Coop's Corner

This wasn't the sort of reaction Carl Icahn was expecting from his former buddies on Wall Street.

Legg Mason Capital Management, which controls about 4.4 percent of outstanding Yahoo stock, plans to back management at the company's shareholders meeting next month. Could it be that Legg Mason thinks he's as clueless as Yahoo claims he is when it comes to managing a complex technology company?

Bill Miller, chairman and chief investment officer of Legg Mason, said Friday in a statement that Legg Mason would prefer the feuding sides reach a settlement and "end this disruptive proxy contest."

But so much blood has been spilled that no one involved believes that scenario is likely. As a result, Miller and his company are giving the nod to Yahoo CEO Jerry Yang.

"We believe the current board acted with care and diligence when evaluating Microsoft's offers," Miller said. "We believe the board is independent and focused on value creation for long-term shareholders."

Win some, lose some. But this is a big loss on Icahn's home turf.

The guy may not know how to navigate around a personal computer, but he knows Wall Street like the back of his hand. So if Icahn, one of the guys who wrote the book on greenmail, couldn't win over one of his own--Et tu, Brute?--you have to wonder about his chances at the showdown with existing management on August 1.

Another day, another filing. By now, you'd think Yahoo had said all that it could say about its increasingly rancorous disagreement with Carl Icahn over the future of the company.

Not by a long shot.

Earlier today, the company issued an in-your-face challenge to Carl Icahn in a letter to shareholders, which also singled out Microsoft for poor judgment. But that didn't exhaust Yahoo's surprising gift for gab.

In the run-up to its highly-anticipated shareholders meeting on August 1, Yahoo filed a document with the Securities & Exchange Commission after the close of trading.

The document rehashes familiar arguments Yahoo execs have made on other occasions--that it boasts a seasoned management and board of directors, that the company has pursued a "thorough process to review strategic alternatives" (unlike you know who), and that the search arrangement signed with Google does more for stockholder value than the competing offer from Microsoft. And, of course, the filing includes analysis and commentary about the Icahn proposal, which it finds wanting.

Yahoo's filing does include a further look at Microsoft's latest proposal to Yahoo. Microsoft says that search deal includes revenue guarantees of $19.5 billion to $26.5 billion over 10 years. For the first five years, Microsoft guarantees $2.3 billion. After that, both companies have an option to renew the agreement, but at very different prices. If Microsoft unilaterally renews, it has to pay Yahoo $3 billion, while Microsoft's guarantee drops to $1.6 billion if Yahoo alone wants to renew.

Microsoft calls the proposal "compelling" to quote its CFO, Chris Liddell. Yahoo obviously had a very different take. And so on.

OK, we get it, guys--though I doubt it's the last we're going to hear on this topic before Yahoo's Day of Reckoning.

While the food fight between Yahoo and Carl Icahn escalates--and while I'm at it, don't forget Microsoft--both the House and Senate Judiciary committees are getting ready to hold hearings on the proposed Yahoo-Google tie-up. In advance of this primo photo op for the hired help, I had a chance to review the prepared testimony of David Drummond, Google's chief legal officer. Give the guy credit for putting together a crisp presentation. Among the highlights:

• If Uncle Sam green-lights this deal, Google won't wind up taking nearly total control of the search market.

• The deal is good for users and advertisers.

• Google is not going to wind up with more search traffic.

It's hard to say all that and keep a straight face, but Drummond's a good lawyer and I'm sure he'll give a convincing presentation. Drummond knows he better bring his A game because he's going up against far sharper minds than the grandstanders who turned the 2006 China-Internet hearings into a veritable circus.

Drummond's central argument will be that Yahoo remains a viable rival. That's where the debate will ensue. How is more concentration of power--i.e. even greater dependence on a single company--supposed to benefit online advertisers? Just to show humor is in no short supply, Microsoft will play that card for all its worth. The biggest software monopoly in history can rightly argue that Google accounts for about three-fourths of search advertising revenue (and roughly the same number of search queries) in the world. Add Yahoo's roughly 20 percent and that translates into POWER. Microsoft knows something about that. But I digress.

Microsoft should also hammer hard on another point: the Yahoo-Google arrangement is structured so that Yahoo earns more money when Google earns more money. Because it will share in Google's revenue, what's Yahoo's incentive for competing against its partner? Google has a briefcase full of counterarguments to offer, but it's going to be a tough sell. Especially considering the change in the political constellation of forces. After nearly eight years letting corporate America have its way, Uncle Sam has piled up a fairly lousy economic track record. And now Congress is being asked to remain mum on Google-Yahoo? Don't bet on it.

