Yahoo investors begin to weigh in on Icahn proxy fight

A major Yahoo investor weighed in late Wednesday with support for Carl Icahn's initiative to unseat Yahoo's board, signaling yet another salvo to be fired in the coming weeks as the proxy fight between Icahn and Yahoo heats up.

Paulson & Co., which owns 50 million Yahoo shares as of March 31, issued a statement saying it was disappointed that Yahoo failed to reach an agreement with Microsoft and continues to support the idea of a tie-up between the two companies to create a stronger rival against Google.

"We intend to support the Icahn slate, but sincerely hope that Yahoo will negotiate an agreement with Microsoft, thereby making a proxy fight unnecessary," Paulson & Co. said in a statement.

The hedge fund is one of the first of what may eventually become a string of Yahoo investors, to declare their support or opposition to Icahn's proxy slate in the coming weeks leading up to Yahoo's July 3 annual shareholders meeting.

Earlier in the day, Icahn announced the formation of a 10-member proxy slate to run against Yahoo's current board at the meeting. Icahn stated he hopes the formation of the slate may prompt Yahoo to re-enter buyout talks with Microsoft, which withdrew its $33-a-share bid on May 3.

Another hedge fund manager, Eric Jackson of Ironfire Capital, is taking a cautious view regarding Icahn's slate of 10.

"I'm inclined to vote for him, given my disappointment in how this current board has steered the company for the last four years," Jackson said in an e-mail interview. "However, I would like to hear the plans from both sides before deciding on my voting. I basically want to hear which group thinks they can best increase value in the company and how."

In sizing up Icahn's proxy slate, one proxy solicitor noted the shareholder activist had assembled a noteworthy crew.

"He has a good lineup," said Bruce Goldfarb, chief executive of proxy solicitation firm Okapi Partners. "He put forth a very credible slate and this will be a very competitive battle."

One source familiar with Yahoo said Icahn's proxy fight comes as no surprise and cautioned against assuming Yahoo will now run over to Microsoft.

"The ball is in their court. They're the ones who walked away and didn't want to do the deal," said the source, who requested anonymity.

That said, the adversary in this proxy fight is no fly-by-night shareholder activist. It's Carl "I can come after you" Icahn, who has won more proxy fights than he has lost over the past 13 years.

Nonetheless, this source said: "He has a reputation that some people like and others don't. I don't know if some white shoe institutional (investors) are willing to put his board in at Yahoo...Sometimes the devil that you do know is better than the devil you don't know."

That point of a known entity verses unknown entity was echoed by one company that advises institutional investors on how to vote on proxy matters.

In most proxy fights, investors are reluctant to throw out the whole board and give dissidents full control of the board, said Shirley Westcott, managing director of policy for Proxy Governance. "Investors tend to want to give only a few board seats to dissidents, so they could serve as watchdogs or bring some shareholder control to the board."

Icahn's effort to wage a proxy fight for all 10 director seats coming up for re-election in July will be challenging as a result, Westcott noted.

"If Microsoft was launching this proxy fight, a vote for their slate would have been a vote for the deal itself. But Icahn is a different situation. If there is no Microsoft offer on the table by the time of the (shareholders) meeting, it'll be like investors are voting for an alternative slate because they are dissatisfied with Yahoo's corporate governance."

Proxy Governance and Glass Lewis & Co. take a similar approach in evaluating proxy fights as it relates to mergers and acquisitions. Both proxy advisory firms review the quality and experience of the incumbent and dissident directors, whether either camp has engaged in a major merger or acquisition before, how the incumbent board has handled talks up to this point, and how the dissidents would undertake such an effort.

But while Proxy Governance meets separately with both groups, Glass Lewis largely relies on public information it has gleaned and generally does not make it a practice to bring both parties in for an investor road show.

Glass Lewis advises approximately 400 pension funds, mutual funds, and asset management firms, which either take the firm's advice and vote their shares accordingly or not. Proxy Governance has roughly 100 to 150 institutional investor clients.

Firms such as these, as a result, can have great sway on how investors vote their shares. And, as a result, are often the first stop on an investor road show for companies under fire and the dissident camp, say proxy solicitors.