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Yahoo Appeals for Investor Support

Proxy fight

Yahoo has again revved up its campaign for investor confidence today, sending out the third letter to shareholders since billionaire investor Carl Icahn announced his proxy war for control of the company.

At Yahoo's (NASDAQ: YHOO) annual meeting on Aug. 1, shareholders will decide whether to re-elect its board, or turn control over to some or all of Icahn's nine dissident directors in the hopes of forcing a transaction with Microsoft (NASDAQ: MSFT).

"Mr. Icahn has made it clear that his only objective is to sell part or all of Yahoo to Microsoft," Yahoo Chairman Roy Bostock and CEO Jerry Yang said in their letter. "That fact, combined with his lack of an operating plan going forward, means that he will have no leverage to negotiate a fair deal with Microsoft. He has set himself up for failure."

The new letter comes as positions have hardened between Yahoo and Microsoft in their stop-start deal talks, with each accusing the other of distorting the reality of their negotiations. With time running short before the annual meeting, Yahoo has come to talk of Microsoft and Icahn as an alliance, telling investors in today's letter that the "Icahn-Microsoft agenda -- as presented to us jointly last week -- will destroy stockholder value."

That plan, which Yahoo received on Friday and rejected the next day, would have involved Microsoft buying Yahoo's search business and offering minimum revenue guarantees over a five-year term, with the option to renew for another five years. Yahoo claimed that it would see a better value through its ad deal with Google (NASDAQ: GOOG), which will allow it to remain in the search business and pull in as much as $800 million in additional annual revenue.

The Yahoo-Google ad deal is the subject of a federal antitrust investigation and is under review in several states.

Last week, the Senate Commerce Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights took up the issue in a hearing that inevitably veered into a discussion of Yahoo's dealings with Icahn and Microsoft.

"Microsoft has turned to activist investor Carl Icahn in the hope of forcing a fire sale," Yahoo General Counsel Michael Callahan said, reflecting the view that Microsoft is hoping to pick up either all of Yahoo or just its search business on the cheap once Icahn lays waste to the current leadership. "What we will not do is allow our business to be dismantled or sold off piecemeal."

In today's letter, Yahoo again said that it would sell to Microsoft (or anyone else) for $33 per share, the same price Microsoft had offered -- and Yahoo rejected -- when talks broke down in May.


Search-only deal?

Yahoo also said that it would consider a search-only transaction, provided that it could be assured of benefiting shareholders and addressed the thorny issue of splitting Yahoo's search and display advertising businesses.

Yahoo admitted that Microsoft's recent proposal was a better deal than its previous search-only offer, "but no one should confuse a modestly improved offer with a good offer."

Much of the letter was an assault on Icahn's plans for the company should he win the board. Yahoo charged that he is only concerned with his own short-term gain and that he is ill-equipped to lead a technology company.

Icahn, who holds a roughly 5 percent stake in the company, could not be reached for comment.

Yahoo also repeated its charge that Microsoft was never fully committed to acquiring Yahoo, suggesting, as Callahan did in the Senate hearing, that Microsoft may be "more interested in destabilizing a key competitor so that it can either enhance its competitive position or buy our highly valuable search business … at a bargain basement price."

Microsoft declined comment for this report.