Warren Cowan, chief executive of the U.K.-based search engine company Greenlight, spammed reporters Monday with his thoughts. But consider what he has to say:

"As far as the advertisers go, I don't see this as a good thing for the online advertising industry. We speak to major advertisers every day, and what they want is better returns, more distribution and less dependency on one provider. Likewise search agencies want to be able to diversify their clients spends and reduce risk too, and this deal doesn't deliver these to anybody. Whilst a Microsoft/Yahoo deal would have reduced the number of people in the market, it would have done much more to balance the options open to advertisers."

Should be fun tomorrow.

For the first time in several months, Jerry Yang can exhale. Though not for very long.

Now the countdown really begins. The long-term question: Will any of this effect substantive positive change? The short-term question: Will Steve Ballmer decide to return to the negotiating table. More about that in a moment.

The new management structure announced today by Yahoo may not please everyone--and don't expect cartwheels from Carl Icahn--but it relieves some of the immediate pressure on Yang and Sue Decker, who were being pressed by unhappy shareholders to shake things up.

The folks still out for executive scalps won't be mollified by what they'll predictably dismiss as a PR stunt. Well, yes, Yahoo is counting on the appearance of change. But that's only part of what's going on.

Even though there's still an awfully long to-do list, at least the Yahoo's two most senior leaders can rely on the new handpicked team to pull in the same direction. That wasn't so obvious during the last several months. After the string of high-profile resignations from the company, it was unclear how much strategy disagreements or simply burnout played in the sundry personnel departures. What Yang and Decker needed most of all was a team they could trust to buy into their vision for the company.

"Put yourself in Yang's place," says a source close to Yahoo. "The guy took over under duress and only had about six months before there was a hostile takeover attempt. Then came a revolt from shareholders. Then he had to decide whether to outsource search. This reorganization is something needed. There needs to be a healthy change in the people (under Yang.) It's time for a different generation to run those positions."

That same source explained that the company is anxious to regroup and accelerate Yahoo's corporate DNA. In particular, the source added, "they need to get products out faster and to different areas of the distribution system faster."

In the reorganization announced today, centralization was the key with three teams now reporting to President Sue Decker Yahoo's also forming a cloud computing and data infrastructure group. (That could be really interesting. We'll have more details later today.) But the storyline for this release could be summed up: All roads now lead through Decker.

From the release:

"The changes we're making today will help deliver superior global products for users and enable faster and better decision-making," Decker said in a statement. "This is a logical next step in light of our success last year in moving to a more centralized approach to developing world-class marketing products. We have planned these changes deliberately over the past several months to clarify responsibilities and to capitalize on the scale advantages while allowing for fine tuning to meet local market needs."

Now the countdown really begins to see whether real change is in store and whether Steve Ballmer will return to the negotiating table. Meanwhile, there's movement on another front.

Kara Swisher, who had the scoop on the reorganization, also is reporting that Icahn and other investors are "pushing Microsoft to radically boost the value of its Google-alternative search deal and buy 33 percent of Yahoo for $30 to $32 a share (instead of the one-sixth of Yahoo at $35 a share Microsoft offered in connection with its last search deal). Microsoft is seriously considering this.

And from what I've been hearing Microsoft is seriously thinking about giving it another go, although it's still unclear whether Steve Ballmer has ordered his team to officially engage Yahoo. But at this rate, Defcon 1 status can't be too far away.

As Yahoo continues to hammer out plans for a corporate reorganization, Steve Ballmer is still eying a possible search deal.

While Microsoft has "no interest" in buying all of Yahoo, top management is still contemplating whether to go back to Yahoo with a sweetened search deal, according to a person familiar with the company's thinking.

Ballmer: Will he or won't he?

(Credit: Dan Farber/CNET News.com)

Earlier this week, CNET News.com reported that several Yahoo board members remain open to discussing a possible sale of the company's search business to Microsoft.

The thinking inside the company is that the search agreement between Yahoo and Google will encounter antitrust objections. Under terms of the pact announced earlier this month, Google will supply Yahoo with some search ads. The sides have voluntarily held off putting the agreement into effect to let the Justice Department review the deal. (Wednesday afternoon, Yahoo CEO Jerry Yang sent a letter to shareholders defending the arrangement.)

