All Things Digital

If, as Carl Icahn claimed this morning, Yahoo’s board has acted irrationally and lost the faith of shareholders, the Internet company apparently sees no point in acting rationally to regain it. In a letter to the investor-agitator, Yahoo (YHOO) Chairman Roy Bostock dismissed Icahn’s threat of a proxy battle nearly as brusquely as it turned away Microsoft (MSFT) (the press release bullet alerts below summarize the letter quite nicely).

According to Bostock and Co., Icahn just doesn’t get it (and, to be fair, there are some who agree). “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,” Bostock wrote. “A fair-minded review of the factual record leads to one conclusion: that Yahoo’s 10-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. Conversely, we do not believe it is in the best interests of Yahoo stockholders to allow you and your hand-picked nominees to take control of Yahoo 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.”

Well, no acquisition offer that Bostock knows of, anyway. Microsoft may not be finished with Yahoo yet. “We think Microsoft may still be interested [in Yahoo] as, in our view, it needs Yahoo to compete vs. Google,” wrote UBS analyst Ben Schachter in a research note today. “We continue to think a deal will be reached.”

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.

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 …

A Blockbuster (BBI) acquisition of Circuit City (CC) may not be as much of a long shot as it first appeared. This morning the electronics chain, which has been vocal in its skepticism of Blockbuster’s ability to finance such a deal, finally opened its books to the video rental outfit.

Why the sudden turnabout? Two words: Carl. Icahn. Apparently, the billionaire investor–Blockbuster’s largest shareholder–has promised to purchase Circuit City if Blockbuster is unable to finance the $1.3 billion deal. In a statement, Circuit City Chairman and CEO Philip Schoonover made it quite clear that Icahn is about the only thing Blockbuster has going for it in this particular gambit and cautioned against reading too much into the sudden opening of its books. “While the Circuit City board has confidence in the company’s ability to successfully implement its turnaround plan and generate shareholder value, we believe that we can best serve the interests of our shareholders by exploring all possible alternatives to enhance shareholder value,” Schoonover said. “Let me be clear that our decision to allow Blockbuster and Carl Icahn to conduct due diligence should not be taken as an indication that the board has completed its review of the Blockbuster proposal, that the board has taken a position on the company’s value or that it has settled upon a particular strategic course of action.”

Not yet, at least. In that same statement, the retail chain said it has hired Goldman Sachs & Co. to explore strategic alternatives, which may include a sale of the company. Seems Circuit City’s board may not have as much confidence in the retailer’s turnaround plan as Schoonover would suggest. And why should it? Circuit City has been posting losses amid declining sales for some time now. And though it has restructured itself a bit, it continues to hemorrhage market share to Best Buy and Wal-Mart et al. That said, selling itself to another struggling company with an outdated business model hardly seems a good solution to such problems. It’s like two drunks propping each other up on the dance floor.

July 3 will be “Independence Day” for Yahoo (YHOO) shareholders (”Independence day. Heh. “Enjoy The Shareholder Meeting. It May Be Your Last …“). So says Eric Jackson, president of Ironfire Capital, who is doing his damnedest to recruit an alternate slate of directors to present at Yahoo’s annual meeting on that day.

“It’s hard to believe the board could let this happen,” Jackson told the Associated Press. “I think they completely misconstrued the situation and thought, ‘Microsoft is rich, so let’s soak them.’ They were bluffing all the way and got caught.”

If Jackson hopes to make good on his threat, he’d best get cracking. Shareholders have only 10 days from the announcement of Yahoo’s annual meeting to nominate directors and Yahoo did just that this past Monday. That means Jackson has until May 15 to pull his slate together. Perhaps he can just borrow Microsoft’s (MSFT) …

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.

So after months of negotiations and posturing, Microsoft (MSFT) has given up its efforts to buy Yahoo. And according to Yahoo CEO Jerry Yang, that’s good news.

Indeed, people close to Yahoo (YHOO) said that Yang and Co. greeted the withdrawal of Microsoft’s bid as a victory, with a celebratory exchange of high-fives. In a hopeful statement posted to the Yahoo blog in the wake of Microsoft CEO Steve Ballmer’s stink-bomb of a kiss-off letter, Yang looked toward the future with a beatific, albeit vacuous, grin stretched ear-to-ear.

… Has this experience changed us? Of course, it has. We’ve emerged a stronger, more focused company with an even greater sense of purpose. I’m so proud of how this company has come together, put the noise aside, and showed the world that we have the resolve and determination to thrive in challenging times.

… So, what’s next? With Microsoft’s withdrawal, we’ll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders. We’ll continue to execute on our plan — making your Internet experience as personal, relevant, open and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo! in a way that developers dream of. And, we’ll also continue to pursue strategic opportunities that position us for long-term success.”

Yeah, good luck with that come tomorrow, Jerry. My guess is by market close, you’ll be “focusing your energy” on damage control for YHOO’s new 52-week low. Perhaps it’s time for another 100-day review of the company, seeing how ineffective that last one was. At this point, it seems the only so-called “sacred cow” you’re going to slaughter is your company’s share price …

Here’s the full text of Microsoft (MSFT) CEO Steve Ballmer’s letter to Yahoo (YHOO) CEO Jerry Yang.

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:

After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo.

I first want to convey my personal thanks to you, your management team and Yahoo’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo has not moved toward accepting our offer. I first called you with our offer on Jan. 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62% premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70% compared to the price at which your stock closed on Jan. 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

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Microsoft’s walked. As first reported by BoomTown, Microsoft (MSFT), which had threatened to abandon its hostile bid for Yahoo (YHOO) a number of times over the past month, did just that on Saturday.

The company confirmed to BoomTown that merger talks with Yahoo, which began in earnest Friday, collapsed Saturday afternoon when they could not agree on a price. Sources tell BoomTown that Yahoo, which had been demanding $40 a share for a friendly deal, recently lowered that price to $37. To Microsoft, however, that price was just another of Yahoo’s “unrealistic expectations.” Unwilling to meet it, it held firm at $33. End result: no deal.

“We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners,” Ballmer said in a letter to Yang. “I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table. But clearly a deal is not to be.”

Ballmer also said that Microsoft has no plans to take Yahoo to the mat in a proxy fight. “Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders,” Ballmer stated. “This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft. … Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.”

So … any bets on how long it will take Yahoo shares to hit a new 52-week low on Monday?