Pressure Building on Yahoo and Jerry Yang

If you thought that you had seen the end of the Yahoo / Microsoft saga, think again.

The two sides couldn't come to a deal last week, as Microsoft was prepared to offer as much as $33 per share for Yahoo, but Jerry Yang (CEO of Yahoo) and company were wanting a minimum of $37 per share. Microsoft pulled their offer from the table and walked away from the negotiations, hoping that Yahoo management would change their minds, or that dissident shareholders would pressure Yahoo management into accepting a deal of $33 per share.

Many people were expecting a major drop in the price of Yahoo's shares once Microsoft pulled their offer from the table. This wasn't the case. The stock, which had been trading at about $19 pre-Microsoft discussions, traded as high as $29.73 in the days leading up to Microsoft's final push to close the deal. After Microsoft announced that they were pulling out of negotiations to buy Yahoo, the stock gapped down to $23.05 before closing at $24.37. A fair-sized drop, but still well above Yahoo's average price before Microsoft announced their intentions to buy the company.

Since then, the stock has trended higher, and closed today at $27.75, which is roughly where the stock was trading when Microsoft/Yahoo negotiations were at their peak. What's happening?

The answer is: some large investors are taking positions in Yahoo, and will attempt to force the company to return to negotiations with Microsoft. These investors are led by Carl Icahn, who has purchased a 4.3% stake in the company (59 million shares) and will attempt to seek control of Yahoo's board if they don't return to the bargaining table with Microsoft. Icahn is well-known (and very successful from) taking positions in companies and agitating for change, seeking to enhance shareholder value.

Icahn's involvement has led to other companies and investors getting involved as well. Paulson & Co., the hedge fund that profited greatly from the implosion in the subprime mortgage market, announced that they took a substantial stake in Yahoo as well. Paulson & Co. announced a 3.6% stake in the company, and also announced that they will be supporting the efforts of Carl Icahn to push Yahoo back into negotiations with Microsoft.

Other major shareholders have recently announced additions to their stakes or new stakes altogether. SAC Capital Advisors LLC, the major hedge fund company run by legendary investor Steven Cohen, announced today that it had boosted its stake in Yahoo to 8.2 million shares and had also secured call options on an additional 750k shares.

Eton Park Capital Management LP announced today as well that they had acquired 4.95 million shares of Yahoo, plus they secured call options on an additional 11.5 million shares.

Capital World Investors announced that it had doubled its already massive stake in Yahoo in the first quarter of 2008.

What does all of this mean? What's next for Yahoo?

First off, there will be a bunch of letters sent back and forth. Carl Icahn has already sent a letter to Yahoo management, saying that their board of directors acted "irrationally" by rejected Microsoft's offer, and said that he will be nominating ten new board of directors for Yahoo.

Yahoo quickly responded, saying that they felt that it is not in Yahoo stockholders best interests to allow Icahn and his "hand-picked" nominees to take control of the company.

Icahn's "hand-picked" nominees include Mark Cuban and Frank Biondi Jr.

Icahn has also sought regulatory clearance to purchase as much as $2.5 billion of Yahoo stock.

The next step? A "proxy fight". Icahn and his group of dissident shareholders will be looking to replace the current Yahoo board of directors at the next company annual meeting, which is slated to take place in early July. If they can win this "proxy fight", then they will install their own board of directors and force change at Yahoo (including likely dumping Jerry Yang as CEO and forcing Yahoo to return to negotiations with Microsoft).

In the end, it all comes down to votes, and if Icahn can find enough dissident shareholders to support his bid to topple the current Yahoo! board of directors, then it is likely that Microsoft will end up buying Yahoo for $33 per share.

Stay tuned, as this story has many more chapters left to be written.


Filed under: Internet Companies