Icahn and Ballmer Strengthen Case for a Microsoft Takeover of Yahoo, but Lose Some Respect

It reminds me of a playground tug-of-war between little kids. Only there’s $40 billion-plus at stake. In any case, the Microsoft-Yahoo battle is heating up again, and this time things could really get nasty. As you might have noticed, there has been a huge flurry of activity and coverage over the past day or so, and I want to point out a few observations that could be particularly telling.

Yesterday, no doubt to help get things rolling, billionaire investor Carl Icahn published an open letter to Yahoo shareholders in which he described having talks last week with Microsoft CEO Steve Ballmer, some of which he said lasted an hour. The gist of the letter was that he and Ballmer have gotten serious about putting a previously aborted deal for Microsoft acquiring Yahoo back on the table. Microsoft also released a statement confirming that acquisition talks with Yahoo could resume if Icahn manages to replace all or part of Yahoo’s nine-member board after the company’s shareholder election on August 1.

Yahoo shot back with a statement of its own, saying it “continues to stand ready” for negotiations and adding that “if Mr. Icahn has an actual plan for Yahoo” other than forcing it to capitulate and accept Microsoft’s offer, then Yahoo would listen. On yesterday’s news, Yahoo (NASDAQ: YHOO) shares rose 12 percent to close at $23.91, and are up to $24.64 as of 4:45 pm ET today.

Let’s back up for a minute. In early May, talks between Microsoft and Yahoo fell through after Yahoo walked away from the Redmond software giant’s $33-a-share, $44.6 billion takeover bid. Icahn, who has since amassed a small stake in Yahoo, then launched a bid to unseat the company’s management and board, claiming that the latter had “botched” the deal.

There has been solid coverage in the Seattle P-I, Bloomberg, and many other outlets. Much of the analysis points to the increasing likelihood of a Microsoft takeover—because Yahoo’s profits are narrowing, its executives are leaving, and it can’t compete with Google on its own. (My informal chats with ex-Microsofties suggest that Yahoo should have seen this coming and is getting what it deserves.)

For instance, David Kirkpatrick of Fortune argues that Microsoft needs to boost the number of Internet searches on its sites to compete with Google, and Ballmer and Co. won’t be denied: “The only way Microsoft can compete with what the business of Google really is—a large marketplace for advertising and searches—is to somehow achieve much greater scale. No method of creating dramatically greater scale seems available other than combining with Yahoo’s search.” And in another Fortune piece, Richard Siklos explains “why Yahoos shouldn’t underestimate Icahn.” Siklos argues that Icahn’s “brilliant touch for ferreting out weakness in big corporate situations” and public-relations savvy makes him a formidable opponent for Yahoo, which “might try to give Icahn a couple of seats on its board to make his proxy fight go away.” (He also points out that one of Icahn’s proposed board members is Mark Cuban, the outspoken and sometimes-controversial owner of the Dallas Mavericks—not sure how that one will go over.)

But more interestingly, the opinion tide may be turning against Microsoft because of questions about its motives. Michael Arrington of TechCrunch writes that until today he’s been a big supporter of Microsoft’s takeover plan because the Internet needs competition in the search market, and “Google controls too much market share and too much related search revenue.” However, after yesterday’s “shenanigans” and “complete nonsense,” Arrington now says Microsoft and Icahn have crossed a line. His take is that Microsoft has been toying with Yahoo after taking its initial rejections too personally. “It’s no longer just about business, it’s about destroying and humiliating the people who embarrassed Microsoft,” he writes.

Saul Hansell of the New York Times concurs, writing that one possible explanation for Microsoft’s actions is that “it wants to destroy Yahoo rather than buy it.” This is an interesting angle to watch, but I would say it’s still too early to tell what Microsoft really wants—and that’s exactly the way Microsoft wants it. In any case, Hansell concludes, “Microsoft seems to be neither a trustworthy partner nor a reliable bidder for Yahoo, no matter who’s on the Yahoo board of directors.”

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