By Yi-Wyn Yen
The only thing surprising about the resolution between Yahoo's board of directors and activist investor Carl Icahn was that it didn't happen sooner.
The proxy campaign that Icahn launched nearly three months ago to eliminate Yahoo's board and replace it with his own cronies at the Aug. 1 shareholder meeting came to an end Monday when the two sides finally agreed to a compromise. Proxy experts say they expected a settlement, which will give Icahn three seats on an expanded 11-member Yahoo (YHOO) board, several weeks ago.
"The end game was fairly obvious. It should have been obvious that the company wasn't going to pitch a shutout. At the same time, it should have been obvious to Carl that he would be unlikely to get a majority vote," said Chris Young, the M&A research director of shareholder advisory firm RiskMetrics ISS. "This was a recipe for a settlement."
Neither side was likely to win without a compromise. Young says Yahoo's board and Icahn were both preparing for the "nightmare scenario" – a full Yahoo slate or an all-Icahn slate that appealed to few Yahoo investors. Both slates were too extreme for disenchanted shareholders who were unhappy that Yahoo's current board botched negotiations with Microsoft (MSFT) and wary that Icahn's directors do not have a Plan B beyond a sale to the software giant.
Young suggests that Icahn would have likely submitted a shortened version of his nine-member slate before the Aug. 1 meeting. Last Friday Bill Miller, a major Yahoo shareholder with Legg Mason, said he would support Yahoo's incumbent slate, which includes CEO Jerry Yang and chairman Roy Bostock, over Icahn's. However, Miller also signaled he'd be willing to support Icahn as a board member. "We believe it is appropriate for large shareholders to have representation on corporate boards if they so desire," Miller said in a statement. Icahn Associates owns a 5% stake, or 68.7 million shares, of Yahoo, making him the third largest institutional shareholder.
A shortened Icahn slate could have spelled trouble for Yahoo's board. Since 2006, activists have succeeded in winning seats through proxy fight or settlement 80% of the time, according to RiskMetrics. Yahoo is among 40 large-cap companies that have reached a settlement with activists in the past year, and is the third largest behind Kraft Foods (KFT), which settled with Nelson Peltz by adding two Peltz-backed nominees to the board last November and Target (TGT), which reversed its longstanding position to sell off its credit card receivables after activist Bill Ackman started rattling cages.
A settlement that gives Icahn a seat on Yahoo's board is a "win-win situation," Young said. "Nobody likes to go to the bitter end. This way, nobody loses face. Everybody can claim victory and address the most important issue – creating shareholder value."
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