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Yahoo's third largest investor offered up some advice Tuesday to dissident shareholder Carl Icahn on what it may take to swing investor votes his way in a proxy fight, according to a Reuters report.

Legg Mason portfolio manager Bill Miller had this observation to offer to Reuters, when queried on whether he would support Icahn's proxy fight to unseat Yahoo's board of directors at the company's August 1 shareholders meeting:

The difficulty with Icahn is he'd have more shareholder support if he would say he wouldn't sell the company for less than $33.

What is the magic number for Carl Icahn?

(Credit: CNET News)

Earlier this week, Icahn's proxy fight got a boost when Microsoft announced it would be willing to renew its buyout bid for all of Yahoo, or just its search assets, with a "new" Yahoo board.

Icahn and Microsoft, however both stated they were unwilling to discuss the details or price of any transactions that Microsoft may propose to a new board.

Said Icahn in his statement Monday, referring to Microsoft CEO Steve Ballmer:

I hope to continue to be speaking to Steve over the next few weeks; however, since I do not yet represent the Yahoo board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

Much has been said about how badly the Yahoo board has "botched up" negotiations with Microsoft over the past months. There is no need to keep pointing out the mistakes I believe Yahoo made by not immediately taking a $33 offer made by Microsoft.

Microsoft withdrew its sweetened unsolicited buyout bid in May, after Yahoo countered with a request for $37 a share, and failed to strike a partial deal for just Yahoo's search business in June.

As Miller calls on Icahn to issue a statement that he would not be willing to sell Yahoo to Microsoft for anything less than $33 a share, the portfolio manager may want to recall similar advice Icahn had given to Yahoo in early June.

Icahn, in a letter to Yahoo chairman Roy Bostock, had stated:

In my opinion, Microsoft does not believe you will ever sell the entire company on a friendly basis. So why don't you stop dancing around the subject and publicly offer to sell the company to Microsoft for $34.375 per share and promise to cooperate completely?

But, of course, that was a different time, a different era, in the five-month saga between Yahoo can Microsoft. That was a time when Microsoft was still willing to negotiate with Yahoo.

Now, as Microsoft said Monday in its statement of support for Icahn's proxy contest:

We have concluded that we cannot reach an agreement with them. We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company.

Shares of Yahoo were down slightly in morning trading, nearly off 1 percent at $24.44 a share.

Investor activist Carl Icahn needed a sign, a tangible sign, that Microsoft was still interested in buying Yahoo, or at a minimum, its search business, if he were to increase his chances of winning his proxy fight to unseat the company's entire board of directors.

On Monday, in a coordinated effort, Microsoft delivered that sign. The software giant issued a public statement that it was not only willing to discuss a potential buyout of Yahoo's search business, but also, alternatively, a renewed bid for the entire company--providing a "new" board was elected at Yahoo's August 1 shareholders meeting.

Despite this significant turn of events, Icahn has yet to pull the trigger and announce whether he will ultimately run a full slate of dissident directors against Yahoo's nine-member board to take control of the company, or only put forth a partial slate to go for less than a majority of the seats on the board. Until Icahn files his definitive proxy, he isn't able to distribute proxy cards asking Yahoo investors to vote for his nominees, or to hit the investor road show circuit touting his candidates.

Although there could be a variety of reasons why Icahn has not yet filed his definitive proxy, ranging from addressing any last-minute changes requested by the Securities and Exchange Commission to unexpected delays over Fourth of July weekend, it could provide the investor activist with an additional bargaining chip in achieving a friendly Yahoo-Microsoft deal before he finalizes his proxy plans.

To increase its chances of later entering into a Yahoo transaction, Microsoft needs Icahn to successfully run a full slate. And to bolster his chances of unseating Yahoo's current board, Icahn needed Microsoft to publicly state it is still interested in buying Yahoo.

But Icahn, an experienced fighter on the proxy front, is aware he can also lose and may wish to leverage his potential bargaining chip to push the parties to narrow the gap on a transaction that both can live with. Last month, Icahn lost his bid for three out of four seats on Biogen Idec's board.

