Icahn notes Yahoo-Google deal maybe worthwhile

If Microsoft was holding out any hope of enlisting Yahoo investor activist Carl Icahn to its side of the table with a partial acquisition of the search pioneer's business, Icahn apparently isn't budging.

Icahn, as quoted in a Reuters report Sunday, said he believed Yahoo's advertising partnership with Google "might have some merit."

Icahn's comments follow Yahoo's statement Thursday that talks with Microsoft have come to an end, after it determined selling its search business to the software giant was not in its best long-term interests and that Microsoft reiterated it had no intent to launch a new buyout bid for the entire company.

Within hours of announcing its failed talks with Microsoft, Yahoo announced it would enter into a search advertising partnership with Google--a move that Microsoft has previously stated it would find objectionable.

Said Icahn in a Reuters interview:

"While the Google deal is not the same as an offer of $34.375 per share for Yahoo, I am continuing to study it, and it might have some merit."

"I continue to be extremely disappointed with the Yahoo management, but the Google deal might have some merit and seems to be better than the alternative deal proposed by Microsoft."

Icahn, in the interview, declined to comment on whether he would continue with his proxy fight to unseat Yahoo's entire board with his own slate of dissident directors, or scale it back and seek only a minority representation on Yahoo's board.

For Microsoft, such comments mean it likely can't count on Icahn to carry its message to Yahoo investors and ask them to vote in his dissident slate, with the hope the dissident slate would approve the partial search buyout deal that the current Yahoo board had rejected.

Whether Microsoft would want to entertain a hostile tender offer for a portion of Yahoo's business and generate enough investor support for such a deal is highly questionable. In fact, that option is not available to Microsoft, given a company cannot launch a hostile bid for a portion of another company's assets, noted one source familiar with hostile bids.

The software giant, however, sounded like a potential presidential candidate testing the waters before declaring, in a memo sent Friday to Microsoft employees. Although the memo was meant for Microsoft's workforce, there was plenty there that could also speak directly to Yahoo investors.

Here's an excerpt from the employee memo, as reported by News.com's Ina Fried :

We believe this proposal would have created compelling value for Yahoo and its shareholders in at least three ways:

• New Transfer of Cash to Yahoo Shareholders. This proposal would have transferred $9 billion from Microsoft to Yahoo, which could have been used by Yahoo to reward their shareholders.

• A More Profitable Ongoing Business. This proposal would have resulted in higher operating income on an annual basis for Yahoo, with our projections more than doubling Yahoo's operating income in the first year of operation, and increasing it by more than $1 billion above its current operating income level.

• A More Compelling Search Offering. The combination of the search platforms would have unlocked new R&D innovation, eliminated redundant engineering efforts and allowed for greater scale in serving our customers.

Taken together, we believe that our proposal would have created total value for Yahoo's shareholders in excess of $33 per share.

Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90 percent of the paid search advertising market in Google's hands. This will make the market far less competitive. There are many experts who suggest that a host of legal and regulatory problems lie ahead for Google and Yahoo.

Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising.

One proxy solicitor had this observation regarding Microsoft's memo:

"In the modern world every message has multiple audiences, in part because of media coverage. Every communication about a corporate event like a proposed transaction - or lack thereof - between Microsoft and Yahoo! will be scrutinized and analyzed by investors, even when the communication may have been designed for internal purposes only."

In the coming weeks, leading up to Yahoo's annual shareholders meeting on August 1, it will be interesting to see whether Microsoft solely spends its time talking about the potential anti-trust issues with a Yahoo-Google advertising relationship, or spends an equal amount of time discussing the shareholder value of its partial Yahoo buyout deal.