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Microsoft: We'll talk deal if Yahoo gets a new board

July 7, 2008 |  9:59 am
Microsoft CEO Steve Ballmer

Microsoft said today that it might renew talks to buy Yahoo’s search technology or the entire company if billionaire financier Carl Icahn succeeds in ousting the Yahoo board and Chief Executive Jerry Yang.

The Internet company fired back at Microsoft, accusing the software giant of teaming up with Icahn to force Yahoo to sell in a transaction that would not be in the best interests of Yahoo shareholders. Yahoo said it approached Microsoft Chief Executive Steve Ballmer in June about a deal but was rebuffed.

If Microsoft really wants to buy Yahoo, "we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it," Yahoo said in a statement.

Yahoo shares jumped 12% to $23.95 this morning on word that Microsoft had been in talks over the last week with Icahn, who controls about 69 million Yahoo shares. Analysts said the development puts more pressure on Yang and increases the odds of a Microsoft deal.

"At the end of the day, we believe Yahoo! must be acquired by Microsoft if Microsoft is serious in its online advertising ambitions," Piper Jaffray analyst Gene Munster said in a research report. "We had previously suggested that Icahn had a 30% likelihood of gaining control of Yahoo!’s board at the annual meeting. Now we believe he has a 50% chance of gaining control."

Microsoft walked away from ...

... a $47.5-billion takeover bid for Yahoo in May when Yang demanded a higher price. Microsoft then tried to buy Yahoo’s search business but could not reach agreement with Yahoo’s board. Microsoft wants Yahoo’s search technology to compete with Google, which dominates search. Yahoo opposes selling its search business, opting instead last month for a partnership with Google, which faces antitrust hurdles. That deal could add as much as $800 million in revenue a year.

In a statement, Microsoft said it welcomed the talks with Icahn. It also cautioned: "We respect the right of Yahoo’s shareholders to determine the destiny of their company, and we do not intend to engage in ongoing commentary on these issues in advance of Yahoo’s shareholder meeting."

Icahn is attempting to gain support for his board slate ahead of a Yahoo shareholder vote Aug. 1. He has the backing of some shareholders, including T. Boone Pickens, chairman of BP Capital LLC, and hedge-fund manager John Paulson. Icahn has nominated nine directors to replace Yahoo’s board members, including himself, Dallas Mavericks basketball team owner Mark Cuban and former Viacom Chief Executive Frank Biondi Jr.

Icahn also issued a statement, saying that over the last week he had spoken "frequently" with Ballmer, with several conversations lasting as long as an hour and some including top executives, including Kevin Johnson, who heads Microsoft’s platform and services unit. The talks centered on the industry but also on how Microsoft and Yahoo could "do a transaction together," Icahn said. Ballmer made it clear that he could not reach an agreement with Yahoo’s current board, but would be willing to consummate a major transaction should the board be ousted, Icahn said.

The two parties did not discuss price. But Icahn says Yahoo is "moving toward a precipice."

"IT IS TIME FOR A CHANGE," he wrote.

The talks with Microsoft may give Icahn a boost, but he must take other steps to persuade major shareholders, Munster said. "We expect shareholders would like to see Icahn announce a CEO candidate or other operational plan for the future so that a Microsoft deal is not the only option," he said.

Yahoo reports second-quarter financial results on July 22.

-- Jessica Guynn

Photo: Jack Guez / AFP/Getty Images