In the Yahoo-Icahn proxy fight, the longer Icahn waits to file his definitive proxy, the less time he'll have to circulate the materials among Yahoo investors before the August 1 annual shareholders meeting.

"The longer he waits, he'll lose on getting votes to retail (mom-and-pop) investors," said one proxy solicitor. "But it may not hurt him if he's concentrating on only large institutional investors. They tend to wait one or two days to vote before a meeting anyway."

Institutional investors include mutual funds, pension funds, and asset management firms.

These large investors, specifically pension funds and index funds, often rely on institutional investor advisory firms for recommendations on how to vote on proxy matters. As a result, these advisory firms can wield a lot of influence in proxy contests and typically give their recommendations to their clients a week or two before an annual shareholders meeting.

One source with an institutional investor advisory firm said Icahn still faces a challenge in winning a recommendation from advisory firms, despite Microsoft publicly stating it would work with a "new" Yahoo board and would be interested in discussing a potential deal.

"We would base our recommendation on how the board has performed and what value it has brought to shareholders," said the institutional investor advisory source. "Sure, we'll pay attention to Microsoft's statement it's willing to work with a new board, but that won't be our main consideration."

But institutional advisory firms may, or may not, have as much of an effect in Icahn's proxy fight.

"Shares of Yahoo are now trading in the hands of fast money," said the proxy solicitor, noting that arbitragers don't rely on institutional investor advisory firms for advice.

Wall Street is largely keeping a cautious eye on Yahoo, despite Microsoft's announcement on Monday that it is interested in negotiating a possible buyout of Yahoo's search assets, or potentially making a renewed bid for the entire company.

Analysts, overall, still have a "hold" recommendation on the stock, according to Thomson Financial's survey of 34 financial analysts who follow the stock. Only one analyst has upgraded a recommendation on Yahoo in the past two weeks, raising it to a "hold" from a "sell" on June 25.

Nonetheless, Yahoo soared as high as 13 percent to $24.14 a share in early trading Monday, following Microsoft's announcement that it would support activist investor Carl Icahn's proxy fight to oust Yahoo's current board and negotiate a possible deal with Icahn's slate of dissident directors, should they be elected at Yahoo's August 1 annual shareholder meeting.

Wall Street analysts are more bullish on the notion that Icahn may prevail with his proxy fight, now that Microsoft has come out with a statement of support for his efforts and interest in negotiating with a "new" Yahoo board about a potential acquisition of the company's search business or a possible renewed bid for a buyout of the entire company.

"With his most recent statement, Icahn has effectively put tremendous pressure on (Yahoo CEO) Jerry Yang to maintain support of shareholders, given that Microsoft says it will not be able to reach a suitable deal with the current board," Gene Munster, a senior research analyst with Piper Jaffray, said in a research note.

Munster raised the prospect of an Icahn board gaining control to a 50 percent likelihood from a 30 percent chance.

"While talks with Ballmer and statements from Microsoft make voting for Icahn's board more attractive for the near term, we expect shareholders would like to see Icahn announce a CEO candidate or other operational plan for the future so that a Microsoft deal is not the only option," he added.

And while Microsoft in its statement said it would be interested in discussing either a partial asset acquisition of Yahoo or an entire buyout of the company, Wall Street places high expectations on a buyout of all of Yahoo.

"Throughout this courtship, our view has been, and continues to be, that at some point, Microsoft will acquire all of Yahoo, as we still think Microsoft needs Yahoo to gain scale in the online business and to compete effectively against Google," UBS analysts Bejamin Schachter and Heather Bellini stated in a research note.

The analysts added that they expect that an acquisition of the entire company would likely be in the range that Microsoft was previously willing to pay, which was initially a deal valued at $31 a share and later bumped up to $33 a share.

"We believe that an acquisition of the whole company is now likely in the $31 to $33 range, as we think anything less than $31 could make the deal viewed as even more unfriendly by key Yahoo employees, a constituency that Microsoft wants to make happy at all costs," the UBS analysts noted.

