All Things Digital

Differences of opinion are what make the financial markets go round. And it would appear that we have some strong ones among the proxy services advising Yahoo shareholders on how to vote at the upcoming election of Yahoo’s board members. This week Egan-Jones Proxy Services threw its support behind all eight board members up for re-election at Yahoo’s Aug. 1 shareholder meeting, arguing that all are qualified for the job.

Glass Lewis & Co., however, does not share that opinion. In a report issued Wednesday, the proxy advisory firm recommended getting rid of three Yahoo (YHOO) directors: Chairman Roy Bostock and directors Ron Burkle and Arthur Kern. All three sit on the company’s compensation committee, of which Glass Lewis seems to take a very dim view. From the Glass Lewis report:

Nominees BOSTOCK, BURKLE and KERN all served as members of the compensation committee in fiscal year 2007, during which time the Company paid more compensation to its top executives but performed worse than its peers. The members of the compensation committee have the responsibility of reviewing all aspects of the compensation program for the Company’s executive officers. It appears to us that members of this committee have not effectively served shareholders in this regard. Further, we are concerned that the committee approved the adoption of the Change in Control Severance Plans with potential brobdingnagian payouts, potentially discouraging a takeover.

Additionally, Mr. Bostock serves as chairman of the nominating and corporate governance committee. At last year’s annual meeting, Messrs. Bostock, Burkle and Kern each received over a 31 percent vote against their re-election. In our 2007 Proxy Paper, we recommended voting against each of these directors due to the Company’s excessive compensation practices. We believe this raises concerns about whether the nominating and corporate governance committee is fulfilling its duty to shareholders, considering that all three directors remain on the board. Moreover, we find it disconcerting that Messrs. Bostock and Kern continue to serve on the committee charged with overseeing governance issues for the Company.”

It’s worth noting, as well, that Glass Lewis was not without concerns about Carl Icahn. In its report, the advisory service noted:

Carl Icahn, chairman of Icahn Enterprises G.P. and CEO of Icahn Capital LP, currently serves on a total of seven public company boards. His total number of directorships will expand to eight once he is appointed to Yahoo’s board. We believe that the time commitment required by this number of board memberships may preclude Mr. Icahn from fulfilling his responsibilities to this Company’s shareholders. We believe shareholders should monitor Mr. Icahn’s ability to devote sufficient time and attention to the Company.”

It was supposed to be Yahoo’s big turnaround day, but like so much in the company’s recent history, it fell woefully short. After market close Tuesday, Yahoo posted second-quarter earnings that fell shy of already lowered estimates.

Analysts hadn’t been expecting much, and Yahoo (YHOO) gave them even less. It underpromised and underdelivered.

Net income for the quarter fell to $131 million, or nine cents a share, from $161 million, or 11 cents a share. Analysts had predicted earnings of 10 cents a share, and $1.38 billion in net revenue. “Yahoo!’s transformation gained momentum in the second quarter as we announced new product initiatives and partnerships along with solid financial results,” said Yahoo president Sue Decker, presumably with a straight face. ” … We remain confident that our efforts will lead to a
stronger and more profitable Yahoo!. Notwithstanding a more difficult economic environment than anticipated, and substantial external swirl related to Microsoft, we are on track with our expectations for 2008, both financially and with respect to our customer offerings and product pipeline, which we expect to combine to drive shareholder return in 2009 and 2010.”

Substantial external swirl?

You can almost hear Carl Icahn rubbing his hands together, can’t you?

Yahoo has managed a détente with billionaire backseat driver Carl Icahn. So the question now is this: Can Yahoo manage one with the rest of its shareholders? We’ll find out this afternoon when the company reports second-quarter earnings. Analysts surveyed by FactSet Research expect Yahoo (YHOO) to post earnings of 10 cents a share, and $1.38 billion in net revenue. And that’s not really expecting all that much. So if Yahoo is able to best those estimates, it could go a long way toward convincing investors that the company is in a turnaround and not in decline. It may even convince them that Yahoo’s virtually unattainable three-year growth plans are, perhaps, not quite so unattainable.

That said, Yahoo’s second quarter is more likely to prove soft than not. Certainly, rival and benefactor Google’s own second-quarter results, reported last Thursday, don’t bode well for the company. Google (GOOG) posted profit and sales gains, but its results nonetheless fell short of Wall Street analysts’ estimates, sending shares lower in late trading. Yahoo, of course, isn’t in nearly as good health as Google. If Google fails to impress the street with a respectable quarter, how can the besieged and beleaguered Yahoo do so?

[Image Credit: Byzantin3]

To trust Mr. Icahn and his board is really a bad choice.”

–Yahoo! CEO Jerry Yang, July 9, 2008

Having so persuasively argued that Carl Icahn is a doddering Luddite with no articulated plan for Yahoo other than the company’s sale to Microsoft, Yahoo has taken the logical next step and appointed the activist shareholder to its board of directors.

This morning Yahoo (YHOO) said it has an reached agreement to settle its proxy battle with Icahn. Under the terms of the agreement, the company will appoint the investor to its board along with two other directors from his dissident slate. In exchange, Icahn, who owns about five percent of Yahoo common shares, will abandon his proxy fight for the company.

In a statement, Yahoo Chairman Roy Bostock welcomed the man he’s spent the past few months belittling. “We are gratified to have reached this agreement, which serves the best interests of all Yahoo! stockholders,” Bostock said. “We look forward to working productively with Carl and the new members of the Board on continuing to improve the Company’s performance and enhancing stockholder value. Yahoo! is a world-class company with an extremely bright future, and collaborating together, I believe we can help the Company achieve its ambitious goals.”

