Friday, June 6, 2008

Icahn playing good cop / bad cop ?

Yesterday I said, "Also both Yang and Icahn, their public spat notwithstanding, seem to be on the same team in terms of objective - selling to MSFT in the mid-thirties, with valuation guarantee". I think today's letter from Icahn confirms this. It looks so much like a good cop / bad cop strategy.

YHOO is the bad cop, and its terms for MSFT deal are:
1. ~$37 negotiable, which means ~$35 with real valuation guarantees. They also have a severance package which is practically comparable to MSFT's offer of $1.5B in terms of cost, although Icahn unnecessarily makes a big deal out of it. No YHOO employee would vote for Icahn, if he keeps doing that, no matter how pissed they are with Yang.

Icahn is the good cop, and his terms for MSFT deal are:
1. ~$34.375, with a real valuation guarantee of ~$33 (note his statement on alternative deals with MSFT). He would like to take off the YHOO severance package, in order to entice MSFT to sign a deal and also allow it flexibility to design the package.

MSFT offer was about $33 with perhaps a valuation guarantee of ~$31 in case of a friendly deal. Considering the beating that its stock has taken since the announcement of the deal, anything more would be detrimental to its stock. I don't think its too concerned about the YHOO severance plan, since its plan was comparable and it is interested in retaining the employees. I didn't see Ballmer making a big deal of YHOO's plan in his letter when he walked.

Also Icahn is talking about just reverting Yang to the "chief Yahoo" role instead of firing him. The conciliatory tone from him indicates that he may be willing to negotiate with Yahoo to get 1 or 2 board positions and back off from the proxy contest. Even with one director, Icahn can facilitate a deal with MSFT by acting as a mediator and preventing any "shenanigans".

Most likely outcome: Icahn gets a board seat, MSFT waits till its stock improves to make any "full acuisition" offer, meanwhile YHOO and MSFT keep talking about "alternative offers". At some point if YHOO stock tanks too much, it signs up with GOOG, with support from Icahn and structure the deal in a way that it doesn't preclude a deal with MSFT.

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