Yahoo was hit with a one-two punch Monday--first a right jab from Carl Icahn, which is calling for the removal of Yahoo's entire board, and then a left hook from Microsoft, which confirmed its support for Icahn's proxy fight and said it's interested in negotiating a deal with a "new" Yahoo board.

Microsoft, in its public statement, said it could see the value in a potential Yahoo deal, to either purchase the 'search' function with large financial guarantees, or alternatively, purchase the whole company--a been there, done that attempt with Yahoo's existing board.

Yahoo counterpunched later Monday morning, issuing a statement (given here in its entirety) expressing its interest in talking to Microsoft about a buyout of the entire company, if only someone would make an actual offer, and the right kind of offer:

Yahoo!'s Board of Directors continues to stand ready to enter into negotiations with Microsoft Corporation for an acquisition of Yahoo!. Indeed, as recently as June, Yahoo!'s independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future "negotiation" between Mr. Icahn's directors and Microsoft's management. We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo!'s stockholders. If Microsoft and Mr. Ballmer really want to purchase Yahoo!, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.

Investor activist Carl Icahn on Monday announced that Microsoft is supporting his proxy battle efforts to unseat Yahoo's board, with the software giant indicating that it is willing to negotiate a potential deal to acquire the company or its search assets with a new board.

Although Icahn and Microsoft acknowledge that there can be no guarantees that a Yahoo buyout or sale of its search assets will occur, if Icahn wins his proxy fight, the search pioneer's stock price is soaring on the Microsoft-Icahn news.

Here is a copy of Icahn's letter:

Dear Yahoo shareholders:

During the past week, I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated.

Our talks centered on the industry in general but, more importantly, on how Yahoo and Microsoft can do a transaction together. Steve made it abundantly clear that, due to his experiences with Yahoo during the past several months, he cannot negotiate any transaction with the current board.

His logic is simple. If and when a transaction (were) consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months, and perhaps longer, to obtain regulatory clearance in the U.S., Europe, and elsewhere.

During that period, if the current board and management team of Yahoo mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk, and a great deal could be lost.

For example, in a transaction to purchase the whole company, a very large amount of capital would be due at closing. Even in an "alternate" transaction, where just the "Search" assets were purchased, large guarantees would have to be made and, again, large sums could be lost if the company was mismanaged.

Microsoft perceives this risk may be quite high, with the current board and management in place. However, Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the "Search" function, with large financial guarantees or, in the alternative, purchasing the whole company.

He stated that Microsoft would be willing to enter into discussion immediately, if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order, the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase "Search" with large guarantees.

I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

Much has been said about how badly the Yahoo board has "botched up" negotiations with Microsoft over the past months. There is no need to keep pointing out the mistakes I believe Yahoo made by not immediately taking a $33 offer made by Microsoft. But one thing is clear: Jerry Yang and the current board of Yahoo will not be able to "botch up" a negotiation with Microsoft again, simply because they will not have the opportunity.

Our company is now moving toward a precipice. It is currently losing market share in its "Search" function; our current board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo, and currently, it is witnessing a meaningful exodus of talent.

It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo. According to publicly available information, Google's income from operations grew 59 percent per year over the last two years, while Yahoo's shrank 21 percent per year. However, none of the above has caused the Yahoo board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.

If elected, I have little doubt that the new board, subject to its fiduciary duties, will do what the current board will not do, i.e.,

• Immediately start negotiation with Microsoft to sell the whole company or, in the alternative, sell "Search" with large guarantees.

• Move expeditiously to replace Jerry Yang with a new CEO with operating experience.

Sincerely yours,
Carl C. Icahn

Microsoft on Monday released a letter in support of activist investor Carl Icahn's efforts to unseat Yahoo's board, as well as confirming its interest to explore a bid to buy the entire company--or just its search assets, with a new board.

Here is Microsoft's letter:

In the past week, we have had the opportunity to discuss with Carl Icahn the prospects for a possible agreement between Microsoft and Yahoo.

Despite working since January 31 of this year, as well as in the early part of last year, we have never been able to reach an agreement in a timely way on acceptable terms with the current management and board of directors at Yahoo.

