News Commentary. Maybe Yahoo should have taken Microsoft's money. Suddenly, there are worse assaults.
Carl Icahn's proxy fight is sure to put an end to Yahoo as we know it—unless a majority of investors rally for the company's cause. But proxy fights favor large investors like Carl is trying to be, even though they are the minority holders in Yahoo.
The proxy battle also illustrates one of the many things wrong with the rules, whether enforced culturally or with regulations, that govern public companies. Yahoo CEO Jerry Yang clearly is in process of turning around the company he co-founded. His predecessor spread Yahoo too far and too thin in an effort to make it into a global media conglomerate. Jerry is aligning Yahoo's priorities with the competitive Web 2.0 marketplace.
Jerry needs more time to right the listing, but by no means sinking, ship. Yahoo may be between a Google rock and a Microsoft hard place, but there is hope in good leadership. (Apologies for the mixed metaphors.) Jerry's team is making Yahoo more pliable, and maybe just pliable enough to squeeze between the rock and hard place.
Shareholder Moral Dilemma
Microsoft's unsolicited bid and now the proxy fight distract from the task at hand. We may never know if Jerry's team could fix Yahoo, because of Carl's self-centered action. I say that not as a value judgment but as a pragmatic observation. He's a ruthless investor and well-known shareholder activist. But is Carl a longstanding investor in Yahoo? He bought 59 million shares or share equivalents following Microsoft's bid withdrawal and seeks to acquire as much as $2.5 billion in Yahoo stock. Carl is suddenly a major Yahoo investor, but is the objective his benefit or Yahoo's? Need I answer?
There is no moral high ground in business. The high ground is quagmire, because all public companies share one, and only one, moral objective: Make profits for stockholders. It's the great contradiction about public companies and the people who own them. U.S. law treats businesses like people, but the organizations don't share the same moral objectives as human beings. The "good of all" isn't about humankind but shareholders. This moral difference is one of the major reasons some businesses egregiously act against the common good of all people. But that's a moral topic for another venue.
The moral issue here is a simply stated question: Who is acting in the best interest of all Yahoo shareholders, Carl Icahn or the company's CEO and board of directors? The answer is the measure by which Carl and Yahoo's board should be judged. My secondary question: What makes newcomer Carl a better judge of what Yahoo should do than people who have been committed to and invested in the company for a long time? (For the record, I am not a Yahoo investor or an investor in any other company.)
In his letter to Yahoo Chairman Roy Bostock, Carl asserted:
"The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft. It is quite obvious that Microsoft's bid of $33 per share is a superior alternative to Yahoo's prospects on a standalone basis. I am perplexed by the board's actions. It is irresponsible to hide behind management's more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72 percent premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer. I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet."
What Happened Before?
Perhaps the measure of Carl's competence to judge Yahoo's board is the past—what happened to other companies besieged by his attacks? Carl's proxy battle to get on Motorola's board failed, but his vicious public criticisms helped undermine confidence in the company. In business, perception is everything. His unsuccessful proxy fight fostered the perception of a weak Motorola—I'd say weaker than it really was—and led to the eventual departure of CEO Ed Zander. How exactly did a perceptually weakened Motorola benefit investors?
Carl's investment in and battle with BEA Systems also undermined confidence in the company and led to its acquisition by Oracle. Are BEA shareholders better off because of Carl's actions? Rather than do the math, I'll ask: If you were a BEA investor, tell me and Microsoft Watch readers in the comments what you think. Did you benefit or lose out?
If you take a hard look at Carl's attack strategy, he invests in companies that appear to be weak and through investment and proxy fights increases the perceived weakness. BEA, Blockbuster, Motorola and Yahoo were all struggling companies with solid foundations when Carl moved in on them. Did all shareholders benefit?
I'll take a single example as answer: Blockbuster stock traded for around $10 a share in May 2005, when Carl's proxy fight won him and two associates seats on the board of directors. In a CNBC interview, Carl described the proxy fight as "a very strong victory. Most importantly, we want accountability." But who's accountable to other shareholders? When I wrote this paragraph, Blockbuster shares were $3.18.
Winner Lose All?
Carl stands to profit from a proxy fight, but he also risks losing hundreds of millions—maybe billions—along the way. His proxy fight is based on the assumption that Microsoft would still acquire Yahoo. That's a rather bold assumption, frankly. Microsoft might come back with an offer, but likely much less than $33 a share—and the premium wouldn't be as great. Carl could still profit nicely from buying shares cheap and cashing in at higher value. But how is that in the best interests of all, or even most, Yahoo shareholders?
Carl's proxy battle can only hurt Yahoo—and Microsoft should weigh the competitive impact of any damage. The proxy battle and, if successful, new board of directors would create grave uncertainties about Yahoo's future. Customers don't like uncertainties, particularly with the economy rocking unsteadily. They need their ads served up by a company they can trust. Google would likely be the greatest beneficiary, picking up advertising and search customers from Yahoo. That's an outcome Microsoft doesn't want.
Microsoft CEO Steve Ballmer knows this. Why do you think he walked away? A proxy fight would diminish Yahoo's value and undermine confidence in day-to-day business operations. Negative perceptions about Yahoo would drive customers away and into the open embrace of Google. I expect that Microsoft would pick up some customers, but Google would take many, many more. A weakened Yahoo could help Microsoft later on, but not yet and certainly not from the kind of perceptions a proxy fight would create.
Strangely, Microsoft might be the white knight that can save Yahoo from Carl Icahn. If Steve and Jerry aren't already talking about a new deal, they should be. Carl just set off the timer on a very dangerous proxy bomb.
Whether or not Yahoo's board wins the proxy fight is immaterial. If Carl uses his past playbook—and his letter indicates that he will—the proxy fight will undermine confidence in Jerry, the board of directors and Yahoo management. It's a lose-lose situation for them and Yahoo. If Carl successfully ousts the board, he may win the battle but lose the war for all Yahoo shareholders, particularly if Microsoft doesn't deal. Then the weakened Yahoo would be crushed between the Google rock and Microsoft hard place.
What do you think?
