In the coming days, Yahoo investors should expect to see shareholder activist Carl Icahn filing the final version of his proxy, indicating to what degree he seeks to control Yahoo's board and keep the door open to Microsoft.
Icahn, who initially launched his proxy fight to push a merger between Yahoo and Microsoft and subsequently saw talks on even a partial search buyout deal fall through, is expected to print and disseminate his definitive proxy materials within the next two weeks, say people familiar with the proxy process.
That document will indicate whether he plans to try to oust a majority of Yahoo's nine directors and replace them with his candidates to run the company, or if he will seek minority representation on Yahoo's board when the company holds its annual shareholders' meeting on August 1.
Icahn initially put forth a preliminary slate of 10 dissident directors when launching his proxy contest in May.
"If Icahn proposes a majority slate, it signals a takeover of the company...and the institutional advisory services will look at him with caution and look at his motives," said one source with an institutional investor advisory service. "Icahn does not have economic ownership of Yahoo (a controlling stake), but by controlling the board, it will allow him to do what he wants to his benefit without paying a premium to take control of Yahoo."
Influential institutional investor advisory services, such as RiskMetrics Group, Glass Lewis, and Proxy Governance, issue recommendations to their clients on how to vote on proxy matters. These recommendations are given to mutual funds, pension funds, and asset management companies a week to two weeks before the annual meeting. Some funds have internal policies that require its votes be cast according to an advisory service's recommendations, whereas other funds allow their portfolio managers to make their own call.
Wall Street observers, meanwhile, note investors should not jump to the conclusion that a re-entry of a Microsoft buyout is on the immediate horizon if Icahn opts to run a slate for control of Yahoo's board.
That assessment comes despite Icahn's original motive in launching his proxy fight, which had been to pave the way for Microsoft to acquire Yahoo at a substantial premium. But the software giant has made no public statements it would rebid for Yahoo since it withdrew its sweetened offer of $33 a share in early May.
The software giant, via an employee e-mail that seemed to issue a wink-and-nod to Yahoo shareholders as well, discussed the financial benefits that Yahoo's shareholders would have received if Microsoft had acquired only Yahoo's search business. Microsoft, however, cannot do a tender offer for only part of Yahoo's assets, and it has made no indication it would launch a tender offer for the entire company.
Nonetheless, Microsoft continues to remain interested in bolstering its search capabilities to further drive advertising revenue, as noted in a Financial Times interview with Microsoft CEO Steve Ballmer, prior to the Yahoo-Google search advertising announcement:
The most important application for the foreseeable future...is search. I don't think we can say: 'OK, well, we're going to be in the ad platform business and we're going to do it just on the strength of non-search-based assets.' We don't have to dominate, but we'd better have a darn good chunk of the search market over time.
Icahn, meanwhile, could face a greater chance of getting his dissident slate elected, if he runs for a number of board seats that would constitute a minority slate.
"He is smart enough to know not to propose a full slate because of the ramifications," said the institutional advisory services source. "If he proposed a full slate, even knowing he may later reduce it, it could distract from his message."
Proxy solicitors and investors agree.
"Carl will likely have scaled down his slate when he files his definitive proxy," said one proxy solicitor. "Otherwise, he has to articulate why investors should support all of his directors, and RiskMetrics and Glass Lewis are not inclined to support a change of control...If he says he wants a few seats to be a watchdog (for investors), he'll likely get more support."
Earlier this week, shareholder activist Eric Jackson called on Icahn to run a short slate of dissident directors. Jackson, who has had talks with Icahn's folks, is proposing the billionaire investor run four candidates, rather than nine.
Like Jackson, one hedge fund manager noted that most institutional investors would be reluctant to kick out Yahoo's board and turn it over to Icahn's slate, given it does not have the prior experience and institutional knowledge in running the Internet search pioneer.
"Icahn's in a tough spot right now," said the hedge fund manager.