Icahn, Yang make nice, but who wins?

Both had to make concessions, analysts say

Yahoo and Carl Icahn have apparently ended their public acrimony over the billionaire investor's proxy fight to replace the company's board of directors and its CEO Jerry Yang.

As part of an agreement announced early Monday, Yahoo has agreed to put Icahn and two of his nominees on the board, and Icahn has agreed to drop his effort to replace Yahoo's board with his own slate.

It seems that both parties had to concede something so they wouldn't end up with nothing, according to analysts. Yang wanted to keep his job and to keep Yahoo intact, at least for now. And the only way to do that was to stop Icahn from moving forward with his proxy fight.

For his part, Icahn may have thought there was a chance he would lose his proxy battle because he didn't have the support of some major shareholders, including investment firm Legg Mason.

"The chessboard was pretty clear to both sides, and this was basically what looked like a stalemate," said Dana Gardner, an analyst at Interarbor Solutions. "It could have been a longer, protracted fight, and it wasn't clear given that Yahoo's large investors, including the cofounders, were interested in going all the way to a complete change of the board. So the risk factor was something that Icahn had to weigh."

Gardner said Icahn probably recognized that he couldn't win the proxy fight and that it was time to negotiate so he wouldn't lose much money on his initial investment. Icahn is one of Yahoo's largest shareholder, and owns 4.98 per cent of its common stock.

"There's risk on both sides," said Rob Enderle, an analyst at Enderle Group. "Icahn wants a certain level of control and a voice in the proceedings, and Yang wants to keep his job. It looked like Icahn was going to win the proxy fight, but no election is certain until it's over, and from Yang's side it looked like they were going to lose."

So allowing Icahn on the board and giving him some control was better than an absolute loss, Enderle said.

"From both sides it removes the risk that Icahn was facing in terms of a win/loss, and from Yang's position it allows the executive team to stay on board and continue to function, at least for the near term," he said.

Caroline Dangson, an analyst at IDC, said the deal seems to take the pressure off Yahoo, at least temporarily, as it heads into its earnings call tomorrow and its August 1 shareholders' meeting.

"Yahoo can finally breathe for a week and a half," she said. "It's very temporary, but is it a game changer? I don't think it is, but it is good news for Yahoo because now they have something positive to say. I also think that Icahn doesn't seem to be getting the support he needed from Microsoft because this [deal] seems to be a compromise."

Dangson indicated that if Microsoft had been willing to make a deal to buy Yahoo on the condition that Icahn gained control of the Yahoo board, Icahn might not have been so willing to reach an agreement with Yahoo and end his takeover bid.

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"We're waiting to see what Microsoft is going to do," she said. "They've been saying they're out of the picture, but we feel that Microsft still needs Yahoo to compete with Google, so we're wondering if this is a game Microsoft is playing to let Icahn and Yahoo fight it out so they won't have to pay as much for Yahoo."

The question now is whether these two formerly bitter rivals can work together for the benefit of the company and the stockholders.

Gardner said it makes good economic sense for the board and the executive team to work together on behalf of two larger groups - Yahoo's employees and its investors.

"Given the amount of money and the importance of these kinds of deals, they can bury the hatchet and move on, but the terms and conditions have to be right," he said.

And a little animosity isn't necessarily a bad thing, Enderle said.

"There are too many boards and chief executives that seem to be buddy-buddy, and the whole point of having a board is to have oversight over a public company that represents the stockholders," he said. "So a certain amount of animosity between the board and the executive team could actually be a good thing and help the company as well as help keep the executive team focused. But too much animosity means they would be nonfunctional."

Dangson said now that Icahn will have a seat on the board, he can still push his agenda even though he's not going to control the majority of the board. But it's also up to Yahoo to prove its value to it shareholders, she said.

How or whether Microsoft remains involved is a big question. But now that Icahn, who support Microsoft's effort to acquire Yahoo, is on the board, he has some authority to structure and vote on a deal with Microsoft.

"He doesn't have a controlling interest yet but that all depends on the dynamics of the board," Enderle said. "Icahn and the people he's going to bring on board can be very compelling in their arguments [about the direction of the company]."

Gardner said the deal with Icahn makes the Yahoo board and Yang appear in a better light to shareholders. "There have been multiple flavors of what the truth is behind these ongoing negotiations [with Microsoft] and this makes it seem like they did have good faith and wanted to express good faith in dealing with Microsoft," he said.

But now Yahoo looks like it is ready to go back to the drawing board and once again reopen talks with Microsoft, Gardner said. And Microsoft has to figure out what it wants to do, he said.

"Microsoft needs to decide what part of Yahoo it wants to buy and for how much," he said.

Enderle said Yahoo is in better shape now by ending the fight with Icahn through negotiations rather than through a nasty proxy fight.

"The proxy fight would have resulted in a board that was going to go in and house clean Yahoo, which means Yahoo would get worse before it gets better," he said. "Now there's a chance that this combination will allow the company to focus on getting better out of the gate."