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Yesterday, TechCrunch reported that Microsoft and Yahoo were talking again. I was immediately skeptical. Recently, All Things Digital had called out TechCrunch as conducting piggyback reporting instead of doing their own heavy-lifting. While I thought that was a bit harsh (All Things Digital is a project of the Wall Street Journal, and quite frankly - who has their connections?), it came as no surprise that TechCrunch would attempt to break a big story.

Still, the mainstream press ran with the story. Surely, they had done their homework.

Maybe not.

This morning, Kara Swisher of All Things D explained why she didn’t run with the story: she couldn’t corroborate it. I read her story with a firm sense of “I thought so” until she said that her Yahoo and Microsoft sources “emphatically went out of their way yesterday–which is not so typical–to deny any talks were going on…”

Sounds like Ms. Swisher’s sources are protesting a little too much.

If talks have resumed, it sounds like they might be doing it the right way this time - keeping the conversation behind closed doors instead of blasting rhetoric through the press. But that might be a big IF.

Hardly a Friday goes by without a good dose of Microhoo drama leading into the weekend. Today, Carl Icahn released his second letter in a week to Yahoo’s Chairman Roy Bostock. He responded to yesterday’s Yahoo response to his earlier letter ripping Yang. Plus, he suggests that Yahoo publicly offer itself to Microsoft for $34.375 per share.

Hey Carl, just one suggestion. That second paragraph is a doozy. Next time, chop those sentences up into more pretty paragraphs, ok?

Anyway, Icahn also outlined 5 steps his board would take if successfully elected at the shareholders meeting on August 1. Check out the letter in its entirety below.

Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153

June 6, 2008

Roy Bostock
Chairman
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Roy:

While you may take issue with the content of my letter, I take issue with your oversight of Yahoo! Again, I stand by my characterization of your “poison pill” severance plan and I find it humorous to see you attempt to defend it.

Roy, it is you who “misrepresents and misstates the details” of the plan. Much like the rhetoric in many well known political campaigns, you keep repeating misstatements in the hopes that by repeating misstatements enough times it will convince your shareholders that these misstatements are valid. For example, you repeated, “the plan was fully disclosed at the time of its adoption and should be no surprise to anyone at this point.” This is simply not true. The egregious magnitude of the dollar amount cost of the plan was never fully disclosed, nor was the email from your compensation advisor calling the plan “nuts.” While you keep repeating that the severance plan was in the “best interests of shareholders”, you neglect to mention that the financial cost of the plan could be immense. The documents obtained during discovery and released in the shareholder complaint show that Yahoo! estimates the maximum change in control severance expenses to be a staggering $2.4 billion if Microsoft bids $35 per share for Yahoo! You neglected to mention that the true cost to an acquirer may be even higher as the perverse change in control severance incentives may diminish the work effort of Yahoo! employees. In case you do not understand the plan, in addition to the $2.4 billion of severance expenses, I believe the plan will negatively impact employee behavior and degrade the ability of an acquirer to successfully integrate the acquisition. In the event of a change of control, the employee may decide not to work as hard in the hopes of cashing in on a robust severance package that awards up to two years salary and benefits, $15,000 of outplacement expenses, and accelerated vesting of stock options and restricted stock units. To make matters worse, it is not just the acquirer firing the employee that can trigger the severance package but the employee who may decide on his or her own to resign for “good reason” at any point within two years of a change in control. It is quite obvious to me that this plan impacts the price an acquirer would pay. Is it any wonder than an acquirer, once fully comprehending this plan, might not wish to negotiate any further? I again call upon you to honor your fiduciary duty to your shareholders and rescind this “poison pill” severance plan.

You asked, “what exactly would happen to our Company if you and your nominees were to take control of Yahoo!” I will give you my perspective on that.

— First, I would work to have the board replace your “poison pill”
severance plan with an acceptable alternative.

