Can you say “truce”? Icahn and I will

by Jeff Dorsch, July 29th, 2008, 7:00 am

Friday’s annual meeting of Yahoo! shareholders will be anticlimactic, thanks to a deal worked out last week between the company and activist investor Carl Icahn, who owns about 5% of Yahoo!’s shares.

Icahn called off his proxy challenge, striking a settlement agreement with Yahoo!’s board and management. Basically, one incumbent director will leave the board, the board will expand from nine to 11 seats, and two of the three vacant seats will be filled by Icahn and former AOL CEO Jon Miller, with Icahn to name a third director. (Please let it be Mark Cuban!)

Icahn briefly blogged on the settlement, which is so 21st century, of this aborted proxy battle.

What brought about this rapprochement? As others have noted, one event that may have tipped the balance and caused Icahn to seek a deal was the declaration by Legg Mason the week before that it planned to vote its shares in favor of the management nominees at the Yahoo! annual meeting. Bill Miller, the manager of Legg Mason’s flagship Value Trust fund, loudly criticized Yahoo!’s board and management for scaring off Microsoft, yet decided in the end to go with the devil he knew. Icahn reportedly saw Yahoo!’s institutional investors circling the wagons around the incumbent board and management and apparently decided against suffering a public defeat.

For their part, the Yahoos in Sunnyvale, California, knew they were about to report mediocre results from their second quarter, so they also had an impetus to come to an arrangement with the barbarians at their gate.

This sally by Icahn is looking like his crusade against Motorola — he buys a small but significant stake in the target company, blusters about the sins of the board and management, pulls together a proxy bid, and then calls it off in exchange for seats on the board for him and some cronies. It remains to be seen whether the Yahoo! episode will play out like Motorola did, with the CEO banished and the company broken up.

Meanwhile, the Evil Empire in Redmond, Washington — excuse me, I mean Microsoft — is officially washing its hands of any interest in all or part of Yahoo!, and turning to its own knitting to defeat Google. Knit one, Perl two? (A little coding humor.)

Yahoo!’s not out of the woods, with Congress scrutinizing its search advertising deal with Google and some shareholders still mad about losing out on $33 a share in cold, hard cash from Microsoft. (The stock closed Monday at $20 and change.) Not much yodeling going on at Yahoo! HQ these days.