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Yahoo, Icahn Declare Cease-fire in Proxy War

Yahoo-Icahn

After two months of bitter public sparring and mutual accusations, Yahoo has made peace with Carl Icahn, the billionaire investor who has been lobbying to take control of the company's board of directors and force a transaction with Microsoft.

Yahoo (NASDAQ: YHOO) today announced a settlement with Icahn, who said he will give up his proxy fight to oust all nine of Yahoo's incumbent board members at the company's annual meeting Aug. 1.

Under the agreement, Icahn himself will take a seat on Yahoo's board, which will be expanded to 11 seats following the meeting to accommodate two members of Icahn's recommendation.

The détente comes as the odds appeared to be getting longer for Icahn. Yahoo has lately been on the offensive against Icahn, warning shareholders that he had no credible plan to lead the company and accusing him of acting out of short-term financial interest. On Friday, Legg Mason Chief Investment Officer Bill Miller said he would support Yahoo's board, voting his firm's roughly 60.7 million shares, or 4.4 percent of the company's outstanding shares, in favor of the incumbents.

Icahn began buying up shares of Yahoo and talking about engineering a sale to Microsoft (NASDAQ: MSFT) when talks between the two companies broke down in May. While he has not backed down from that goal, the conciliatory tone of today's announcement was in marked contrast to the pitched rhetoric of his recent comments.

"I am very pleased that this settlement will allow me to work in partnership with Yahoo's board and management team to help the company achieve its full potential," Icahn said in a statement. "While I continue to believe that the sale of the whole company or the sale of its search business in the right transaction must be given full consideration, I share the view that Yahoo's valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders."

The truce between Icahn and Yahoo could make a transaction with Microsoft a more distant possibility.

"We believe that a deal for Microsoft to acquire Yahoo's search business or the entire company will become less likely, and that Microsoft will aggressively build its online service business through smaller acquisitions and organic growth," Standard and Poor's analyst Scott Kessler wrote in a research note.

Icahn, who holds slightly less than 5 percent of Yahoo's stock, will join Chairman Roy Bostock and CEO Jerry Yang on the company's board under the agreement. Icahn has repeatedly accused Bostock and Yang of failing to negotiate with Microsoft in good faith and had vowed to replace Yang as chief executive if he won the board.

In their statement, Bostock and Yang both expressed relief that the strain of the proxy battle was over.

"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."

Icahn will take his seat on the board from Activision Blizzard CEO Robert Kotick, who had indicated to Bostock he planned to step down from the board once the proxy contest was resolved.

In addition to Icahn and the eight incumbents, Yahoo said it plans to appoint two new members to the board. They will be chosen from Icahn's recommendations, which includes his previously announced slate and Jonathan Miller, who previously served as chairman and CEO of AOL, and has been a potential successor to Yang.

In a research note, Jefferies analyst Youssef Squali suggested that Miller's nomination "positions him as potentially the next Yahoo CEO in case a deal with Microsoft is not reached and Yahoo fails to execute against its aggressive growth plans," he said.

Squali called Miller's nomination an "insurance policy" for Icahn, giving him a tough and experienced Internet executive who could replace Yang if the company continues to sputter. As chief executive, Miller could be counted on to move aggressively to make deals and spin off assets, Squali said

Icahn had recently been negotiating with Microsoft in an attempt to revive talks about a transaction with Yahoo. Earlier this month, Microsoft and Icahn presented Yahoo with a proposal to buy its search engine with a minimum revenue guarantee.

Yahoo rejected that proposal, claiming that it could not deliver a better value than the ad deal it recently signed with Google (NASDAQ: GOOG). That agreement, which the companies voluntarily put on hold pending a regulatory review, could still be nixed if Yahoo strikes a deal with Microsoft.

Yahoo reports its second-quarter earnings tomorrow evening, and many analysts are expecting a fall to the low end of the company's guidance.