Yahoo-Icahn-Microsoft Aftermath: Who Really Won?

By Michael S. Malone           

If you read the news, the consensus in the media today is that the months-long battle over the fate of Yahoo! has now been settled.  Founder/chairman Jerry Yang will stay in place, take-over artist Carl Icahn will (with two others in his camp) be rewarded with three seats on an expanded Yahoo board, and Microsoft has been left in the cold – perhaps to make a run at AOL.

            All of that sound and fury just for this? 

            Icahn even came out with a few comments, obviously designed to calm the roiled waters:  “I am very pleased that this settlement will allow me to work in partnership with Yahoo’s board and management team to help the company achieve its full potential.”   Yahoo, preparing for Tuesday’s quarterly numbers, was otherwise silent on the deal; as was Microsoft.

            The mainstream media can now be expected to close its notebooks, switch off its cameras and move on to the next big corporate scandal.  But is the Yahoo-Icahn-Microsoft war really over?  And if not, who really won this most recent battle?

            In light of the recent announcement, let’s look a little more closely at the three players, and see why each might think it is the current winner . . .and why this story is a long ways from completion.

            Yang won.   This is the most popular position.  After all, just a month ago, with Yahoo’s numbers slumping and the company being assaulted by both its biggest competitor and (in terms of influence) its biggest shareholder – all while being strung along by its biggest threat (Google) and bleeding top executives from every door – Yahoo looked doomed.  The betting line in Silicon Valley was that Yang’s remaining time at Yahoo would be measured in weeks, even days. 

            Now, look what Yang has managed to accomplish:  he’s run off Microsoft, stabilized (sort of) Yahoo’s stock, and neutralized his biggest shareholder threat by giving away only three board seats to Icahn and his crowd – with none of those seats from the existing, Yang-backing, Yahoo board of directors. 

            Better yet, by bringing Icahn into Yahoo, Yang has now made him partially responsible for whatever bad news the company has in the months to come – a much better scenario than having him sitting outside the company.  Yang can now string this relationship along, rope-a-doping Icahn long enough that either Yahoo turns itself around or, in the worst case, Icahn has to share the blame for Yahoo’s fall.

            Best of all, and this may be something Yang appreciates far more than Icahn does, the new regulations (full disclosure, Sarbanes-Oxley) governing boards of directors are so stringent that Icahn, by joining the Yahoo board, has now been stripped of his bully pulpit of running his campaign through the media.  Thanks to S-Ox, he tries that now and the SEC will investigate.

           Icahn won.  Let’s try to keep some perspective on all of this.  Carl Icahn may be a famous corporate raider, but last week he was also merely an out-spoken shareholder of Yahoo trying to cheerlead his way to a proxy war.  He knew that strategy wouldn’t work in the long run — because institutional investors almost never support shareholder revolts.  Remember Hewlett-Packard’s proxy war?  Basically, every employee and ex-employee voted against Carly Fiorina’s plan to buy Compaq Computer – perhaps the great employee/shareholder revolt in U.S. business history . . . but it failed anyway, because the big institutional investors, who would stand by a stuffed animal if it sat in the Chairman/CEO’s chair, backed Carly against her own organization chart.

          That’s what Icahn was up against.  So he made a brilliant move:  having done as much damage as he could do on the public stage, he now goes inside of Yahoo with two of his confederates.  There, they have full access to all of Yahoo’s financials and strategic plans, can fill in any holes in their understanding of the company’s technologies, products and markets . . .and most of all, they can start their sub rosa lobbying the rest of the board. 

           Icahn is now the snake inside the breast of Yahoo.  He is the Tom Perkins on the HP board with Carly Fiorina.  Because the snake represented by Icahn and his team is not allowed to hiss, Yang thinks he can control it.  But the snake can still bite.  Give Icahn about three months – about the time Yahoo’s next quarterly financials come out – and he will make his move.

            Microsoft won.   No one seems to be considering this one.  Microsoft has been pretty silent in the last few days, leading most observers to assume that it is licking its wounds.  Perhaps.  But if Icahn really is an ally of the Boys in Redmond, then he has just given Microsoft its first true beach-head into Yahoo, from which it will be difficult to repel.  And if Yahoo stays in financial trouble, who do you think will first lead the revolt that kicks out Yang, then will re-approach Microsoft about a deal?

            In the meantime, with Yahoo in chaos, Microsoft can focus on the third leg of the plan that it seems to have quietly worked out with Icahn:  buying AOL (it’s not a coincidence that one of those three new Yahoo board seats is likely to go to Jonathan Miller, former AOL CEO).  Microsoft is feeling pretty good these days, especially with the success of its new search pay-back program, and isn’t nearly as desperate as it was late last year when it made its initial run at Yahoo.  It can probably envision much worse scenarios than having Yahoo fall apart, while it snaps up the one group – AOL’s army of tech troglodytes – that isn’t yet owned heart and soul by Google.  Then it can go back, and with Icahn’s help, snap up Yahoo.  Or simply let it die.

           That won’t win the Search wars for Microsoft – not with Google owning eighty percent of the business, but it will make the company a strong No. 2 – where it can patiently wait for the increasingly volatile Google to stumble.   Following, after all, is what Microsoft does best.