Yahoo settles with Icahn to avert control battle

Yahoo! Inc. gave three director seats to billionaire activist Carl Icahn, dividing the board as the Internet company struggles to increase sales growth after spurning takeover offers.

Icahn will join the board, which will expand to 11 members, and current director Robert Kotick will leave, Yahoo said today in a statement. The other two seats will be filled from a list of nine candidates backed by Icahn, which now includes former AOL Chief Executive Officer Jonathan Miller.

The agreement puts Icahn a step closer to forcing Yahoo CEO Jerry Yang to accept a combination. While the pact leaves Yang in his job, even after Icahn had pressed for his removal, it places a voice for change on the board. That makes it tougher for Yang, 39, to put off a deal if he can't quickly turn around Yahoo, which has repeatedly snubbed advances from Microsoft Corp.

"Icahn clearly is agitating for change at Yahoo -- this guy is a deal person," Michael Shinnick, a portfolio manager at First Source Bank in South Bend, Indiana, told Bloomberg Television. "With him on the board they're going to be much more receptive and reasoned in terms of considering a Microsoft offer."

Investors weren't so much impressed by Yahoo officials as they were concerned about the alternative, Sanford C. Bernstein & Co. analyst Jeff Lindsay said in an interview.

Shareholders didn't want to sell the search business to Microsoft and leave an "unknown" slate of directors running the rest of the company, as Icahn had proposed, he said. Legg Mason Capital Management Chairman Bill Miller threw his support behind Yang three days ago, undercutting Icahn's bid for control.

Bigger Holders Balked?

"Icahn didn't have the vote," said New York-based Lindsay, who expects Yahoo shares to perform in line with the market. "The large institutional shareholders were more in favor of keeping the current management structure" at the meeting Aug. 1.

Sunnyvale, California-based Yahoo fell 61 cents, or 2.7 percent, to $21.84 at 1 p.m. New York time in Nasdaq Stock Market trading. Microsoft declined 28 cents to $25.58.

With Icahn, 72, as a director, Yang may face more internal pressure to reignite the company's growth or sell to Microsoft. The company's second-quarter results tomorrow may show sales growth of 10 percent to $1.37 billion, excluding revenue passed on to partner sites, according to a Bloomberg survey of analysts. That compares with 11 percent growth a year ago and 14 percent in the first quarter.

Yahoo, which posted eight straight quarters of profit declines before the Microsoft bid, had argued that the earlier offers didn't reflect its value and growth prospects.

Possible Union

"This makes it more likely that these two companies will get together," said Larry Haverty, an associate portfolio manager at Gamco Investors Inc. in Rye, New York. "The tolerance of this continual turnaround at Yahoo not working is going to decrease." His firm held Yahoo and Microsoft shares among its $29 billion in assets under management as of March 31.

Icahn owns about 5 percent of Yahoo's shares, making him the second-biggest institutional investor, according to data compiled by Bloomberg. Legg Mason, the third-biggest, said last week that it would back Yahoo's current board in an Aug. 1 vote. Miller said he would prefer the two sides forge a deal instead of pursuing a "disruptive proxy contest."

Before the agreement, Icahn had sought to replace Yang, saying he didn't have the operational expertise to run the company. The investor helped hasten the departures of executives at companies such as Blockbuster Inc. and Motorola Inc., whose CEOs stepped down after Icahn's lobbying efforts.

Microsoft spokesman Frank Shaw and Icahn representative Susan Gordon didn't immediately respond to calls seeking comment. Yahoo representative Brad Williams declined to comment.

Status Quo?

Not everyone is convinced a deal is likely. Icahn's failure to win a majority of board seats may reduce the chances of a combination with Microsoft, with Yahoo operating largely as before and Yang attempting to revive profit growth on his own, Needham & Co. analyst Mark May said. The New York-based analyst advises investors to hold Yahoo shares.

The two sides traded barbs as late as last week, suggesting a deal wasn't likely. Yahoo accused Icahn of trying to "coerce" management into a sale and called his plan to split the businesses "ludicrous." He retaliated by saying Yahoo tried to "distort, omit and twist events and facts."

Microsoft, based in Redmond, Washington, first bid to take over all of Yahoo for $31 a share, or about $44.6 billion, six months ago. Yahoo rebuffed that offer and a sweetened bid of $33, prompting Microsoft to abandon its pursuit in May.

Google Fight

Icahn entered the fray after talks collapsed, saying the two need each other to take on Google Inc., which handles almost three times as many U.S. Internet searches as Yahoo. Spurred by Icahn, Microsoft began trying to buy Yahoo's search business, with Yang rejecting the latest offer less than 10 days ago.

This year, the activist investor also pushed mobile-phone maker Motorola to include him in its board, along with two of his nominees. Last July, Blockbuster Chief Executive Officer John Antioco agreed to step down after Icahn, one of the video-rental chain's largest shareholders, led a fight to cut his pay.

The investor, who has earned billions as a corporate raider, led the 1985 takeover of Trans World Airlines Inc. He made $893 million trying to break up RJR Nabisco Holdings Corp. in the 1990s.