VentureBeat

There will be no fireworks on display at the Yahoo shareholder meeting on August 1. Or at least, they won’t be as bright. Billionaire investor Carl Icahn has reached an agreement with Yahoo to drop his pursuit of a hostile takeover of the company. In return, Icahn will get a seat of his own on Yahoo’s board of directors as well as the potential for two other seats for the board replacement members he had chosen.

Yahoo and Icahn negotiated this settlement over the weekend to avoid a nasty proxy fight at the shareholder meeting that would have seen Icahn try to replace Yahoo’s entire board of directors — including chief executive Jerry Yang — with people of his own choosing. Icahn owns over 68 million shares of Yahoo stock, right around 5 percent of the company.

Here are the key quotes from the press release:

“We are gratified to have reached this agreement, which serves the best interests of all Yahoo! stockholders,” said Yahoo! Chairman Roy Bostock. “We look forward to working productively with Carl and the new members of the Board on continuing to improve the Company’s performance and enhancing stockholder value. Yahoo! is a world-class company with an extremely bright future, and collaborating together, I believe we can help the Company achieve its ambitious goals.”

“This agreement will not only allow Yahoo! to put the distraction of the proxy contest behind us, it will allow the Company to continue pursuing its strategy of being the starting point for Internet users and a must buy for advertisers,” said Yahoo! Co-founder and Chief Executive Officer Jerry Yang. “No other company in the Internet space has our unique combination of global brand, talented employees, innovative technologies and exceptional assets, attributes that will help us take advantage of the large and growing opportunity ahead of us. I look forward to working together with our new colleagues on the Board to make that happen.”

Mr. Icahn said, “I am very pleased that this settlement will allow me to work in partnership with Yahoo!’s Board and management team to help the Company achieve its full potential. While I continue to believe that the sale of the whole Company or the sale of its Search business in the right transaction must be given full consideration, I share the view that Yahoo!’s valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders. I believe this is a good outcome and that we will have a strong working relationship going forward. Additionally, I am happy that the board has agreed in the settlement agreement that any meaningful transaction, including the strategy in dealing with that transaction, will be fully discussed with the entire board before any final decision is made.”

As you can see, Icahn is still all about a transaction. So while there may be peace for now, don’t expect this saga to be truly over until Yahoo sells either its search business or the entire company. The leading contender in both regards remains, of course, Microsoft.

Yahoo shares are down 3 percent today on news of the Icahn/Yahoo truce.

To make room for Icahn and the two new board members, Yahoo will expand its board from 9 members to 11. All of the current board members will stand for re-election (with Icahn’s backing) except Robert Kotick, who is stepping down. Kotick is the chief executive of the newly merged Activision Blizzard gaming company.

The back and forth between Yahoo and billionaire investor Carl Icahn, who is attempting to take the company over, is now arguably more entertaining than the formal letter wars during the whole Microsoft/Yahoo debacle.

Icahn recently got FTC approval to purchase a huge amount of Yahoo stock, putting him one step closer to a hostile takeover.

This morning, Icahn sent a letter to Yahoo laying out five steps of what he plans to do with the company upon a successful hostile takeover:

• First, I would work to have the board replace your “poison pill” severance plan with an acceptable alternative.
• Second, I intend to ask our new board to hire a talented and experienced CEO (attempting to replicate Google’s success with Eric Schmidt) to replace Jerry Yang and return Jerry to his role as “Chief Yahoo”. Indeed, it was much speculated that Jerry would serve in the CEO role temporarily until a permanent CEO was hired after the board asked Terry Semel to resign.
• Third, I intend to ask our new board to inform Microsoft that unless any alternative transaction can insure a $33 or higher stock price (of which I am skeptical) all talks of alternative transactions are over.
• Fourth, I will ask our new board to offer publicly to sell Yahoo! to Microsoft in a friendly and cooperative transaction.
• Fifth, to the extent Microsoft does not want to make a proposal, I will ask our new board do a deal on search with Google, but only if it contains termination provisions that would in no way impede a subsequent acquisition by Microsoft.