Icahn too said he’s happy with the arrangement, though he’d still like to sell Yahoo to Microsoft (MSFT). And now that he’s claimed a seat on Yahoo’s board perhaps he can. Clearly, he’s not the “current Yahoo management” with which Microsoft has said it’s unwilling to negotiate a full purchase.

Well, look who missed analysts’ expectations by a penny. Microsoft. Though the company Thursday reported 18 percent in revenue growth and 21-percent growth in earnings for its fourth quarter, its 32-percent growth in per-share earnings didn’t quite meet Wall Street expectations. Investors wanted per-share earnings of 47 cents. Microsoft (MSFT) gave them 46 cents.

The one-cent discrepancy has played havoc with the company’s share price, knocking it down to near-Yahoo (YHOO) levels. “Clearly, we’re disappointed that our strong financial results are not reflected in our stock price,” Microsoft CFO Chris Liddell told financial analysts during the company’s earnings conference call. “The 18-percent revenue growth rate represents our fastest growth in over a decade [and] we’re confident we can continue to produce double-digit growth.”

Yahoo’s latest broadside against the “Microsoft-Icahn agenda” has struck a chord with a key investor: Legg Mason Capital Management. The firm on Friday threw its support behind Yahoo, saying it will vote its 4.4 percent stake in Yahoo (60.7 million shares) against the slate of dissident directors presented by investor-agitator Carl Icahn. “After consideration of the relevant facts and circumstances and our fiduciary duty to our clients, it is our intention to vote in favor of the slate of directors proposed by the current board,” said Bill Miller, chairman of Legg Mason. ” … We believe the current board acted with care and diligence when evaluating Microsoft’s offers. We believe the board is independent and focused on value creation for long-term shareholders.”

Apparently, Legg Mason (LM) also finds the latest Microsoft-Icahn agenda profoundly unappealing. Still, the investment firm said it remains willing to consider a sale to Microsoft (MSFT), given the right conditions. “If Microsoft wants to acquire Yahoo, it can make the terms and conditions of its offer public,” Miller added. “If Yahoo shareholders support it, I am confident the board of Yahoo will accept it.”

Legg Mason’s vote is an important endorsement for the increasingly desperate Yahoo (YHOO), which today added a massive anti-Icahn button to its homepage in an effort to court shareholder sympathy. Click on it and you’re taken to a vicious critique of Icahn and his intentions for Yahoo that ironically begins with the investor’s own words: “It’s hard to understand these technology companies.” Yahoo then offers proof of that apparent lack of understanding with a helpful chart. Pulled from the company’s 34-page SEC filing today, it shows share prices of 12 of the 15 public companies in which Icahn has involved himself lately in apparent decline.

Google accounted for 77.4 percent of all search engine spending in the second quarter of 2008. This according to Efficient Frontier, which notes that Google claims $1.10 of every new search dollar.

How is that possible? Because advertisers are putting their new advertising dollars with Google (GOOG) and pulling some of their old ones away from the company’s rivals. Yahoo (YHOO) lost $0.09 of every new search dollar in the second quarter. Microsoft (MSFT) lost $0.01.

A dismal state of affairs if you’re Yahoo or Microsoft. That said, allocation of search marketing dollars hasn’t really changed all that much. Google maintained its 77.4 percent share of U.S. search marketing dollars, while Yahoo captured 17.8 percent of spending and Microsoft Live Search maintained its 4.8-percent share.

Oh, happy day! Another letter from Yahoo Chairman Roy Bostock and CEO Jerry Yang!

Yawn …

With its Aug. 1 shareholder meeting fast approaching, Yahoo’s (YHOO) leadership is doing all it can to rally support for its incumbent board of directors. Hence today’s paean to redundancy, which argues once again, and in mind-numbing detail, why the company believes stockholders should beware the “Icahn-Microsoft agenda.”

“Carl Icahn bought his stock two months ago for an estimated average cost of less than $25 per share,” Bostock and Yang wrote. “He is well-known as a corporate agitator with a short-term approach to his investments. … His short-term approach gives Mr. Icahn a strong incentive to strike any deal with Microsoft (MSFT) that enables him to recover his investment and get back his money quickly, even a deal that does not provide full and fair value to you. Is that in the interests of all stockholders? Clearly, it is not.”

The pair offered an equally caustic opinion of investor Microsoft and its intentions.

“Microsoft’s flip-flops and inconsistencies over the past five months are so stupefying that one can only conclude that Microsoft was never fully committed to acquiring Yahoo,” Bostock and Yang wrote. They argued that “Microsoft is more interested in destabilizing a key competitor so that it can either enhance its competitive position or buy our highly valuable search business–and the enormously desirable intellectual property associated with it–at a bargain-basement price.”

Yahoo, says the pair, would much prefer to “sell the entire Company to Microsoft for $33 per share or more if Microsoft will negotiate a transaction that delivers certainty of value and certainty of closing.”

$33 per share? Isn’t that exactly the offer that was refused by Yahoo in early June?

Microsoft (MSFT) and Time Warner (TWX) are finally getting around to finishing up the joint venture talks they began back in … oh, September of 2005. While no transaction is imminent, the two companies are said to be “casually” discussing a possible combination of Microsoft’s online operations and AOL–perhaps even at this very moment. Silicon Alley Insider reports that executives from both companies were scheduled to meet in Seattle sometime today.

Meanwhile, Yahoo (YHOO) continues to pursue its own discussions with AOL. With its annual shareholder meeting fast approaching, the struggling Internet company is scrambling for something, anything, with which to distract shareholders from the travesty of the past few months.

News of developing talks between Microsoft and AOL, and AOL and Yahoo, was first reported in BoomTown on Monday.