Last Updated: May 14, 2008: 6:12 PM EDT

Deadline looms for Carl Icahn and other activists to launch a campaign against Yahoo’s board of directors.

By Yi-Wyn Yen, writer

NEW YORK (Fortune) — Disgruntled Yahoo investors have until Thursday to decide if they want to shake up the company’s board of directors. 

With many Yahoo shareholders have said that they are dissatisfied with the way Yahoo’s management handled negotiations with Microsoft (MSFT, Fortune 500), it appears that billionaire activist Carl Icahn may be leading a charge to remove Yahoo’s board, according to Reuters.

Microsoft withdrew a $47.5 billion offer to buy the Internet portal on May 3. Yahoo has given shareholders until May 15 to nominate an alternate slate of directors before it holds its annual shareholder meeting one day before the July 4 weekend.

Icahn is looking to start a Yahoo (YHOO, Fortune 500)shareholder revolt. The famous activist, who led a high-profile crusade against Fortune’s parent company Time Warner (TWX, Fortune 500) two years ago and is currently involved in a proxy campaign against Motorola, (MOT, Fortune 500) has reportedly lined up a list of 12 nominees.

Calls to Icahn’s office were not returned.

Icahn recently bought 50 million shares of Yahoo, which many see as a sign that he will nominate a slate that would favor a sale to Microsoft.

He also has not revealed when he bought Yahoo’s shares. Some industry watchers argue that if Icahn bought the shares before Microsoft announced it was walking away, the purchase merely signals that he was looking to get a windfall - not a plan to launch a proxy battle.

Yahoo shareholders have one other option to put pressure on the board, if Icahn or other activist hedge fund managers don’t submit a new slate together by the end of Thursday. At the annual meeting on July 3, shareholders can vote against board members, including CEO Jerry Yang. All 10 are up for reelection. A director must resign if a majority votes against that person. However, Yahoo’s board ultimately decides whether to accept or reject a resignation.

Analysts say a “vote-no” campaign run by an activist is a more likely scenario than an activist launching a proxy battle. For starters, it’s cheaper than running a proxy campaign, which costs several million dollars in solicitation and legal fees. Also, Yahoo had given shareholders just 10 days to nominate a new slate.

“It’s very difficult to scramble and come up with the right directors in such a short time,” said Robert McCormick, chief policy officer of Glass Lewis, an independent proxy adviser. “The easier response is to just vote against Yahoo.”

Some argue that a vote-no campaign is less effective than a proxy fight because it doesn’t create the same sense of urgency. Others question whether a proxy fight, even with Icahn and major shareholder support, would bring back a Microsoft deal. Sources say Microsoft’s CEO Steve Ballmer has no plans to return to the negotiating table.

“Here’s a scenario. Let’s say somebody does a proxy fight and puts together a slate. What’s the guarantee that Microsoft would renew its offer? Maybe Microsoft does come back and comes back with a lower offer,” said Paul Schulman, an executive managing director at the Altman Group, a New York-based proxy firm.

Schulman said if investors really believed Microsoft would return, the stock would be trading closer to Microsoft’s original offer. Since Microsoft withdrew its bid nearly two weeks ago, Yahoo’s shares have hovered between $24 and $27. The stock jumped more than 6% in trading Tuesday on a CNBC report that Icahn was mulling a proxy fight.

Shareholders’ confidence in Yahoo remains mixed. Two of Yahoo’s biggest holders, Legg Mason Value Trust’s Bill Miller and Capital Research Global Investors’ Gordon Crawford have publicly voiced their displeasure that Yahoo’s board let Microsoft walk away at $33 a share.

Some investors think Yahoo deserved a higher price. A source on Wall Street told Fortune that investment analyst Mark Casey at Capital World Investors, Yahoo’s biggest shareholder, disagreed with Crawford and wanted $37. In an e-mail, Casey said he had no comment.

Some shareholders think Yahoo is better off without Microsoft. There are those who feel Yahoo can boost its stock price with an ad-sharing deal with Google (GOOG, Fortune 500). Analysts have estimated that Yahoo can increase its cash flow up to $1 billion if the company outsources text ads through Google’s AdSense program.

Yahoo has said that the Google partnership is its top priority, a source familiar with the matter said. But the deal won’t pacify opportunistic fund managers.

“Yahoo may want to announce its strategic partnership with Google soon to appease some of the shareholders on the fence. But that won’t stop activists who still want a sell to Microsoft,” said Chris Young, a research director with RiskMetrics Group. “This is like one huge chess game.”  

First Published: May 14, 2008: 4:21 PM EDT

source : Fortune

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