In summary: Icahn would eliminate one of the main deterrences that stopped Microsoft from taking over Yahoo. He would then push Yahoo chief executive Jerry Yang aside and replace him with clone of Google chief executive Eric Schmidt. (He would allow Yang to stay with the company as a cheerleader.) With steps three and four, Icahn would then beg Microsoft to come back to the table. And finally, if a Microsoft deal wasn’t immediately possible, he would be okay with the Google/Yahoo search advertising deal back up plan — until Microsoft eventually came around again, at which point he would kick Google to the corner.

This all sounds great except that it relies upon the willing submission of at least a half dozen other parties who would have to do exactly what Icahn wants.

This isn’t a game, but Icahn is almost making it seem like one. It’s like fantasy CEO. Yang isn’t working out so lets replace him with a five-tool chief executive like Schmidt. Come on, we can totally get him, we have a high draft pick.

We saw Yahoo respond this afternoon with a much shorter letter:

Leaving aside Mr. Icahn’s inaccurate interpretation of our retention plan, we again note that he has no credible plan to operate Yahoo!. We believe that Mr. Icahn’s suggestion that we cancel our retention plan would have a destabilizing impact on Yahoo! and would clearly not be in the best interests of our shareholders. Furthermore, his suggestion that we put out a price publicly to see if Microsoft will alter its stated position is ill-advised. As we have stated numerous times publicly and privately, we are shareholders.

In summary: Icahn is crazy.

Billionaire investor Carl Icahn is back making waves for Yahoo again today. He’s now saying that if he is successful in his hostile takeover bid of Yahoo, he will remove its chief executive Jerry Yang, according to The Wall Street Journal.

Icahn believes Yang and Yahoo’s current board dropped the ball with regards to Microsoft’s proposed buyout of the company, which fizzled last month. Icahn also believes Yang and the board never had any intention of accepting a Microsoft offer, and worse, may have taken steps to deter such a deal. He believes this despite public assurances by Yahoo that it was open to listening to all offers and was actively talking with Microsoft.

A couple of reports that have recently come to light do not look too good for Yahoo.

First of all, it appears that the company rejected a $40-a-share offer from Microsoft back in January of 2007. Microsoft, of course, came back a year later with its public $31-a-share offer because Yahoo’s stock fell dramatically over that span.

Another report today suggests that Yahoo actually opposed a search advertising deal with Google prior to Microsoft’s bid, according to eWeek. In fact, the report says that Yahoo rejected the notion just one day before the Microsoft bid.

This is very interesting because the Yahoo/Google agreement was widely seen as a main factor for how Yahoo could possibly get away without selling to Microsoft. It seems odd that Yahoo would be so gung-ho about the deal under the cloud of the Microsoft takeover, but against it just prior to it. The term, “marriage of convenience” comes to mind.

Yahoo board is convening today at its Sunnyvale headquarters. That should be an interesting meeting…

We’ve known that billionaire investor Carl Icahn had been trying to buy massive amounts of Yahoo stock to push ahead with his quest for a hostile takeover of the company. One speed bump in that plan was the Federal Trade Commission, which sometimes frowns upon massive stock purchases as being anti-competitive. That speed bump has been removed. The FTC approved Icahn’s purchase request today.

This puts Icahn squarely in the drivers seat if he wants to go ahead with taking over Yahoo by installing his own replacement board of directors. The question now is: When will this all go down?

Last week, Yahoo delayed its board meeting which had been set for July 3, when one of its board members resigned. The meeting should take place sometime near the end of July now, however no firm date has been set.

In related news, Microsoft chief executive Steve Ballmer and Yahoo chief executive Jerry Yang met for a round of golf last weekend. They are said to have discussed Microsoft’s new desire to buy just Yahoo’s search business. This follows the failure by both sides to get a deal done that would have merged the two companies completely.

It’s probably a good bet that Icahn’s name came up as well.

[photo: Chip East/Bloomberg]

Terry Semel, who was brought in to turnaround Yahoo after the Internet bust, has stepped down from the top job.

The former Hollywood exec looked like a master initially — when Yahoo’s revenue and profits surged after 2001. There’s no doubt Semel’s steady hand helped. Soon, however, it became clear Yahoo’s performance had more to do with the boom in Yahoo’s search business than with Semel’s guidance. As Google has left Yahoo further and further behind, shareholders like Eric Jackson have increased their criticism.

