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Icahn also fighting clock in Yahoo board challenge

Investor activist Carl Icahn gets an encouraging sign from Microsoft but has yet to outline his challenge for Yahoo's board of directors.

Investor activist Carl Icahn needed a sign, a tangible sign, that Microsoft was still interested in buying Yahoo, or at a minimum, its search business, if he were to increase his chances of winning his proxy fight to unseat the company's entire board of directors.

On Monday, in a coordinated effort, Microsoft delivered that sign. The software giant issued a public statement that it was not only willing to discuss a potential buyout of Yahoo's search business, but also, alternatively, a renewed bid for the entire company--providing a "new" board was elected at Yahoo's August 1 shareholders meeting.

Despite this significant turn of events, Icahn has yet to pull the trigger and announce whether he will ultimately run a full slate of dissident directors against Yahoo's nine-member board to take control of the company, or only put forth a partial slate to go for less than a majority of the seats on the board. Until Icahn files his definitive proxy, he isn't able to distribute proxy cards asking Yahoo investors to vote for his nominees, or to hit the investor road show circuit touting his candidates.

Although there could be a variety of reasons why Icahn has not yet filed his definitive proxy, ranging from addressing any last-minute changes requested by the Securities and Exchange Commission to unexpected delays over Fourth of July weekend, it could provide the investor activist with an additional bargaining chip in achieving a friendly Yahoo-Microsoft deal before he finalizes his proxy plans.

To increase its chances of later entering into a Yahoo transaction, Microsoft needs Icahn to successfully run a full slate. And to bolster his chances of unseating Yahoo's current board, Icahn needed Microsoft to publicly state it is still interested in buying Yahoo.

But Icahn, an experienced fighter on the proxy front, is aware he can also lose and may wish to leverage his potential bargaining chip to push the parties to narrow the gap on a transaction that both can live with. Last month, Icahn lost his bid for three out of four seats on Biogen Idec's board.

In the Yahoo-Icahn proxy fight, the longer Icahn waits to file his definitive proxy, the less time he'll have to circulate the materials among Yahoo investors before the August 1 annual shareholders meeting.

"The longer he waits, he'll lose on getting votes to retail (mom-and-pop) investors," said one proxy solicitor. "But it may not hurt him if he's concentrating on only large institutional investors. They tend to wait one or two days to vote before a meeting anyway."

Institutional investors include mutual funds, pension funds, and asset management firms.

These large investors, specifically pension funds and index funds, often rely on institutional investor advisory firms for recommendations on how to vote on proxy matters. As a result, these advisory firms can wield a lot of influence in proxy contests and typically give their recommendations to their clients a week or two before an annual shareholders meeting.

One source with an institutional investor advisory firm said Icahn still faces a challenge in winning a recommendation from advisory firms, despite Microsoft publicly stating it would work with a "new" Yahoo board and would be interested in discussing a potential deal.

"We would base our recommendation on how the board has performed and what value it has brought to shareholders," said the institutional investor advisory source. "Sure, we'll pay attention to Microsoft's statement it's willing to work with a new board, but that won't be our main consideration."

But institutional advisory firms may, or may not, have as much of an effect in Icahn's proxy fight.

"Shares of Yahoo are now trading in the hands of fast money," said the proxy solicitor, noting that arbitragers don't rely on institutional investor advisory firms for advice.