Partial Microsoft-Yahoo deal won’t appease investors

The big money interests behind the scenes of the Microsoft Corp. and Yahoo Inc. drama — or in the case of activist investor, Carl Icahn, stridently in front — are unlikely to be happy with any revived talks between the two companies short of Microsoft’s making a full takeover of Yahoo, say industry and financial experts.

Unhappy Yahoo investors bet too much money on a $45 billion-plus Microsoft acquisition of the beleaguered Web company. Emboldened by Icahn’s public threat last week to force a proxy fight and resulting sale of Yahoo, they are demanding that the paper profits they were counting on rematerialize again.

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“At this point, somebody has to buy [Yahoo],” said Michael Angell, editor of Flashwire Daily, a newsletter about mergers and acquisitions published by investment data provider, FactSet Research Systems Inc.

Others say Yahoo’s dismissal of Icahn last week may have inadvertently and unwisely insulted the notoriously tough corporate raider.

“The way [Yahoo] responded was relatively personal,” said Rob Enderle, an analyst at San Jose-based Enderle Group. “They basically implied that he was clueless, so that makes it much more likely that he’s going to want to drive through this to prove that he’s not.”

Microsoft said late Sunday that it might now buy part of Yahoo rather than the entire company. That would presumably be Yahoo’s search business, which is second in the overall market behind Google Inc.

Yahoo shareholders such as Eric Jackson, president of Ironfire Capital, an activist investment firm in Naples, Fla., say a partial deal is “not as preferable” as an immediate buyout.

“It’s a half-step that Yahoo might embrace as a way of retaining independence, and Microsoft might embrace as a foothold to the eventual endgame,” he wrote in a blog. “But the endgame is the endgame. Microsoft will buy Yahoo”

Other experts suggested Microsoft and Yahoo might be negotiating a joint-venture in the online ad business, to present a stronger challenger to Google.

But that too is unlikely to appease investors who are worried about the teetering economy, and would prefer to bring this four-month soap opera to a close.

“There’s some sense they would prefer to cash out and get some money in hand rather than try to grow the business,” said Allan Krans, an analyst at Technology Business Research Inc. in Hampton, N.H.

None of these scenarios would be on the table if not for Icahn’s proxy bid, which provoked Microsoft’s leaders into coming back to the negotiating table.

“Microsoft coming back is absolutely Carl,” said Mark Stevens, who wrote an unofficial biography of Icahn in 1993, “King Icahn.” “He makes Ballmer look like a complete wimp.”

Which is something Icahn, who grew up poor, enjoys.

“Icahn once told me, ‘One of my goals is to run CEOs’ golf games and pour vinegar in their martinis,'” said Stevens, who now runs a business consulting firm, MSCO Inc., out of Rye Brook, N.Y. “He likes to win by humiliating CEOs.”

Others say Microsoft’s apparent reluctance to buy all of Yahoo is less about the company losing face, and more a deliberate ploy.

“Microsoft’s [original] walking away was a bluff,” wrote Ironfire’s Jackson, who led a grassroots investor campaign that helped topple Yahoo’s ex-CEO, Terry Semel.

Icahn, who Angell calls the “enforcer” for large investors that want to avoid the spotlight, doesn’t always demand a quick sale of the entire company. At Motorola Inc., Icahn is forcing the company to spin off its money-losing cell phone handset business. That could be a prelude to Icahn demanding the sale of Motorola completely to another company, or to asking its board to issue stock dividends to enrich big shareholders like himself.

But Yahoo, like most tech growth companies, is reluctant to give up cash and issue dividends back to investors, Angell said. It hasn’t issued any dividends in the past five years, according to Morningstar.com, though it did split its stock 2:1 in 2004.

An economic downturn would also make it difficult for Yahoo to justify returning extra cash to shareholders. And with Icahn likely borrowing money to finance his Yahoo stake, everything points to “it coming down to the same thing, getting the biggest bang for the buck,” Angell said.