Yahoo tells Icahn that its own board knows best

by James Niccolai

May 15, 2008 —

Yahoo has responded to investor Carl Icahn's threat
to take control of Yahoo's board and force it back to the negotiating table
with Microsoft. The search company said Icahn's proposal shows "a significant
misunderstanding" of how it handled Microsoft's offer, and argued that
Yahoo's current board remains "the best and most qualified group"
to handle its affairs.

In a
letter to Yahoo made public earlier Thursday, Icahn said he planned to nominate
10 candidates to replace the incumbent directors on Yahoo's board. He argued
that Yahoo was wrong to reject Microsoft's offer to buy the company for $33
per share, and said he hopes to install a new board at Yahoo's shareholder meeting
in July that will resume talks with Microsoft.

Later in the day Yahoo released its response
to Icahn, signed by board chairman Roy Bostock.

"Unfortunately, your letter reflects a significant misunderstanding of
the facts about the Microsoft proposal and the diligence with which our board
evaluated and responded to that proposal," the company wrote. "A fair-minded
review of the factual record leads to one conclusion: that Yahoo!'s ten-member
board, comprised of nine independent directors along with Yahoo CEO Jerry Yang, remains the best and most qualified group to maximize value for all Yahoo
stockholders."

The letter describes the negotiations with Microsoft in detail, in a bid to
show that Yahoo took the offer seriously. It says it would not be in the best
interests of Yahoo's shareholders for Icahn to nominate a slate of directors
"for the express purpose of trying to force a sale of Yahoo to a formerly
interested buyer who has publicly stated that they have moved on.

"Please may I remind you that there is currently no acquisition offer
on the table from that company or any other party," the letter states.
"That said, we have been crystal clear in our stance that we have been
and remain willing to consider any proposal from any party including Microsoft
if it offers our stockholders full and certain value."

Microsoft announced its $44.6 billion bid for Yahoo on Feb. 1, but it walked
away from the deal on May 3 after the two companies failed to agree on a price.
Microsoft eventually raised its offer to $33 per share, or by about $5 billion,
but Yahoo's board wanted $37 per share.

Icahn, a billionaire investor who last year pressured Motorola to spin off
its mobile-phone division, has bought up 59 million Yahoo shares since Microsoft
walked away from the deal and hopes to buy a further $2.5 billion of Yahoo stock.
He argued Thursday that Microsoft's offer of $33 per share is "obviously"
superior to Yahoo's prospects as a stand-alone company, and said "a number
of shareholders" have asked him to launch the battle for Yahoo's board.

"I am perplexed by the board's actions," he wrote. "It is irresponsible
to hide behind management's more than overly optimistic financial forecasts."

Yahoo stuck to its guns and insisted again that Microsoft's offer undervalues
the company. It said its board has met more than 20 times to discuss Microsoft's
offer and other alternatives. It said it solicited input from shareholders,
and that "the senior-most management" from both companies met seven
times in person to discuss the deal.

On May 2, Yahoo's board instructed Yang to tell Microsoft that Yahoo was prepared
to be sold for $37 per share, provided that Microsoft could show it was reasonably
certain it could close the deal without running into regulatory issues.

"This was communicated to Microsoft in-person at a meeting in Seattle
on May 3rd. With Microsoft's offer at $33 and Yahoo's counter-proposal at $37,
Microsoft elected, within hours, to walk away from the negotiating table and
informed us that they were 'moving on,' having never engaged further on price
or any of the key non-price deal terms."

The letter concludes that Yahoo is open to a deal "with Microsoft or any
other party" for the right price, and that its own board can best steer
the company moving forward.

"We look forward to a productive dialogue," it concludes, anticipating
a response from Icahn.

IDG News Service