4 Lingering Questions on the Yahoo/Icahn Deal

Lawyers rarely take tort law cases to trial. By some measures, more than 90% of these cases are settled outside of judge or jury. According to the DOJ’s Bureau of Justice Statistics, of 98k such cases in 2002 and 2003, only 2% were decided at trial. The rationale is that it is usually safer and less expensive to settle with a sure thing than risk the uncertainty and cost of trial. Apparently, proxy fights with activist shareholders share that in common. Despite increasing momentum, and the recent pledged support of a major shareholder, Yahoo (YHOO) Monday agreed to settle their proxy fight for board control with Carl Icahn.

Under the terms of the agreement, which will terminate the proxy fight, eight of Yahoo’s current nine board members will stand for reelection at the Company’s upcoming annual meeting. The 9th board member, Bobby Kotick, the CEO of newly minted Activision Blizzard (ATVID), will step down. Carl Icahn will take that seat. In addition, two new seats will be created to increase the size of the board to eleven members. The nominees for the new seat will include Jonathan Miller, both a partner at Velocity Interactive and the former Chairman and CEO of AOL, along with the eight remaining members of Carl Icahn’s proposed slate.

The recent combatants and now new partners all expressed relief and satisfaction at the settlement, along with pledges and promises Yahoo Chairman Roy Bostock said he was “gratified.”  Carl Icahn said he was “pleased.”  And Jerry Yang expressed his happiness that the “distraction” is now behind all.

The question on many people’s mind is whether that’s true. Is the distraction gone? or will three seats on Yahoo’s board give Team Icahn a better vantage point from which to push his own agenda? Inquiring minds want to know.

It’s a fair question. Just a week ago the parties were publicly deriding each other.  Now they have to kiss and make up. 

The results so far are right out of a playbook Icahn has successfully used before.  As described in a past review on Metue (here): while Icahn has evolved from corporate raider to activist shareholder, his tactics borrow from the same toolbox.  Typically, he will look at troubled companies and begin to buy influence. His positions might range from a few percentage points to more. From them, instead of buying a company outright, he’ll use the leverage of the minority position, and the support of like-minded investors, to push the board toward realizing near term shareholder value. They’ll argue for buybacks, asset divestitures, asset purchases and executive shakeups. Public threats, open letters, and proxy fights (which can be carried out or settled) act as fulcrums to increase the pressure.

It can be an effective combination. In 2004, Icahn used the threat of a proxy fight to keep Mylan Labs (MYL) from acquiring King Pharmaceutical, a deal Icahn thought harmful. In January, 2007, he targeted Motorola (MOT). There, he used a small initial position to threaten a proxy fight from which he won a board seat. His goal, according to later reports, was to pressure the company into buying back shares.  That changed once he was inside.

When Motorola’s market stature proved more dire than realized, instead of bailing out,  Icahn held on. This past March (2008), more than a year later, he ramped up the pressure again. This time, he filed lawsuits and used the  press  to try and reseat the board. The eventual settlement got Icahn board representation and helped push Motorola to divest its mobile phone business to a separate company.

So will Yahoo be another Motorola? Or is this progress?

It’ll take some time to play out. For now, what remains mostly are questions:

• In settling, did Yahoo let the fox in the hen house?
• Is it a validation of Yahoo’s strategy plans? Or a condemnation?  
• What will the settlement mean for Yahoo’s other shareholders? Will it improve the likelihood of a Microsoft (MSFT) deal?
• Will Jonathon Miller’s experiences with AOL help Yahoo if he joins the board? What now?….

Some answers may come with the next earnings announcement. More may take months to develop.

Comments

[Carlos Bazan]

While "the distraction" might be over, Q2 earnings might revive the quarrel. And having your enemy inside might be very risky for Jerry Yang.

[MuddlingInvestor]

Yahoo! did let fox in the hen house. But they didn't have a choice. By different estimates, Icahn had support of up to 40% of shareholders. Such big a group has to have board representation.

Deal with Microsoft? Forget about it.

Johnathan Miller's AOL experience means nothing. Can even be negative. AOL is dead, has been for the last 5 years. That nominee is just a sign that Icahn himself doesn't understand Yahoo! business and needs somebody's help. He just doesn't know who can help.

Last, but not least: Motorola experience. It shows that Icahn doesn't understand tech. At all.