Thursday, May 15, 2008

Ichan's Way (and Chutzpah)

The current news about the future of Yahoo! and who is likely to control it is coming with sufficient rapidity that you almost have to refresh any account you read (such as the report provided by Reuters) after you have finished to check if anything has changed. Nevertheless, beneath all this turmoil lies the foundation that troubles just about any publicly traded business these days, and that foundation is a question of priorities. Whose satisfaction is most important? Once upon a time the "talk" (if not the "walk") was that customer satisfaction was always paramount, although one of the corollaries of the "quality movement" was the premise that highly satisfied workers constituted a prerequisite for highly satisfied customers. These days, however, it is hard to find a business where the raw profit-motive interests of the shareholders do not overrule the interests (not to mention actual satisfaction) of both workers and customers; and it is this realignment of priorities that has led Yahoo! into its current dire straits.

From one point of view, the current narrative may have begun as a game of chicken: Microsoft made an offer. Yahoo! did not like it. Yahoo! said so. Microsoft made a better offer. Yahoo! pondered it; and, right about the time we expected the game would end, Microsoft withdrew its offer. This brings us to the morning news and the three opening paragraphs of the Reuters report, which appear to have converged to a stable state:

Financier Carl Icahn on Thursday launched a proxy battle to force Yahoo Inc to reopen buyout talks with Microsoft Corp, saying the Yahoo board had acted "irrationally" in refusing its $47.5 billion offer.

Icahn harshly criticized Yahoo for the breakdown in talks, saying he accumulated 59 million shares and options in Yahoo and assembled a 10-member dissident board slate for election at Yahoo's annual meeting on July 3.

"It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft," Icahn wrote in an open letter to Roy Bostock, Yahoo chairman. "It is obvious that Microsoft's bid of $33 per share is a superior alternative than Yahoo's prospects on a stand alone basis."

While it is possible that both Microsoft's Steve Ballmer and Yahoo!'s Jerry Yang brought a bit of the video gaming culture of their respective youths to their takeover confrontation, one certain thing is that Icahn does not share that culture. Here is how the Reuters report put it:

One analyst said Yang will face a rougher road dealing with Icahn, a blunt-spoken veteran financier known for bare-knuckle takeover tactics, than Microsoft CEO Steve Ballmer.

"If Jerry Yang had a tough time dealing with Steve, wait till he meets Carl Icahn," said Colin Gillis, a Canaccord Adams analyst.

If the description in that first paragraph is not convincing enough, consider the following paragraphs from Icahn's Wikipedia entry (complete with Powerset links, which include Wikipedia footnotes):

Icahn began his career on Wall Street in 1961. In 1968, he formed Icahn & Co., a securities firm that focused on risk arbitrage and options trading. In 1978, he began taking control positions in individual companies. He has taken substantial or controlling positions in various corporations including: RJR Nabisco, TWA, Texaco, Phillips Petroleum, Western Union, Gulf & Western, Viacom, Uniroyal, Dan River, Marshall Field, E-II (Culligan and Samsonite), American Can, USX, Marvel Comics, Revlon, Imclone, Federal-Mogul, Fairmont Hotels, Kerr-McGee, Time Warner and Motorola.

Icahn made extensive use of financier Michael Milken's junk bonds. After the junk bond and overall market bust in the early 1990s, Icahn played a lower-profile role in the business world, preferring to be less public in his dealings.

Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985.[1] The result of that takeover was Icahn systematically stripping TWA of its assets and selling them off.[2]

Speaking before the Senate Judiciary Committee on Airline Consolidation on February 7, 2001, United States Representative Gregory W. Meeks of New York spoke of “... an [airline] industry that once upon a time, not too long ago, was represented by two individuals whom I believe have the lowest of character and no integrity. Two individuals who intentionally bankrupted successful companies for their own personal gain. As many of you know, I am speaking of Carl Icahn and Frank Lorenzo.”

Chutzpah, of course, is not a matter of brute force. There has to be more to the story. Things get interesting with the next quotation from Gillis in the Reuters report:

It's not clear that he has a buyer. We think that Microsoft has really walked away.

Gillis' conjecture has been confirmed in a report by Andrew Ross Sorkin for The New York Times, which for some odd reason that probably has to do with the world the Internet has made has tomorrow's date on it. However, beyond asserting that "Microsoft has given no indication that it would be willing to return," Sorkin provides a bit of elaboration:

People included in Mr. Icahn’s proxy effort say he wants to propose a full slate so that he will have enough leverage to push the company into the arms of Microsoft. Getting Microsoft, or any other suitor, to make a bid for Yahoo would raise the share price and yield a profit for Mr. Icahn.

Still, Microsoft has given Mr. Icahn no assurance it will re-enter talks, these people said. Mr. Icahn has tried to approach Steven A. Ballmer, Microsoft’s chief executive, and his advisers through various channels.

We now see the chutzpah emerging in the first of these two paragraphs. Icahn is in the game for no other reason than to jack up the price of Yahoo! shares, whether or not that constitutes a fair present or potential valuation of a company that is in a lot of trouble but still has a lot to offer. Now I suspect there are those who would feel it is unfair to give Icahn a Chutzpah of the Week award for doing no more than exercising the "virtues of capitalism." I am not one of them. I prefer to cast my lot with Meeks, because I have a vivid memory of what happened to the airline industry. Yesterday I would not have put much of a chance on the software industry going the way of the airline industry; but now that Icahn has become a "player" I shall probably have to rethink my likelihood metrics!

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