Icahn, Yahoo Heighten Drama in Play for Shareholder Votes

The ground battle in the proxy war between Carl Icahn and Yahoo has begun in earnest, with Yahoo directly urging shareholders to back the board’s slate of directors and ignore Icahn’s pleas for change.

Yahoo filed a copy of the proxy solicitation notice it sent to shareholders with the Securities and Exchange Commission, urging them to vote to keep the current leadership in place and warning that backing Icahn — or not voting at all — could lead to further loss in the company’s value.

“Given Microsoft’s stated position of not wanting to acquire Yahoo, the election of Mr. Icahn’s slate could result in substantial erosion of stockholder value,” CEO Jerry Yang wrote in the letter to shareholders. “Mr. Icahn’s only plan for Yahoo, if his slate is elected, is to hope that Microsoft — which withdrew its acquisition proposal more than a month ago and has since publicly reaffirmed that it is not now interested in a full acquisition — can be persuaded to come back to the table and agree to acquire our company. But this is not a strategy.”

Debate Over the Severance Plan

Yahoo also filed a document with regulators that reiterates the Web portal’s position that a potentially costly severance program recently put in place would be triggered by an Icahn-led takeover of the company. Yahoo’s filing also downplays the financial impact of the package.

Critics have said the plan could cost US$2.4 billion to implement, while Yahoo said a more realistic figure would be $845 million — and that level would only be reached if 30 percent of the workforce were laid off.

Meanwhile, Icahn continued to pound away at Yahoo CEO Jerry Yang and the incumbent board of directors, telling an audience at the New York Financial Writers Association Awards that the portal cannot compete without merging with Microsoft. Icahn also called Yahoo’s severance plan a “travesty” and said he remained hopeful a deal would get done.

Also Tuesday, shareholders suing Yahoo for various moves they believe made a deal with Microsoft impossible — including the severance package — pressed a judge to grant a speedy trial, arguing the case must be heard ahead of the company’s Aug. 1 annual shareholder meeting.

War by Proxy

Yahoo’s filing sets in motion the final run-up to the shareholder meeting, when Icahn hopes enough shareholders will back his slate of directors to replace the existing board with people eager to see a sale to Microsoft take place.

Proxy fights can quickly become complex and arcane wars of tactics, strategies and vote-counting, and even though millions of Yahoo shares are in the hands of smaller or individual stockholders, the winning side could be determined by a small number of major investors.

According to Yahoo’s SEC filing, Capital World Investors holds about 135 million shares, or almost 10 percent of all outstanding shares. Legg Mason and Capital Research Global Investors each own more than 6 percent, while cofounders David Filo and Yang hold 5.79 percent and 3.92 percent of the outstanding shares, respectively.

The public battle in the media may be designed to motivate voters, but it’s also not giving investors the information they need, said N. Venkat Venkatraman, a professor of management at Boston University.

“Both sides need to go beyond letters and press releases,” he told the E-Commerce Times. “Right now, all each side is saying is that the other lacks a credible plan to [move] Yahoo forward. If Yang has a real vision and strategy for moving forward, he should lay it out. If it’s worthwhile, investors will rally behind it.”

Doing the Math

It’s believed that Icahn and funds he controls now hold about 60 million shares, or just under 5 percent of the total. He may also have support of several other major individual and institutional investors.

Right now, it appears Icahn may have 30 percent of the shares on his side — a group that includes the dissident shareholders who have sued Yahoo over its severance plan — according to Peter Cohan, president of Peter S. Cohan & Associates.

While a majority of shareholder votes is needed to win, the real work in such a battle is to get the votes out. Individual shareholders typically do not actively exercise their rights to vote — or attend annual meetings — unless a controversy erupts. In such cases, companies often hire outside firms to contact shareholders directly and accept their votes by telephone or online.

While the battle is now over the proxy fight, it may be that Icahn’s strategy is larger than simply wresting control from Yang and his allies, management consultant and author Kaihan Krippendorff told the E-Commerce Times.

“Icahn is playing a critical role in competitive dynamics that could play to Microsoft’s favor,” he said. The strategy of sowing discord may work even if Icahn cannot win a majority of board seats. Indeed, the investor has shown in the past that he has the patience to wait out a company and see his initiatives come to pass over time.

“The battle may be the proxy fight, and that battle will get fierce, but the war is even larger,” Krippendorff added.