If Microsoft's management does give the green light to its negotiators, the feeling is that it would be easier to pursue a sweetened Yahoo deal with the current board and while Yang remains CEO. Yang has been under increasing pressure from disgruntled shareholders since the collapse of the Microsoft talks and the drop in Yahoo's share price.

Meanwhile, a source close to Yahoo said the company's main objections to the Microsoft proposal are its exclusivity and term. The source indicated that Yahoo remains open to discussing a search deal despite its letter and its deal with Google.

A shareholders meeting is slated for August 1. Billionaire investor Carl Icahn is waging a proxy battle to replace the board with his own slate.

It is not known whether Microsoft representatives have contacted their opposite numbers at Yahoo to reopen talks about a possible deal.

TechCrunch had floated a (still unconfirmed) rumor that the sides were again talking about "a full buyout." Several sources told CNET News.com that a full buyout was not on the table.

Meanwhile, Yahoo President Sue Decker is reported to be working out details of a management reorganization. At this point, the situation remains fluid, as conversations continue with prospective departmental heads. The idea is to come up with a management structure that would foster faster product development and distribution as well as reduce corporate red tape.

CNET News.com's Ina Fried contributed to this report.

Now it's make-or-break time for Jerry Yang.

Yahoo CEO Jerry Yang

(Credit: CNET Networks)

If his gambit succeeds, Yang will be feted as the second coming of Steve Jobs, reviving the glory of a one-time technology bellwether. If not, he'll join Terry Semel and Tim Koogle on the roster of failed Yahoo CEOs.

Earlier Thursday, Yahoo announced that Microsoft was no longer interested in pursuing a deal. Into the breach steps Google CEO Eric Schmidt with a search advertising arrangement that could be worth as much as $800 million to Yahoo.

•  During the first year after implementation, Yahoo expects the deal to generate an estimated $250 million to $450 million in incremental operating cash flow.

•  The agreement is nonexclusive. Yahoo can display paid search results from Google, other third parties, as well as its own Panama marketplace. (Here are more details on Yahoo's search ad-pact with Google.)

After all the "sturm und drang" revolving around a possible Microsoft deal, this much-rumored Google tie-up comes as a bit of an anticlimax. But at least Yahoo has chosen a direction, moving beyond the endless muddling of the last five months.

Steve Jobs: Been there, done that

(Credit: Dan Farber/CNET News.com)

Yang's immediate task is to find a way to sell the Google deal to regulators. The agreement won't officially kick in for another three and a half months because of antitrust sign-offs. Yahoo can probably persuade Washington to give the green light.

Some will dismiss the deal as an acknowledgment that Yahoo wasted millions of dollars developing its Panama search advertising platform (not to mention the $1.6 billion it paid in 2003 to buy Overture Services). There's some truth there but it may be too harsh a judgment. Besides, the Google arrangement may turn out to be a clever move if it fosters the two companies' respective strength in search and display advertising.

Whether Carl Icahn and the investor class agree--we'll know Friday morning when Wall Street opens up for business. Icahn could do nothing Thursday but count his losses as shares of Yahoo plummeted after the company announced the collapse of the Microsoft talks. If the Google deal fails to do much to revive the stock price, they'll naturally call for Yang's scalp.

Of course, that goes with the territory. Yang never wanted to see Yahoo get swallowed by Microsoft. He wanted the opportunity to direct the turnaround, and now he's got his wish. Is Yang equal to the challenge? Beats me. He's super-smart and knows the company backwards and forwards. But he is not a charismatic leader and he turned in an uneven performance on the conference call announcing the Google deal. He tripped over words and sounded unsure as he spoke, leaving No. 2 Sue Decker to handle the hard questions. I wouldn't read too much into appearances, but strong CEOs know how to put on a good show.

Forget shock and awe. This is more like making a pain in the neck of yourself until the other side caves just to shut you up.

Microsoft's making another pass at Yahoo, but this time Steve Ballmer's not trying to go all the way with Jerry Yang. Instead, he says getting to first base will be enough.

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo. Microsoft is not proposing to make a new bid to acquire all of Yahoo at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo or discussions with shareholders of Yahoo or Microsoft or with other third parties."