Jackson wrote this post for VentureBeat more than six months ago, demanding that the board fire Semel. We’re not sure if Jackson’s ensuing campaign has anything to do with Semel’s announced departure today, but his group has been relentless (here’s his blog).

Semel’s massive compensation became a target for criticism. He also appeared out of touch. Underling execs such as Brad Garlinghouse called out for action, producing the famous “Peanut Butter memo” about Yahoo’s malaise.

Jerry Yang, Yahoo’s co-founder, steps in as CEO.

Sue Decker, the former CFO, becomes president. Semel stays non-executive chairman.

Here are more details from Bloomberg news.

Updated

Alibaba, the large Chinese company that owns Yahoo China, is preparing to file another hard-hitting suit against competitor Qihoo and its leader, Zhou Hongyi (pictured above).

Yahoo China has already filed one suit against Qihoo, saying the search engine start-up’s software notifies users that Yahoo’s toolbar is malware and prompts deinstallation, and that it’s hurt Yahoo’s market share.

The coming suit, which VentureBeat learned about early this week, will go much further. It will attempt to take out the man at the center of the stand-off: Zhou Hongyi. He is the founder of Qihoo, and is backed by the aggressive venture capital firm, Sequoia Capital. Zhou embittered Yahoo China since he was forced out of that company last year. Yahoo China will claim that Zhou has embezzled from Yahoo China and defrauded it, according to a source familiar with the lawsuit being prepared.

This isn’t helping Qihoo, which is reportedly trying to raise another round of funding at a high valuation of about $80 million. Its main backer, Sequoia Capital, had a few conflicts in China too. Sequoia was a big backer of Google, which is now a competitor to Qihoo. It was also an original backer of Yahoo. However, it’s not clear how much the U.S. Sequoia team is involved in the Qihoo deal. Sequoia’s Chinese office has been the main liaison with Qihoo.

Meanwhle, a separate source says Yahoo’s co-founder Jerry Yang is actively seeking to dissuade investors from backing Qihoo. A Yahoo spokeswoman declined comment. VentureBeat has contacted Qihoo, but was unable to reach Zhou by the time of this writing (Update: See our story here for Zhou’s response). A spokesman for Yahoo China did not respond to a request for comment.

Qihoo’s Zhou is controversial. He was the founder of 3721, China’s first search engine, which Yahoo bought for $120 million in 2003 to help it gain a significant foothold that had eluded it in China since it entered in 1999.

But 3721’s software had become popular by lodging itself in computers as spyware. It introducing pop-windows, bedeviling its users — and some would say it introduced spyware into China.

Things went down hill after Yahoo’s acquisition. Zhou, who took over Yahoo China’s operations came to loggerheads with Yahoo’s US headquarters. Zhou has subsequently blamed Yahoo China’s arrogance for the fallout. But Alibaba’s suit will claim Zhou initiated illegal behavior long before he was pushed out. Yahoo China says it first became upset with his performance: He refused to hire English speaking employees, and had become distant from his U.S. owner. Meanwhile, he was biding his time until he qualified for the earnout under the Yahoo China acquisition contract.

Then, last year, Yahoo invested $1 billion into Alibaba. Alibaba, under that agreement, took over the operations of Yahoo China. Alibaba’s leader Jack Ma forced out Zhou. Zhou then vowed to some his executives that he’d do anything he could to make sure Yahoo China never succeeded, according to the suit to be filed.

Yahoo China will claim Zhou was already using his position before the Alibaba acquistion to steal partnership and investment opportunities away from Yahoo China, preparing the groundwork for his exodus to Qihoo. He also offered money to key Yahoo China staff if they left the company, the suit will allege. He even launched press releases through front PR firms, saying in one case that a Yahoo China deal with MSN had expired when in fact it hadn’t, the suit will claim.

Qihoo is now reportedly raising another round, asking for a $80 million pre-money valuation. Our source said Sequoia’s Michael Moritz planned to meet Yahoo’s Jerry Yang this week to sort things out, something VentureBeat wasn’t able to confirm. Sequoia did not respond to a request for comment. According to the rumor, Qihoo wants to raise $10 to 20 million and is projecting $3 million in revenue for 2006, and $18 million for 2007.

In Qihoo’s first round, Sequoia joined CDH Investment and IDG Ventures to invest $20 million.