We have concluded that we cannot reach an agreement with them. We confirm, however, that after the shareholder election, Microsoft would be interested in discussing with a new board a major transaction with Yahoo, such as either a transaction to purchase the "Search" function, with large financial guarantees or, in the alternative, purchasing the whole company.

As Mr. Icahn notes in his statement today, it would be premature to discuss at this time important details such as the price or other terms of a possible transaction. We respect the right of Yahoo's shareholders to determine the destiny of their company, and we do not intend to engage in ongoing commentary on these issues in advance of Yahoo's shareholder meeting.

As we explained on June 12, when Yahoo announced an agreement with Google, we believe that our proposed search acquisition and partnership would have delivered superior value to Yahoo's shareholders and the marketplace as a whole.

We have not changed our position, even as we continue to move forward with our own online search and advertising offerings. We therefore welcome interest by Mr. Icahn in pursuing this and other discussions.

While, of course, there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo's shareholder meeting, if a new board is elected.

Update at 3:49 p.m. PDT, with closing stock price and timing of when Icahn expects to file his definitive proxy.

Investor activist Carl Icahn and Microsoft on Monday asked Yahoo investors to oust Yahoo's board and in its place elect Icahn's dissident slate, potentially paving the way for a purchase of the Internet company in its entirety or just its search assets.

Here is part a statement from Icahn, who is running a dissident slate of directors to unseat Yahoo's entire board, that cites discussions with Microsoft CEO Steve Ballmer:

Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase "Search" with large guarantees.

And for good measure, confirmation came just a few minutes later from Microsoft on those discussions with Icahn. Microsoft has been frustrated so far in its months-long pursuit of Yahoo and not long ago said it was giving up the chase--though apparently not all interest. According to Microsoft:

We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company.

Shares of Yahoo jumped as high as $24.25 a share during intraday trading, before ending the session at $23.91 a share, up nearly 12 percent.

While Microsoft's announcement that it supports Icahn's efforts potentially gives his proxy battle a bigger stick, it is far from offering any guarantees.

It has yet to be seen whether Microsoft's public statement will be enough to sway investors, absent of any specific price, terms or other details prior to Yahoo's annual shareholders meeting on August 1. Microsoft stated it does not plan to make such information available before the annual meeting.

Advisory services to institutional investors, for example, may be reluctant to recommend support for Icahn's proxy slate, in absence of any details of what Microsoft plans to offer, according to one source with such an advisory service. Institutional advisory services can be influential in proxy battles, given some mutual funds, pension funds, and asset management companies rely on their recommendations to vote on proxy matters.

Microsoft could lend a greater hand to Icahn's proxy battle if it were to go directly to Yahoo's investors with a tender offer and work in tandem with Icahn's proxy battle.

A tender offer could include all the details of a buyout offer and be set to expire sometime after Yahoo's annual shareholders meeting. That would give investors a guarantee a deal was waiting to be done at the end of the day.

Both Microsoft and Icahn note in their statements that there is no guarantee a transaction of any kind will definitely occur, should Icahn's slate be elected.

Meanwhile, one source close to Yahoo said, "If Microsoft was interested in purchasing the company, they should make their proposal public. As recent as a few weeks ago, they weren't willing to enter into discussions at the same price range that they had previously proposed."

Microsoft announced a deal back in February that initially valued Yahoo at $31 a share, and then later bumped it up to $33 a share in May, before walking away after Yahoo countered with $37 a share.

Yahoo, in a statement, responded to comments made by Icahn and Microsoft:

Yahoo's Board of Directors continues to stand ready to enter into negotiations with Microsoft Corporation for an acquisition of Yahoo. Indeed, as recently as June, Yahoo's independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo into selling to Microsoft its Search business at a price to be determined in a future "negotiation" between Mr. Icahn's directors and Microsoft's management. We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo's stockholders. If Microsoft and Mr. Ballmer really want to purchase Yahoo, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.

While the statements by both Icahn and Microsoft point to a strong interest in ousting Yahoo's entire board, Icahn has yet to file his definitive proxy, which had been expected to occur before July 4.

