All Things Digital

Can a search-advertising alliance between Yahoo and Google possibly pass regulatory muster? We may soon find out.

Now that investor-tormentor Carl Icahn has filed a proxy slate to unseat Yahoo’s board with the intent, one way or another, to push the company back into merger negotiations with Microsoft (MSFT), an obviously panicked Yahoo (YHOO) is scrambling to pull together a search-ad deal with Google (GOOG).

The possibility of a search-ad outsourcing arrangement between the two companies was, in part, what caused Microsoft to lose its appetite for Yahoo. Could it cause Icahn to lose his as well? Seems doubtful. Even if, as sources close to the situation tell the New York Post, the deal is the sort of open-to-all-comers arrangement Yahoo and Google hope would pass regulatory scrutiny. Under its terms, a real-time auction system would be used to select the most lucrative ads for a given search query from among those sold by Yahoo, Google or anyone else that cares to participate. Structured in this way, the deal might not, as Microsoft has claimed in the past, consolidate over 90% of the search-advertising market in Google’s hands and draw the ire of antitrust regulators.

Instead it might consolidate, oh say … 89.99% in the search sovereign’s hands. Said Kevin Lee, chairman of search engine marketing firm Did-It, “Given the way the ecosystem is put together now, Google would probably be the winner in a vast majority of cases.”

Looks like Yahoo’s (YHOO) boardroom blitz is on. Billionaire investor Carl Icahn has decided to move forward with a proxy fight to oust Yahoo’s entire board in favor of one more amenable to merger negotiations with Microsoft (MSFT).

“It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer,” Icahn wrote in a letter to Yahoo’s leadership. “I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet.”

So strongly, in fact, that Icahn–who owns 59 million Yahoo shares–has asked the Federal Trade Commission for permission to buy as much as $2.5 billion more of the company’s stock and has assembled a 10-member alternative board slate. Among the directors nominated, Icahn himself, his lieutenant Keith Meister, former Viacom Inc. (VIA) Chief Executive Frank J. Biondi Jr., and Dallas Mavericks owner Mark Cuban (Mark Cuban?!?).

And lest there be any doubt that Icahn was gunning for anything less than a referendum on Microsoft’s takeover offer, the financier concluded his letter with a parting word of advice: “I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.”

What’s not yet clear is whether Microsoft is even willing to resume merger talks. Though it’s certainly possible that Microsoft CEO Steve Ballmer and Icahn have been having some back-channel chats about the issue recently …

Yahoo and Microsoft are both trading higher on the news.

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.

If this Yahoo-Microsoft deal debacle becomes any more ludicrous, NBC will be able to use it as a plot line in the next season of “The Office.”

First Yahoo (YHOO) insiders claim that the company didn’t know Microsoft had raised its bid for the company to $33-per-share. And now Yahoo CEO Jerry Yang is telling anyone who will listen that Yahoo remains open to a deal with Microsoft. “If they have anything new to say, we would be open,” Yang told Reuters. “I am more than willing to listen. There are some that are disappointed that a deal was not reached and there are others that are probably pleased we didn’t do the deal at $33. The bottom line is we went in there to have honest and good-faith negotiations and they walked away. We didn’t walk away.”

Yang gave a similar story to the New York Times, again blaming Microsoft (MSFT) for the failed negotiations. “They chose to walk away after we put a price on the table, and they didn’t want to negotiate,” he said of Microsoft. “From my perspective, we were open all along to selling to Microsoft. We just feel Yahoo, either standalone or with Microsoft, is worth more than what they put on the table.”

Yang’s account, of course, conflicts with that of Microsoft and its CEO Steve Ballmer, who insist the software giant attempted to negotiate in good faith and Yahoo settled on a price of $37 a share and ultimately refused to budge.

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.”

Microsoft (MSFT) and Yahoo (YHOO) have apparently taken some of their merger negotiations out of the press and into the boardroom. The two companies are said to be in “last-ditch” negotiations to reach a friendly deal, despite threats from the software giant this week that it would launch a hostile proxy bid or walk away from the deal entirely.

DealBook, citing a person involved in the talks, says Microsoft has upped its offer by several dollars a share and refers to the fresh talks as an “enormous breakthrough.” That said, the person also cautions that talks could still be postponed or collapse entirely.

Oh, one last thing: a deal is still not imminent. My God, what a fascinating new development.

Anyway, it seems Microsoft’s sweetened offer isn’t yet sweet enough for Yahoo, which worries that the merged companies would be forced to divest their email and instant-messaging assets by antitrust regulators. “We need a lot of reason to do the deal, because it could be very bumpy once we agree,” a Yahoo insider told BoomTown. “How damaged would Yahoo be if it did not go through or if important pieces of Yahoo had to be separated from the company?”

Mediated contract negotiations between the Writers Guild of America and Hollywood producers broke off last night setting the stage for a writers’ strike that could leave sitcoms without scripts, late-night shows without topical monologues and television viewers with an even more limited choice of broadcast dross than they have now (”America’s Next Top Model,” “Dancing With the Stars” and “Farmer Wants a Wife” on the CW! How will I ever decide?)

Seems writers and producers still can’t agree on pay schedules for content distributed on the Internet and via other digital media. Or rather, the Alliance of Motion Picture & Television Producers is a bit too attached to the lousy DVD deal it convinced the writers to agree to 20 years ago, which gives writers, directors and actors a combined 20 cents for each DVD sale–30 cents less than the sum given to manufacturers of DVD packaging material.

“The companies refused to continue to bargain unless we agree that the hated DVD formula be extended to Internet downloads,” the guild said in a statement. “[W]e presented the AMPTP with a comprehensive package of proposals that included movement on DVDs, new media, and jurisdictional issues. We also took nine proposals off the table. The companies returned six hours later and said they would not respond to our package until we capitulated to their Internet demand. After three and a half months of bargaining, the AMPTP still has not responded to a single one of our important proposals.”

Too bad for the writers then. Because AMPTP president Nick Counter says increasing the DVD formula (a huge money-maker for the studios) is a nonstarter. “We want to make a deal,” he told WGA negotiators. “We think doing so is in your best interests, in your members’ best interests, in the best interests of our companies and in the best interests of the industry. But, as I said, no further movement is possible to close the gap between us so long as your DVD proposal remains on the table.”

Way to extend that desiccated olive branch, Nick. As John Scott Lewinski notes over at Wired, the producers offering to settle if the Guild drops all that is like the Galactic Empire telling Luke Skywalker, “OK, we’ll surrender … but only if we get to keep the Death Star.”