A few years ago, Yahoo had an opportunity to buy Google for less than one percent of its present value and passed. After that, the company went from being poorly managed by Terry Semel to being poorly managed by Jerry Yang. Its shares went down to $19. At that point, Steve Ballmer and the Microsoft management team saw an opportunity to buy Yahoo for a reasonable price and gave it a try.
At the same time, Yang and the board members thought they could take advantage of a “rich buyer” and achieve through tough negotiations what they could not achieve via able managing, namely a high share price. They not only rejected the offer of $31, but asked for $37 or nearly twice as much as the share price was worth before Microsoft had first mentioned the word Yahoo.
Ballmer´s reply was simple “we may be rich, but we ain´t stupid” and ditched them. Those shareholders that had bought shares thinking the sale was a done deal were left holding the bag.
Icahn, an expert in takeover battles in the 80’s, threw himself into the battle without having experience with the Internet and started buying cheap shares with the objective of having Microsoft buy Yahoo! at $31 per share and go back home with $1 billion.
The rules of the board of Yahoo were favorable for Icahn. While most of the companies elect their directors and board members at different times, Yahoo elected them all at once and this makes it extremely vulnerable for a takeover. Icahn saw this opportunity to chose an alternative slate of directors and sent an aggressive letter to the board that is well commented by Kara Swisher, one of the best technology journalists so I link to her for this part of the blog post.
The guys at Yahoo replied with this letter saying that they did not want to give Yahoo away to Microsoft and other weak arguments, as it is hard to explain to shareholders why $25 is higher than $31.
Now Yahoo shareholders have only bad choices left. They can vote for a management team who had a chance to buy Google and passed, who had a chance to sell to Microsoft and passed and who had a chance to dominate the internet a la Google and failed. Or alternatively they have the opportunity to vote for a corporate raider who knows nothing about the internet and who´s only strategy is to sell to Microsoft. Will there be another unexpected buyer such as large global telco in the meantime? Will Yahoo find a way to divest of its Japanese and Chinese properties and raise $20bn + in cash? Will the current Yahoo board bring a stellar CEO and win the election? All these are possibilities that do not escape Icahn, who is convinced that one way or another he will make money with his Yahoo shares.