HOWZAT

Although Icahn does not appear to have had talks with Microsoft, the two sides have similar thoughts as to who should be on the board at Yahoo. Microsoft, too, was considering putting up an alternative board for election.

Icahn’s choices of John Chapple, former chief executive of the mobile-phone firm Nextel Partners, and Edward Meyer, former boss of the Grey global advertising group, were reportedly on Microsoft’s list.

Icahn has also roped in his lieutenant, Keith Meister, internet billionaire Mark Cuban and the former Viacom chief Frank Biondi.

Herbert Denton, president of shareholder activist Providence Capital, said Yahoo was up against it. “Carl is feral,” he said. “He is capable of twists and turns that nobody sees coming.”

Denton said it was clear that a number of Yahoo’s leading shareholders, including Legg Mason and Capital Research, were disappointed with the board’s performance and wanted change. “It’s hard to bet against Carl,” said Denton.

When Icahn attacks a company, hedge funds follow. Highfields Capital, Tudor Investment and others followed his lead into Motorola stock, and all are happy to attack underperforming managements.

Last week, rumours emerged that Firebrand Partners, led by the similarly aggressive Scott Galloway, may join the fight, further turning up the heat on Yahoo.

Icahn has, however, experienced failure. The film-rental firm Blockbuster has been a dud since he owned it. His high-profile bid to break up Time Warner last year didn’t convince Wall Street, although he made money when the company bounced back.

“It’s all good for Yahoo shareholders,” said Lindsay. “There was always a risk that Yahoo would get stuck after Microsoft walked away,” he said.

At the heart of Yahoo’s — and Microsoft’s — dilemma is one simple question: what to do about the dominance of Google?

While both firms remain huge and profitable, they are slipping further behind Google on the web. More than half the $41 billion online advertising market comes from internet-search ads, with analysts estimating that Google captured 77% of spending in the fourth quarter, compared with Yahoo’s 18% and Microsoft’s 5%.

Yahoo has spent more than $2 billion on acquisitions to build its own search engine, and after many teething problems released a program last year called Project Panama to make search ads more relevant and more likely to be clicked by users.

Before Microsoft walked away from the deal it was clear that chief executive Steve Ballmer saw the Yahoo purchase as a way to even the playing field. It was a move welcomed by many advertising bosses, including WPP’s Sir Martin Sorrell, who would like to see a stronger rival to Google.

As if to emphasise Google’s dominance, it was to the search giant that Yahoo turned for help in its bid to escape Microsoft. Shortly before the deal collapsed, Yahoo brought in Google on a two-week trial to place text advertisements on Yahoo’s search pages in America.

Many analysts expected that a paid search outsourcing deal with Google would be announced in the days after Microsoft withdrew its offer. The two sides are still in negotiations.

Lindsay said it appeared that either Yahoo’s enthusiasm for such a deal had waned or the outsourcing deal was little more than a ploy to deflect Microsoft all along.

Yahoo’s share price fell after Microsoft’s exit. Since then it has drifted and, at $27.66, is well below Microsoft’s $33 offer.

Analysts remain sceptical about Yahoo’s future plans and about whether an improvement can be delivered by Jerry Yang, chief executive and founder.

There are no signs yet from Ballmer that he wants to join the fray. In fact, Microsoft co-founder Bill Gates has even said he believes the company should now go it alone.

Lindsay and others are convinced the Seattle firm is still interested: “They have been trying for 10 years and have got nowhere — regardless of what they say.”

Collins Stewart analyst Sandeep Aggarwal shares the conviction that Microsoft and Yahoo will return to negotiations. “Body language from Yahoo and Microsoft does not suggest that both companies have really moved on,” Aggarwal wrote in a note to clients. “Had both companies moved on, we would have expected Yahoo to announce its relationship with Google and Microsoft to be acquisitive and announce some radical changes in its search strategy — and neither has happened so far.”

With Icahn in the fray, the stand-off doesn’t look like it will hold for long.

Yahoo’s annual meeting is set for July 3, the day before Independence Day. The fireworks have already started.

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