All Things Digital

Carl Icahn and Yahoo. Could it be any more perfect? Icahn specializes in shaking up companies suffering from critical failures in oversight and leadership. Yahoo (YHOO) is the very definition of that. So it’s no surprise to hear that the billionaire investor has amassed roughly 50 million Yahoo shares in anticipation of a proxy fight to nominate new directors at the company’s annual meeting this summer.

If there’s anyone that can strong-arm Yahoo back into merger negotiations, it’s Icahn. He has forced a number of companies to face unpleasant realities that they would have otherwise preferred to avoid. That said, the unpleasant reality in this particular case is no longer on the table. But it may not yet have walked so far away that it can’t be dragged back to it.

Said S&P Internet analyst Scott Kessler: “If I were an activist, the first call I’d make would be to Microsoft (MSFT) and make sure that offer of $33 would still be available.” Best make that call soon too. The deadline for nominating new Yahoo directors is Thursday.

Microsoft (MSFT) has withdrawn its bid for Yahoo (YHOO), spanked its CEO in a stink-bomb of a public letter, disavowed plansfor any future acquisitions, and disbanded the slate of dissident directors it had lined up should it have decided to go forward with a hostile proxy bid for the company.

But if Yahoo, beaten into submission by irate investors, should suddenly come crawling back to the now empty negotiating table, Microsoft might indulge it, if only for a moment. For now, it’s busy with what Microsoft’s Chief Research and Strategy Officer Craig Mundie refers to as “Plan B.”

“The market may wish that the Yahoo deal may come back together, but Microsoft at least at this point assumes it’s over,” Mundie told Reuters. “Yahoo could always come back again and say, Please buy us for $33 (a share), and I’m sure we might reconsider it, but we’re not assuming that’s going to happen.”

Seems Microsoft, like Yahoo CEO Jerry Yang, is more than willing to listen if the company has anything new to say. And it’s not even facing any shareholder lawsuits …

Get this. Yahoo (YHOO) didn’t accept Microsoft’s (MSFT) offer of $33-per-share, because it didn’t know Microsoft had offered $33-per-share. This according to people close to Yahoo, who claim that Yahoo only learned Microsoft was willing to raise its bid in Microsoft CEO Steve Ballmer’s kiss-off letter to Yahoo CEO Jerry Yang. “We did not know what the offer was,” said one.

Meanwhile, another source close to Yahoo claims Microsoft has mischaracterized the negotiations between the two companies. “It is simply factually incorrect to make it seem as though we weren’t actively engaged in robust negotiations,” he told CNBC, stressing that Yahoo had embraced its fiduciary responsibilities, not shirked them as Microsoft would suggest. “Microsoft is lying,” he said. “How much communication do they want? They were upset because we wouldn’t accept a low-ball bid.”

But perhaps not as upset as Yahoo shareholders may be having just watched $14 billion evaporate into thin air because the company’s board suddenly claims not to have known what Microsoft’s offer was. You can almost hear the shareholder lawsuits being written. Said Stuart Grant, managing director at Grant & Eisenhofer, a law firm that specializes in bringing investor lawsuits: “I think it’s pretty hard for the Yahoo board to turn down $33 when they’ve shown no ability to turn around their stock price. There’s going to be breach-of-fiduciary-duty lawsuits, and I must tell you they are looking pretty good right now.”

“There’s a reason why we’re the only fortune 500 company with an exclamation point at the end of our name,” Yahoo CEO Jerry Yang said yesterday. “And now is the time to demonstrate what that exclamation point stands for.”

Today investors are doing just that. Sadly for Yang, it’s with criticisms and epithets, not calls to arms. Seems Yahoo (YHOO) investors’ view of what that exclamation point stands for post-Microsoft (MSFT) differ just a wee bit from Yang’s. What follows is a selection of reader comments on Yahoo CEO Jerry Yang’s “OK, So Now What?” blog post:

• Dear Mr. Yang, You had the opportunity to provide your shareholders and dying company with a somewhat respectable exit. A 70% premium sat in your lap and you had the ARROGANCE to ask for more.

• I don’t doubt that the pro-Microsoft crowd is celebrating right now. I’ll bet no one in Redmond wants to go through the pain of integrating with a company that has undergone an engineering talent-exodus and is becoming irrelevant in its core technologies. So as a Microsoft shareholder, thank you for acting in my best interests. Had you accepted Microsoft’s offer it would most certainly have crippled Ballmer and company.
• Hi Jerry, Nice job. … Now will you please buy my 500 shares at $31. I mean it’s a great deal for you since your stock is worth $37 as you say.
• How are you going to turn this aging hippy around? How about coming out and announcing Yahoo’s new strategy. You can start by appointing Sue Decker CEO.

There’s a reason why we’re the only Fortune 500 company with an exclamation point at the end of our name, and now is the time to demonstrate what that exclamation point stands for.”

–Yahoo CEO Jerry Yang

The market is finally having its say about the collapse of the Microsoft-Yahoo deal and its words are far from kind. Shares of Yahoo (YHOO) plunged some 21% in premarket trading this morning after Microsoft (MSFT) abandoned its takeover bid, wiping out about $8.7 billion of the company’s market value. Yahoo’s current premarket price is about 30% below Microsoft’s final offer of $33 a share, which the company deemed inadequate.

Meanwhile, investors are eyeing the market’s opening with a dark, albeit bemused, cynicism–as well as a little wish-it-were-so fancy. From the YHOO message boards this morning …

Fed Opens Yahoo Lending Facility

In response to recent events [the] Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a Yahoo Lending Facility (YLF) to avoid significant stock market disruption and to support Yahoo Inc. shares. Yahoo Inc. and its authorized agents will be able to borrow from the facility to support stock price.

This facility will be available for business on Monday, May 5. It will be in place for at least six months and may be extended as conditions warrant. The interest rate charged on the credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

In addition, Yahoo Inc. shareholders who are unable to sell their shares at or above Friday, May 2 closing price, will be able to swap Yahoo shares for the U.S. Treasuries at the set price of $29.70 per share.”

UPDATE:

A few moments after market open, Yahoo is down 17.2% to $23.79. Microsoft is up a little over 2% to $29.83.

Sen. Ted Stevens was right: The Internet is not a big truck. It’s “a series of tubes”–tubes that can be filled to capacity by “enormous amounts of material.” And, according to AT&T, that’s going to happen about two years from now.

In remarks at the Westminster eForum on Web 2.0 this week in London, Jim Cicconi, vice president of legislative affairs for AT&T (T), said the Internet will hit its capacity in 2010. “The surge in online content is at the center of the most dramatic changes affecting the Internet today,” Cicconi said. “In three years’ time, 20 typical households will generate more traffic than the entire Internet today. We are going to be butting up against the physical capacity of the Internet by 2010.”

Clearly, some bigger tubes are in order here–$55 billion worth of them, according to Cicconi, who was quick to note that it will be companies like AT&T footing the bill for them. “There is nothing magic or ethereal about the Internet–it is no more ethereal than the highway system,” he said. “It is not created by an act of God, but upgraded and maintained by private investors.”

Ah yes, private investors. Like the ones who promised in the mid-1990s to provide fiber-optic connections to millions of households across the country in exchange for some $200 billion in tax cuts? The ones who never delivered on that promise, content to pocket direct tax credits of, on average, $2,000 per subscriber, without fulfilling their end of the bargain? Those investors?