(Also take a look at the text of this memo Kevin Johnson sent updating his team on Microsoft's search strategy.)

A few observations:

A) Microsoft must believe Yang's position is a lot weaker than it was when it ended negotiations about a possible acquisition. That's easy to understand considering the howling from Yahoo investors about losing out on a sure payday. Especially in light of Carl Icahn's decision last week to wage a proxy fight, Microsoft may be thinking that Yahoo's board would be more amenable to a partial buyout than it would to a 100 percent acquisition.

B) In order to believe the above, Microsoft must also think Yahoo's board is really desperate. Subtract whatever relevant Yahoo services would be covered in "online services and advertising" and what's going to be left? Flickr's great and millions use Yahoo Mail. A lot hinges on what Microsoft has in mind but Yahoo is going to be careful not to commit ritual hara-kiri by ripping out the guts of the company. Say what you want, but we're not talking about a collection of village idiots.

C) Of course, with shareholder suits and Icahn circling, Yahoo's board is under a lot of pressure. By offering to return to the negotiating table, Microsoft's offer may have the effect of preventing Yahoo from pursuing a rumored deal with Google for search ads. In the end, maybe Microsoft can secure a similar deal for itself--or even something more--with Yahoo. And that would leave the door open to further negotiations, especially as the proxy fight plays out. (Reuters is reporting Sunday that Microsoft has not yet held any discussions with Icahn.)

Had it not been for Jerry Yang and Tim Koogle, Mark Cuban would be just another middle-aged rich guy. Not George Soros-rich, but with enough shekels in the bank to spend a life of leisure.

Hey guys, I'm baaaack

In 1999, he sold Broadcast.com to Yahoo for the princely sum of $5.04 billion in stock (and then was smarter than the average bear by cashing out before the bubble burst). Up until then, Cuban was working with the proceeds from his 1990 sale of MicroSolutions, a computer reseller, for $6 million. Not bad, but not enough to buy a professional basketball team.

Now Cuban is part of the 10-person slate that Carl Icahn is proposing to take over Yahoo's board. Talk about a smack in the head! Of course, Cuban's a sharp tack and knows the ins and outs of the Internet business better than most. Still, maybe it's just me, but talk about biting the hand that feeds you. Yeah, I know, it's business, not personal.

Jerry Yang was able to rope-a-dope Steve Ballmer. But he's never had to square off against a royal pain in the ass like Carl Icahn.

This afternoon, Icahn, a billionaire with a God complex--or is that repetitive?--wrote a new chapter in this deliciously goofy Microhoo saga when he launched plans for a proxy contest to challenge Yahoo's famously feckless board of directors with his own handpicked nominees.

Talk about jumping out of the frying pan into the fire.

The problem for Yang is that he's over-matched. We're talking about a geek going up against one of the most brilliant, cold-hearted bastards this side of T. Boone Pickens (and I meant that as a compliment.) Icahn basically wrote the book on greenmail when he was squeezing sundry CEO testicles as a corporate raider in the 1980s. An abbreviated list of corporations he's had his way with include Trans World Airlines, B.F. Goodrich, Phillips Petroleum, US Steel, Texaco, Goodrich-Uniroyal, RJR Nabisco, General Motors--and more recently--Time-Warner.

Yo Jerry, I can take down Gordon Gekko with one hand tied behind my back

(Credit: The Icahn Report)

In a recent profile, Fortune labeled Icahn "The Hottest Investor in America." Aside from the typically Madison Avenue hyperbole, the description is apt. Icahn, who has a brilliant knack for uncovering undervalued companies, has an important ally in this looming proxy fight: the timing's all in his favor.

After infuriating investors by walking away from the sure payday that Ballmer put on the table, Yahoo doesn't have any options (And no, neither Google nor Time Warner is going to play white knight with a surprise buyout bid.) Yang may be true to his word about having a long-term rescue plan, but that's not helping Wall Street's bad mood. Whatever the truth, Yang was portrayed during the Microsoft negotiations as a passive-aggressive ditherer who queered a good thing. A bit harsh, perhaps, but a lot of paper profits when Microsoft withdrew its offer.

In a perfect world, Yahoo's fate would be placed in the hands of technologists, win, lose, or draw. Let the best ideas flourish and to the victors go the spoils and all of that. In the real world, though, finance capitalism trumps all. If he doesn't already realize it, Yang will soon: Now he's up against the Big Dog.