Yahoo settles with activist investor Icahn

updated 4:02 p.m. ET July 21, 2008

SUNNYVALE, Calif. - Yahoo Inc. averted a showdown with rabble-rousing investor Carl Icahn Monday by giving him three seats on its board of directors in a truce that still leaves the door open for a possible sale to Microsoft Corp.

The compromise spares Yahoo from more bickering with Icahn, an acerbic billionaire who had spent the past two months spearheading a rebellion to replace the Internet company’s entire board in retaliation for its rejection of Microsoft’s $47.5 billion takeover bid in May.

The duel had been scheduled to culminate in a shareholder vote at Yahoo’s Aug. 1 annual meeting.

It now appears there will be fewer fireworks at that gathering, although some Yahoo shareholders are still expected to vent about the board’s inability to get a deal done with Microsoft after six months of wrangling.

The main order of business will be the cease-fire giving Icahn three of the 11 seats on Yahoo’s board, which will be expanded to make the deal possible.

Eight of Yahoo’s current nine directors will be retained, leaving the company’s current regime — headed by Chairman Roy Bostock and Chief Executive Jerry Yang — in the driver’s seat.

Robert Kotick, the CEO of video game maker Activision Blizzard Inc. and a Yahoo director for the past five years, will surrender his seat as part of the agreement.

But the compromise, negotiated over the weekend, doesn’t necessarily settle Yahoo’s fate, which has been unclear since Microsoft first made its unsolicited offer in January.

Icahn, who owns a 5 percent stake in Yahoo, emphasized he still believes a sale of all or part of Yahoo may be the best way for the Sunnyvale, Calif.-based company to lift its sagging stock price.

Interactive Key players in Microsoft-Yahoo saga Interactive: A look at some of the major players involved with the dealings.

And with more than $1.5 billion invested in Yahoo, Icahn isn’t likely to be satisfied with the status quo. He paid an average of about $25 per share for his Yahoo holdings, meaning he will sustain a loss unless the company’s stock perks up.

Yahoo shares were trading at about $22 Monday — well below the $33 a share that Microsoft CEO Steve Ballmer dangled in May before withdrawing the bid after Yang sought $37 per share.

Icahn’s involvement on corporate boards hasn’t always paid off. For instance, he won three board seats at Blockbuster Inc. in May 2005, and the movie rental chain’s stock price has plunged about 75 percent since then.

Microsoft didn’t respond to requests for comment Monday but has previously indicated it remains interested in exploring a deal with Yahoo, especially if the negotiations were handled by a new board.

Having been repeatedly rebuffed by Yahoo so far, Microsoft has been reported to be discussing a possible acquisition of Time Warner Inc.’s AOL. Microsoft wants to strengthen its Internet business to challenge Google Inc.’s dominance of the online search and advertising market.

Standard and Poor’s Internet analyst Scott Kessler doubts Microsoft will buy Yahoo, but interpreted the Icahn agreement as a sign that the current board realizes it needs to shake things up even more than Yang has already done since he became CEO 13 months ago.

“It makes it more clear to shareholders that Yahoo’s board is amenable to new ideas and is willing to do what’s necessary to get the business back on track,” Kessler said.

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