Parsing Yahoo: It's Yours for $33

Like the dull thud of a battering ram against a scarred-but-still-solid palace gate, the weekend proposal from Microsoft and Carl Icahn did not seem intended to actually deliver a break-through, but instead simply remind the beleaguered court inside that the siege is tightening.

Oddly enough, neither Microsoft nor Icahn commented, which meant the only explanation of the terms of the sweetened proposal came from Yahoo.

The most telling nugget in the Yahoo statement was that Yahoo "repeated its offer to sell the entire Company to Microsoft for at least $33 per share." That number -- and Microsoft's rejection of it -- had been reported by the WSJ's Matt Karnitshnig and Robert Guth, but never publicly confirmed by Yahoo.

Consequently, the current dynamic is yet another overly precious stand-off, in which Yahoo still wants the $33 that Microsoft once sort of offered, and Microsoft says it would rather take its chances with a new board.

As Jack Flack suggested in a recent Rescue Memo to Jerry Yang, the current board can significantly strengthen its hand with shareholders if it gets very explicit that it will stick to $33, in contrast to Icahn's unknown number, which is assumed to be meaningfully lower. If fully re-elected , the Yahoo board would find itself back in a somewhat pre-Icahn position: sitting on a deteriorating, but still unique, strategic asset that Microsoft needs. But if fully re-elected with a $33 mandate from shareholders, the board will be able to negotiate a full sale with some semblance of solidarity with its shareholders.

With or without a $33 mandate, the big question is, "If they do re-elect the current board, do Yahoo shareholders believe Microsoft will truly walk away?"

Here's the parse of the Yahoo statement, for full understanding.

Yahoo: Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, confirmed today that it has rejected a joint proposal from Microsoft Corporation and Carl Icahn for a complex restructuring of Yahoo! that would include the acquisition of Yahoo!'s search business by Microsoft.

Translation: It's complex. That means we can characterize it one way, and Microsoft another.

Yahoo: The proposal was made on Friday evening and Yahoo! was given less than 24 hours to accept the proposal, the fundamental terms of which Microsoft and Mr. Icahn made clear they were unwilling to negotiate.

Translation: They ruined our weekend with a phony offer.

Yahoo: After reviewing the proposal with its legal and financial advisers, Yahoo!'s Board of Directors determined that accepting the proposal is not in the best interests of its stockholders.

Translation: Finally, an offer that actually isn't in the best interests of the stockholders.

Yahoo: The Board's rejection of the proposal was based on a number of factors, including the following:

Translation: How bad is this deal? Let us count the ways...

Yahoo: 1. Yahoo!'s existing business plus its recently signed commercial agreement with Google has superior financial value and less complexity and risk than the Microsoft/Icahn proposal.

Translation: 1. We still maintain the Google deal will pass anti-trust scrutiny.

Yahoo: 2. The Microsoft/Icahn proposal would preclude a potential sale of all of Yahoo! for a full and fair price, including a control premium.

Translation: 2. The Microsoft/Icahn proposal would eliminate the only potential buyer of all of Yahoo -- Microsoft.

Yahoo: 3. The major component of the overall value per share asserted by Microsoft/Icahn would be in Yahoo!'s remaining non-search businesses which would be overseen by Mr. Icahn's slate of directors, which has virtually no working knowledge of Yahoo!'s businesses.

Translation: 3. His blog is terrible, and he doesn't even have any Facebook friends.

Yahoo: 4. The Microsoft/Icahn proposal would require the immediate replacement of the current Board and removal of the top management team at Yahoo!. The Yahoo! Board believes these moves would destabilize Yahoo! for the up to the one year it would take to gain regulatory approval for this deal.

Translation: 4. It would be dangerous for Yahoo lose all that stability we currently enjoy.

Yahoo: Roy Bostock, Chairman of Yahoo! said, "This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!'s stockholders in mind.

Translation: They're only pretending they like each so they can gang up on us. They never even used to sit at the same cafeteria table during lunch.

Yahoo: Clearly, Microsoft, having failed to advance in search, is aligning with the short-term objectives of Mr. Icahn to coerce Yahoo! into selling its core strategic search assets on terms that are highly advantageous to Microsoft, but disadvantageous to Yahoo! stockholders.

Translation: It's as if they think we're in a weak position.

Yahoo: Yahoo's Board of Directors will not allow that to happen.

Translation: OK, so we are in a weak position. But, at this point, what have we got to lose by riding it out?

Yahoo: Yahoo!'s Board remains open to any transaction that delivers full value to our stockholders - we just do not believe such a transaction should be dictated by Microsoft and a single short-term investor."

Translation: Yahoo!'s Board remains open to any transaction that delivers $33.

Yahoo: Mr. Bostock continued, "After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a 'take it or leave it' proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!'s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond.

