Yahoo's declining share price a drag on Icahn's proxy fight?

Yahoo's share price has been hit with an 8.6 percent decline over the past two days, signaling investors may be less than thrilled with Microsoft's sweetened offer to buy the Internet pioneer's search assets.

That may be problematic for investor activist Carl Icahn, who is hoping to use Microsoft's sweetened bid as a means to entice Yahoo investors to vote for his slate of dissident directors, as he seeks to oust Yahoo's current board of directors in a proxy battle.

Yahoo closed at $21.54 a share on Tuesday, down 8.6 percent since the company rejected Microsoft's renewed search-only buyout bid on Saturday. The broader markets have also declined in the same period, but to a far less degree of approximately 1 percent.

"Our read is that a full offer for Yahoo would be more palatable for Yahoo holders," Mark Mahaney, a Citi Investment Research analyst wrote in a note Monday.

And one arbitrager noted Yahoo investors are desperate to find a catalyst for the stock, but Microsoft has yet to make a renewed bid for the entire company.

Icahn may also find Yahoo's declining stock could be a minor problem unto itself, given at least one proxy advisory service to institutional investors takes note of share price performance of companies in proxy battles.

"We do look at (stock price performance) to get an indication of what the market is thinking...but it doesn't have too much weight," said one source with a proxy advisory service. "In this situation, the board has been together for a while and, so, we'll see how they've performed during their tenure, with a lot of weight given to the last several months as they've dealt with Microsoft."

Proxy advisory services such as RiskMetrics, Glass Lewis, and Proxy Governance will be making recommendations to their clients, beginning as early as next week, on how to vote regarding the election of Yahoo's board members. These clients include mutual funds, pension funds, and asset managers, creating a situation where potentially a large number of shares are swayed to vote one way based on their recommendations.

Meanwhile, one proxy solicitor noted a company's share price performance is not necessarily a sign of whether one party or the other is gaining favor with investors in a proxy contest.

Proxy solicitors serve as consultants to companies and dissident shareholders on how to drum up votes among investors and develop strategies for getting investors to vote for their clients.

"Price fluctuation doesn't necessarily indicate support one way or another in a fight," said the proxy solicitor. "There is no perfect correlation between Icahn's proxy fight and whether Microsoft and Yahoo do a search deal."