— Second, I intend to ask our new board to hire a talented and
experienced CEO (attempting to replicate Google’s success with Eric
Schmidt) to replace Jerry Yang and return Jerry to his role as “Chief
Yahoo”. Indeed, it was much speculated that Jerry would serve in the
CEO role temporarily until a permanent CEO was hired after the board
asked Terry Semel to resign.

— Third, I intend to ask our new board to inform Microsoft that unless
any alternative transaction can insure a $33 or higher stock price (of
which I am skeptical) all talks of alternative transactions are over.

— Fourth, I will ask our new board to offer publicly to sell Yahoo! to
Microsoft in a friendly and cooperative transaction.

— Fifth, to the extent Microsoft does not want to make a proposal, I will
ask our new board do a deal on search with Google, but only if it
contains termination provisions that would in no way impede a
subsequent acquisition by Microsoft.

Now let me ask you a couple of questions, Roy:

— Why don’t you, now that you have the opportunity, remove the “poison
pill” severance plan that I find to be ridiculous and thereby remove a
major obstacle to a Microsoft acquisition?

— In my opinion, Microsoft does not believe you will ever sell the entire
company on a friendly basis. So why don’t you stop dancing around the
subject and publicly offer to sell the company to Microsoft for $34.375
per share and promise to cooperate completely?

— Why are you still giving hope to Microsoft that there is a possible
“alternative deal”? As long as there is the possibility of an
“alternative deal”, isn’t it obvious that Microsoft will not make a bid
for the whole company?

Sincerely yours,

CARL C. ICAHN

On yesterday’s earnings call, Chris Liddell, Senior VP and CFO, affirmed recent statements by Steve Ballmer to focus on the online advertising market. He said that the strategy was based on three pillars:

• To drive innovation and search
• To increase value to advertisers and publishers
• To grow user engagement across MSN and Windows Live properties

Liddell said that Yahoo would accelerate that strategy. But later, he made this statement:

We’ve yet to see tangible evidence that our bid substantially undervalues the company. In fact we see the opposite.

Yahoo continues to lose search share and profitability continues to decline year-on-year. The results that they announced on Tuesday were in line with the guidance that they gave on their last earnings call on January 29, after which their stock price closes at $19.05 and Wall Street analysts’ consensus on value was significantly decreased.

Just how is Microsoft expected to accomplish their three pillars if Yahoo is as awful as they say?

Perhaps Liddell and Ballmer are beginning to ponder that exact question. Earlier this week, Ballmer suggested that Microsoft would go forward without a merger. During yesterday’s call, Liddell suggested that an alternative to Yahoo’s “no” is to withdraw the proposal.

Meanwhile, Yahoo remained consistent in what they’ve been saying all along – that they’re worth more than Microsoft’s original offer. Speaking on Yahoo’s earnings call on Tuesday, CEO Jerry Yang reinforced his confidence in the overall value of his company:

Yahoo! has a unique and valuable combination of assets that include our global brand, our large worldwide audience, our leadership in online advertising, our strategic positions in Asia, our mobile and emerging market franchises, and our scales, tools, and technology.

Yang stated that Yahoo’s Q1 revenues were particularly remarkable in the light of uncertainty caused by Microsoft’s unsolicited offer. He also said that Yahoo remains open to its options, including a deal with Microsoft.

Then Yang zeroed in on what he felt was his most important statement on the matter:

If you take only one thing away from this brief discussion, I hope it will be that our board and management are committed to choosing a path to maximize stockholder value and will not enter into any transaction that does not recognize the full value of this company.

Tomorrow, the ultimatum comes. Decisions will be made and actions will be taken. But the rhetoric still has just begun.

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Introduction”Rhetoric is the art of discovering, in a particular case, the available means of persuasion.” [...]

After the uproar caused by his proposed code of conduct for bloggers, Tim O’Reilly could have let the subject drop into the deep waters of blogospheric controversy, only to be remembered as a cautionary tale, a footnote to the history of the Web.
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