Translation: Then they blindfolded us, spun us around three times and started banging pots and pans together.

Yahoo: It is ludicrous to think that our Board could accept such a proposal.

Translation: $33.

Yahoo: While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders."

Translation: We would rather be bludgeoned out of our jobs than bludgeoned into a bad transaction.

Yahoo: Mr. Bostock also noted that Microsoft's position that it would not deal with, or otherwise engage with, Yahoo!'s management to reach agreement on this proposal or to implement it, is completely absurd and irresponsible given the complexity of the deal - one that requires the removal of half of Yahoo!'s business from Yahoo! and then the integration of it into Microsoft.

Translation: Hmmm. It's as if they want a showdown at the shareholder meeting.

Yahoo: Yahoo!'s Board points out that a transaction to acquire the whole company would be much more straightforward and involve far less risk than the new proposal or any similar alternative.

Translation: If we keep repeating "$33...$33...$33" to ourselves, maybe it will happen.

Yahoo: The Board believes a whole company transaction could be negotiated and executed prior to August 1st.

Translation: We've counted the votes, and actually we would much rather avoid an embarrassing showdown. Even if we win, we don't.

Yahoo: In rejecting the Microsoft/Icahn proposal, Yahoo! not only repeated its offer to sell the entire Company to Microsoft for at least $33 per share, but also offered to negotiate an improved search only transaction.

Translation: We need $33... but we told them they could go higher if they liked.

Yahoo: Microsoft rejected both offers.

Translation: They don't really want to make this work.

Yahoo: Ironically, Carl Icahn, who jointly with Microsoft developed and presented this proposal, had previously urged Yahoo! not to sell its search business to Microsoft.

Translation: Not ironically, Carl Icahn seems only interested in money.

Yahoo: Specifically, in an interview on CNBC's Fast Money program, on June 4, 2008, Mr. Icahn said, "... it's crazy for this company now to do this alternative deal and give the store away, because obviously, an alternative deal is a poison pill because once you've done an alternative deal and given the search to Microsoft, you don't need Microsoft to buy you anymore. So, that would be a poison pill...."

Translation: Carl said it would be crazy. Now Carl wants it. Therefore, Carl is crazy. Ha!

Yahoo: Significantly, the Board believes Microsoft and Mr. Icahn are overstating the value their search and restructuring proposal would deliver to Yahoo! stockholders and are substantially understating the risks.

Translation: What were the odds that we would disagree on valuations?

Yahoo: Yahoo! noted that a transaction that would separate the Company's search and display businesses is an undertaking of great complexity.

Translation: The only way for us to get decent value is to keep the whole thing bundled. Did we mention $33?

Yahoo: While the Board acknowledges that the current proposal contains a number of improvements over Microsoft's earlier proposal, the Yahoo! Board's conclusion that the current proposal is not in the best interests of stockholders is based on a number of factors, including:

Translation: It's not different enough from the old proposal.

Yahoo: The revenue guarantees suggested, which are conditional and subject to reduction, are well below the search revenue that the Company is expected to generate on its own and in association with its announced commercial agreement with Google. That agreement alone is estimated to generate $250 to $450 million of incremental cash flow for the first twelve months following implementation, while allowing Yahoo! to remain a principal in paid search;

Translation: We won't see the Google money for a long time, if ever. "Implementation" requires regulatory clearance.

Yahoo: The success of the remaining Company is critically dependent on Microsoft's ability to effectively monetize search;

Translation: They would effectively control us... and we wouldn't get our $33.

Yahoo: Microsoft/Icahn's proposed Traffic Acquisition Costs rates are below market;

Translation: Microsoft/Icahn's proposed Traffic Acquisition Costs rates were intended to be rejected.

Yahoo: The proposal calls for Yahoo! to sell its industry-leading algorithmic search business and its related strategic and valuable intellectual property portfolio for no incremental consideration; and...

Translation: Yes, we still have intellectual property.

Yahoo: Many of the components of the headline value that Mr. Icahn and Microsoft put forward, such as the spin-off of the Yahoo!'s Asian assets and the return of cash to stockholders, are steps that could be taken by Yahoo! on its own and the Board continues to evaluate these options.

Translation: So those steps are not reasons to vote against us.

Yahoo: Mr. Bostock concluded, "Microsoft and Mr. Icahn are trying to dismantle the Company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo! stockholders.

Translation: Mr. Bostock concluded, "Microsoft and Mr. Icahn know that it will not be Microsoft or Mr. Icahn who will be blamed for everything disadvantageous that has happened to Yahoo." It will be the Yahoo board.

Yahoo: We are prepared to let our stockholders, not Microsoft and Carl Icahn, decide what is in their best interests and we look forward to the upcoming vote."

Translation: It's going to be ugly, but we think we can win.