13 (Bloomberg) -- Yahoo! Inc. rejected a proposal from Microsoft Corp. and billionaire investor Carl Icahn that would have broken up the Internet company, saying they were trying to ``coerce'' officials into selling assets.

Under the plan, Yahoo's current board and top management would be replaced. Microsoft would buy Yahoo's search business and leave Icahn with the rest of the Sunnyvale, California-based company, an ``odd and opportunistic alliance'' that doesn't have the best interests of shareholders in mind, Yahoo said.

``Carl Icahn and Microsoft presented us with a `take it or leave it' proposal,'' Chairman Roy Bostock said in a statement. ``It is ludicrous to think that our board could accept such a proposal. We will not be bludgeoned into a transaction that is not in the best interests of our stockholders.''

The decision steps up pressure on Yahoo Chief Executive Officer Jerry Yang to prove his alternative deal, a partnership with Google Inc., can deliver better returns. Icahn has proposed a set of directors and is challenging Yang for control of the board at an Aug. 1 meeting.

Yahoo, owner of the No. 2 Web search engine after Google, said it was given 24 hours to weigh the latest proposal, made Friday evening. Some of the ideas, including spinning off the Asian investment assets and returning cash to shareholders, are items the board is already considering.

No Negotiating

Yahoo ``has shown no flexibility in separating the search engine from the rest of the company,'' Andrew Frank, an analyst at industry researcher Gartner Inc. in New York, said today in an interview. ``Microsoft is sincere in that it wants to make a deal and Yahoo sincerely thinks it is undervalued.''

Microsoft and Icahn didn't want to negotiate, Yahoo said. Directors again offered to sell the entire company for at least $33 a share, the last price the software maker put out in the six months of on-and-off talks. An outright acquisition would be much more ``straightforward,'' Yahoo said. A deal for the whole company could be negotiated before Aug. 1, Yahoo said.

Icahn didn't return a call to his home. Microsoft spokesman Frank Shaw declined to comment. The software maker said July 7 it has concluded officials cannot reach any agreement with Yahoo's current board.

Since Microsoft made its original offer of $44.6 billion public Feb. 1, CEO Steve Ballmer tried several proposals to woo Yahoo to expand its Internet-search business and compete with Google in the $41 billion worldwide online advertising market.

Yahoo repeatedly rebuffed the bids, demanding more money. When Ballmer switched to offers for just the search unit, they also were rejected.

Less Complexity

Yahoo, which closed at $23.57 July 11, has dropped 10 percent since June 11, the day before Microsoft said it would end attempts at a transaction. Microsoft fell 20 cents to $25.25 July 11 in Nasdaq Stock Market trading.

Founded more than a decade ago by Yang and David Filo, Yahoo reported eight straight quarters of profit declines before Redmond, Washington-based Microsoft's bid and is now relying on its biggest rival for growth.

Yahoo agreed last month to let Google sell some of the advertisements it runs alongside Internet search results. The agreement has ``superior financial value and less complexity and risk than the Microsoft/Icahn proposal,'' Yahoo said.

The deal would generate as much as $450 million in cash flow in the 12 months after it starts, Yahoo said, because Google generates more money from each search.

Tricky Separation

Microsoft and Icahn also sweetened the offer for Yahoo's search business, Yahoo said, without getting into specifics. Microsoft had offered to buy $8 billion in Yahoo shares for $35 each and the search business for an additional $1 billion.

The two companies also would have struck a long-term search engine partnership guaranteeing Yahoo higher revenue for three years than what it gets from its own ad system.

Still, even with higher guarantees for Yahoo, separating the search business from the unit that sells ``display'' banner advertising and video spots would be tricky, the company said.

There is also risk with the Google arrangement. Federal regulators are expected to begin hearings this week on whether the ad accord between the two dominant Internet search companies is anti-competitive, Google CEO Eric Schmidt said July 10.

Yahoo handled about 20.6 percent of U.S. Internet searches in May, more than twice Microsoft's search traffic, according to researcher ComScore Inc. Google, based in Mountain View, California, accounted for almost two-thirds.

Icahn is seeking to build momentum ahead of the Yahoo shareholder meeting next month, aiming to replace Yahoo's board with nine nominees including himself. Icahn has already won backing from holders including T. Boone Pickens, chairman of BP Capital LLC, and hedge-fund manager John Paulson.

``It's hard to gauge the loyalty of the shareholders at large to the board and their frustration that Yahoo has not availed itself of any offers,'' Gartner's Frank said. ``The next step will be the August board meeting, and we'll have to wait to see what kind of theatrics go on.''

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