Carl Icahn's Non-Auction of Yahoo

Carl Icahn's gambit with Yahoo is falling apart. Today, Yahoo announced that its talks with Microsoft have ended. Apparently, the two companies discussed the possibility of a merger and less comprehensive transactions as well. Yahoo reportedly asked Microsoft if it was still willing to pay the $33 a share Microsoft had offered earlier this year, and Microsoft said no. Microsoft evidently wanted to buy Yahoo's online advertising business and Yahoo, unwilling to sell its crown jewel, said no. Both Yahoo and Microsoft have strategic problems. But they apparently won't be working together to solve them.

Icahn's mistake was buying an interest in a company that had only one realistic suitor. No one other than Microsoft could feasibly have acquired Yahoo. By stepping in and turning up the heat on Yahoo's management, Icahn weakened management's negotiating position and may have made Microsoft think it could extract Yahoo's best asset without having to buy all of Yahoo's problems. If Yahoo had sold its online advertising business to Microsoft, it probably wouldn't have been left with enough of a company to do anything except liquidate. That, to be sure, would have delighted Microsoft. And it might not have meant much profit for Icahn and other dissident shareholders.

Icahn seems to be off his game. A company that has only one realistic suitor cannot be auctioned. A meaningful auction requires at least two bidders. Who did Icahn think Yahoo could have played Microsoft against in order to trigger a bidding contest? Perhaps he thought Microsoft needed Yahoo so badly it would increase its offer, even if there were no other bidder. But Microsoft has a shipload of cash in its treasury, and can keep cruising along for a long time while mulling its strategic alternatives.

Icahn threatens a proxy contest at Yahoo's August shareholders meeting. While it's unclear he would win, let's assume he does. Then what? He's said he'd hire a brilliant outside executive to replace Yahoo's current management. Okay. But is he likely to install a manager who would look to revive Yahoo? Or is Icahn more likely to resort to his past strategy of breaking up companies he controls and selling the individual pieces? Icahn has a somewhat thin history of patiently operating companies until they succeed. And that may be what Microsoft is thinking. If Icahn wins the proxy contest, Microsoft might swoop in and buy Yahoo's crown jewel online advertising business at a price that a sole bidder could command--and then leave Icahn to clean up the remaining mess.