Microsoft may come out winner in Yahoo and Icahn settlement

Updated 10:45 a.m. PDT, with comments from the M&A director of research at RiskMetrics Group.

Microsoft may be the biggest winner in the proxy fight settlement between Yahoo and activist investor Carl Icahn, whose peace accord was announced Monday.

With its ally Icahn and two members of Icahn's former dissident proxy slate getting three seats on Yahoo's expanded 11-member board as part of the settlement, Microsoft may find a sympathetic ear on any future buyout or asset acquisition proposals for Yahoo's search business, said sources. That, as a result, could push Microsoft to make another bid sooner than later, sources said.

"This settlement is a good thing for Microsoft," said one attorney who specializes in mergers and acquisitions and has been involved in proxy fights before. "It puts people on the board who aren't interested in more of the same, so it creates new opportunities to get a new perspective on the board."

And Chris Young, director of M&A research for institutional investor advisory service RiskMetrics Group, said the settlement may bring Microsoft back to the negotiating table once again.

"In my opinion, there is a greater chance Microsoft comes back to the table than there was yesterday. Whether it's more likely a deal gets done is hard to say," Young said.

He noted that without Icahn waging a proxy fight and keeping the pressure on Yahoo leading up to the Internet pioneer's August 1 shareholders meeting, Microsoft has no reason to delay making another offer for all, or part of Yahoo.

"Before, Microsoft was taking advantage of the leverage that Icahn's proxy fight gave them. But now that leverage is gone," Young said. "If they truly were interested in a deal, there is no reason to delay to maximize their leverage."

Yahoo met with RiskMetrics on Thursday to make its case as to why its current board should be re-elected to a one-year term and Icahn was scheduled for Tuesday, Young said. RiskMetrics, and other institutional investor advisory services, issue recommendations on how investors should vote on proxy issues. As a result, these services can be influential in proxy contests, given mutual funds, pension funds, and asset management companies are their clients and may base their votes on these services' recommendations.

"The settlement is an admission by Yahoo that they felt they'd lose a few seats in a proxy fight," Young said.

Yahoo and Microsoft were not immediately available for comment. Icahn did not return phone calls.

Microsoft, in announcing its support for Icahn's initial proxy slate to run against Yahoo's current board earlier this month, said it was no longer willing to negotiate a deal with the Internet search pioneer's current board.

The settlement will alter Yahoo's current board, but it has yet to be seen how much influence Icahn and two of the members from his former dissident slate will have on the 11-member Yahoo board. To make room for Icahn's three board seats, Yahoo director Robert Kotick has agreed not to run for re-election at the annual shareholders meeting. That would drop the board down to eight members, but the additional three will bring it up to 11.

Wall Street appeared a little skeptical. Yahoo fell nearly 2.67 percent in morning trading to $21.78 a share.

Nonetheless, the M&A attorney noted that Icahn has had success in winning other directors over to his views and thinking, even in situations where he or his representatives accounted for less than a majority of the seats on a company's board.

Under the agreement, Icahn will be nominated to Yahoo's board of directors and the current board will chose two additional directors from among Icahn's former dissident slate to join Yahoo's expanded board of 11 members. Icahn will have three of those 11 seats.

But only having a minority of the available board seats didn't deter Icahn from having an effect on ImClone Systems, a biotechnology company he waged war with two years ago.

In a previous CNET News article on Icahn's track record with his proxy fights, David Sidransky, an ImClone director who served on the biotechnology company's board prior to and after Icahn's arrival, said:

The board was divided with different strategic alternatives in mind...Although (Icahn) was in the minority...he presented a plan and said this is what I want, and this is how I want to achieve it. He got people interested in that plan and eventually gained a majority support on the board.

Icahn, during his proxy fight, advocated taking ImClone's core cancer drug, Erbitux, which is used for combating head and neck cancers, and aggressively expanding trial tests for other uses. The former corporate raider also called for finding a permanent CEO after a lengthy period with an interim CEO and tying executive compensation more tightly with ImClone's stock price. Sidransky further added:

Carl is very convincing and has passion. He convinced me that we could do it--that we could get the drug going and expand the company. We've since hired a competent CEO and the right management...This is a complete turnaround. This board is going in a completely different direction now, than before Carl came aboard.

The M&A attorney made a similar observation.

"If a strong director is on a board, even if they are in the minority, that person can add value to the board, because directors want to accommodate reasonable views," said the M&A attorney.

And if some of the advisory services to institutional investors still want to weigh in on Yahoo's director nominees, post-Icahn settlement, one act they could take would to be to issue a "withhold" recommendation, noted one source with such a service.

"Yahoo's recent behavior calls into question some of their activities. Although people have called into question (co-founder David) Filo going to negotiate with Microsoft when he wasn't even a director, it raises the question of where was the chairman and the corporate governance committee?" said a source with an institutional investor advisory service. "If there is a withhold vote of 30 to 50 percent on directors, it sends a strong message and would give a dissident a strong voice on the board."

Whether advisory services to institutional investors, such as RiskMetrics, Glass Lewis & Co., and Proxy Governance, issue withhold recommendations has yet to be seen.

But one proxy solicitor said any benefit of greater influence on Yahoo's board that Icahn may receive from a "withhold" vote recommendation will depend on the reason cited by the institutional investor advisory service.

Said the proxy solicitor: "Sometimes dissidents put on a board are piranhas and remain outsiders, and sometimes they integrate very well on the board and are thought leaders."