Icahn coming around to Google-Yahoo deal?

16 June 2008

After weeks of railing against the Yahoo management for not accepting Microsoft's buyout offer, billionaire investor Carl Icahn is evidently in a conciliatory mood as he considers the advantages of Yahoo's advertising deal with Microsoft.

However, he tempered his positive comments by suggesting that his current stance was an outcome of Microsoft's revised offer revealed last week, and that he still considered the enhanced buyout option at $34.375 a better deal. (See: Yahoo strikes $800-million ad deal with Google, ends talks with Microsoft)

He said that while continue to be extremely disappointed with the Yahoo management, the Google deal was not the same as an ouright acquisition at $34.375 per share for Yahoo, he was continuing to study it, as the propossal migh have some merit and appeared to be better option to the alternative deal proposed by Microsoft. (See: Microsoft opposes Yahoo-Google deal, reveals another rejected stake plus search offer)

In an internal memo Microsoft president Kevin Johnson said that his company had offered Yahoo $9 billion in cash, money that could have been used by Yahoo to reward its. His company also guaranteed Yahoo an annual increase in profit of $1 billion for three years, thanks to the savings Yahoo would have realised from selling its search business and a bounty that Microsoft promised to pay every time someone clicked a search ad on one of Yahoo's web sites.

Microsoft's proposal had three parts. It would have paid Yahoo $1 billion for its search advertising business and an additional $8 billion for a 16-per cent equity stake. Microsoft also would have provided Yahoo with all the data on those searches and search ads to enable Yahoo to use in its display ad platform according to a source.

However, Icahn apparently agreed with Yahoo CEO Jerry Yang, who's sacking he has been demanding, that this offer undervalued the search business and the company as a whole. Moreover, the agreement would have locked Yahoo into an exclusive deal for 10 years, while only offering higher returns for only three years.

On the other hand, the deal with Google, though offering a potential $450 million in operating cash flow in the first year, is non-exclusive, meaning that other companies will be able to sell advertisements that appear on Yahoo's pages.

The agreement has "change of control" provisions that allow Google or Yahoo to terminate the deal if Yahoo is acquired or if a majority of its board is replaced at its shareholder meeting on 1 August.