The definitive proxy allows him to begin mailing out proxy cards to Yahoo's investors and hit the road with his investor presentation, which would include wooing the institutional investor advisory services.

As a result, it raises questions on whether Icahn is keeping his options open, despite a rapidly narrowing window of time when he has to choose between running a dissident slate with enough candidates to gain control of Yahoo's board, or go for a partial slate that would not constitute a majority on Yahoo's board.

For now, Icahn is planning to run a full slate, according to an interview he gave to the Los Angeles Times.

He noted he expects to make his final decision within days. Said Icahn in the interview with the Los Angeles Times:

We really only have a few days, so probably this will take care of itself.

Nonetheless, the public statements by both Icahn and Microsoft may yet serve as a cattle prod to Yahoo to get it to enter into negotiations to sell just its search business to the software giant at terms both can live with.

A fresh look at Yahoo's search results Thursday by Hitwise Intelligence raises the question of whether Yahoo could survive just fine without its search engine.

Such a question is rather important to Yahoo investors, given the Internet search pioneer has given a cold shoulder to Microsoft, which has previously expressed interest in buying Yahoo's search assets. Yahoo, however, rebuffed the offer, noting in its investor presentation that selling its search assets, including its algorithmic search, would:

Jeopardize the Yahoo user experience and make it difficult for Yahoo to maintain search and display volume.

But Heather Hopkins, vice president of research for Hitwise, noted in her blog that Yahoo's valuable sites would not necessarily fair poorly without Yahoo's search engine.

Hopkins took Yahoo's top 20 U.S. Internet properties for the month of June and ranked them, based on user traffic.

As expected, Yahoo Mail represented a 37.5 percent slice of the traffic pie, followed by the main Yahoo site with 30.6 percent and Yahoo search with 12.l percent.

Then Hopkins compared whether these top 20 sites were getting their users by way of a Google search or a Yahoo search. In all but six of the top 20 sites, more users were coming to Yahoo's top 20 sites by way of a Google search--even to its popular Yahoo Mail and Yahoo.com.

Yahoo Answers showed the disparity the most, with 49 percent of its U.S. traffic coming from Google in June, while only 20 percent was from a Yahoo search.

Hopkins made this observation in her blog:

I'll admit, I went into this analysis thinking that the data would show that Yahoo was worth more together--I thought that the sum of the whole would be greater than the parts. However after looking more closely at the data, I'm not sure that is necessarily true.

Whether Yahoo is better kept whole or split up I can't say. What I can say is that the parts of Yahoo are quite valuable and wouldn't necessarily be lost without the search engine.

Wonder if Yahoo has read Hopkins' blog?

A bit of deja vu is creeping into recent media reports of Microsoft whispering into the right ear of News Corp. and Time Warner's AOL about potential partnerships, while Yahoo is whispering in their left.

According to a Reuters report, Yahoo and Time Warner have been chatting for months about a potential deal involving Time Warner's AOL and Yahoo. The report, however, notes that the parties don't appear any closer to inking a deal than they were when Microsoft had a buyout bid on the table for the Internet search pioneer.

Meanwhile, the Wall Street Journal is reporting that Yahoo's talks with Time Warner have regained some traction, now that Microsoft's withdrawn offer of $33 a share for the Internet search pioneer appears to remain comatose. But as with Reuters, the Journal also notes that the discussions don't appear to be serious. For one thing, the Journal notes such a combination had put an approximate $10 billion valuation on AOL, but that was before Yahoo's stock had plummeted back to trading levels near the pre-Microsoft offer watermark.

In the end, Yahoo is looking for ways to bring its value back to the $33 a share that Microsoft had offered before merger talks broke off in early May, and Microsoft is looking for ways to bring scale to its online advertising search business, which may one day ultimately pay for any free business applications the Redmond giant gives out to compete with those currently offered by Google, like its Google Docs and Google Calendar.

So, Yahoo and Microsoft can continue to hit the replay button with Time Warner and News Corp., or switch to a new channel. I hear a new season with potentially a new cast of characters is gearing up for an August 1 debut.