Icahn, Yahoo dispute benefits of Microsoft search offer

Investor activist Carl Icahn claims the latest offer would bring shareholders $33 per share worth. Yahoo says that's overly optimistic.

Yahoo and investor activist Carl Icahn threw proverbial punches at each other Monday, disputing the validity of the value assessments each put on Microsoft's failed sweetened bid to acquire just the search assets of Yahoo .

The dog fight between Yahoo and Icahn is just beginning, following Icahn's filing of his final proxy Monday, indicating he is seeking to oust all of Yahoo's nine directors at its August 1 shareholders meeting.

Icahn's definitive proxy was filed after the search-only buyout talks broke down again over the weekend. Icahn, as he noted in an open letter to Yahoo shareholders, outlined his effort in getting Microsoft to agree to sweetened terms that Yahoo indicated interest in and specifics of that joint-proposal he and Microsoft put forward on Friday night:

During the last week, Goldman Sachs called me a number of times asking me to relate to them any transaction that Microsoft might be interested in transacting with Yahoo. I discussed with them the possibility of doing a "Search only" deal wherein Microsoft would purchase "Search" from Yahoo and pay Yahoo for any searches that would originate from a Yahoo content page. Yahoo felt that a deal of this nature would be very interesting, but only if Microsoft would guarantee the revenue that Yahoo now received. This would obviously be a great deal for Yahoo because Yahoo would, for five years, receive a minimum of the $2.3 billion they are currently receiving as long as they continued to supply the page views and affiliate traffic they now had. Heretofore, Microsoft had been unwilling to even come close to making this guarantee. However, after I negotiated with Steve Ballmer for the better part of a week, he agreed to the guarantee. He also agreed to commit $7.7 billion dollars to the transaction (consisting of a $1 billion payment for "Search", a $2.8 billion loan and a $3.9 billion tender offer to Yahoo shareholders).

Here are the specifics of Microsoft's offer and the valued assigned to each component, if no and all shares are tendered:

Value to Yahoo shareholders tender No shares tender All shares tender
Yahoo distributes $12.5B in Asian assets $9.00 $9.00
Yahoo distributes $3.5B in cash to shareholders (Microsoft $1B for search/$2.5B of cash on hand) $2.50 $2.50
Microsoft offers $2.8B in preferred debt at 5 percent $2.00 $2.00
Microsoft tenders $3.9B for Yahoo shares at $19.50 0 $2.77
Remaining shares $16.73=effective value of shares after tender (86 percent x $19.50) $19.50 $16.73
Total value to Yahoo shareholders $33.00 $33.00

Yahoo, meanwhile, cast the value Microsoft and Icahn assessed the software giant's proposal at as overly optimistic, according to its revised shareholder presentation.

While Microsoft improved the terms on search revenues the software giant would pay Yahoo, compared with its initial offer last month , the search pioneer finds the guarantees lacking.

Microsoft is offering to pay Yahoo either 70 percent to 80 percent of net search revenues in the first five years, or a flat $2.3 billion annually after search traffic acquisition costs during the same five-year period, providing Yahoo maintains its historical U.S. page views and affiliate revenue. Microsoft would pay whichever is greater of the two.

Yahoo re Microsoft-Icahn proposal
Here's a look at Yahoo's assessment of the Microsoft-Icahn joint proposal. Click on the image for a larger view. Yahoo

But Yahoo notes its ability to maintain its page views and affiliate revenue will be tied to the degree of success Microsoft encounters once it takes over Yahoo's search assets.

Here's a look at Yahoo's assessment of the Microsoft-Icahn joint proposal:

Yahoo investors also weighed in, sending the search pioneer's shares down 5.13 percent in morning trading to $22.36 a share.

 

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