Meanwhile, Yahoo could still proceed with a Google search outsourcing pact, which would turn Microsoft off. For all the talk about how Icahn pushed for change at Motorola and BEA, which ultimately sold to Oracle, this Yahoo gambit is no sure bet.
"Given Icahn's history, we believe it is unlikely he is investing in Yahoo!'s management for the long term and that it is probable he will take action to bring Microsoft back to the table," says Piper Jaffray analyst Gene Munster.
Analysts expect Icahn to nominate a board that is basically the same cast of characters that Microsoft would have pushed.
UBS analyst Benjamin Schachter says Icahn is likely to nominate John Chapple, former CEO of Nextel; Edward Meyer, former CEO of Grey Global Advertising Group; Jaynie Studenmund, former operating chief at Overture and Vanessa Whitman, CFO of Adelphia. Microsoft was going to nominate all of those folks, according to a Wall Street Journal report April 24.
Our view is that Icahn's move only makes sense if he thinks he can revive the Microsoft bid and has reason to believe that Microsoft would be amenable if he takes control. While the individuals selected by Icahn have not been released, we would be surprised if they differed from Microsoft's original selection.
A few scenarios:
Yahoo runs to Google (again): If Yahoo wants to truly stay independent it will have to outsource search to Google to keep Microsoft--the only likely bidder--away. Icahn's role will be minimized if he can't convince Ballmer to bid. Google is the most likely option for Yahoo given that negotiations with AOL and MySpace haven't delivered much, says Jeffries & Co. analyst Youssef Squali.
Microsoft hangs back to let Icahn do the dirty work. Proxy fights are distractions. Ballmer is likely to hang back and do nothing. Let Icahn lead, distract Yahoo management and allow Microsoft to focus a bit. This option is the most likely one right now.
Microsoft comes back to the table with a bid of $34 or so. It's highly unlikely that Microsoft will rush back to the table, especially if Yahoo goes scorched earth with Google. Icahn will have to turn over the board before Microsoft comes back.
Ballmer decides Yahoo isn't worth it. Many analysts still expect Microsoft and Yahoo to merge at some point, but do you really want to bet on that?
Yahoo management is distracted due to Icahn, falls short of its three-year financial targets and Icahn wastes his time. Yahoo shares fall and taking Microsoft's offer looks like one of the biggest financial blunders ever.