Billionaire Carl Icahn said Yahoo's board should "stop dancing around" and offer to sell the Internet company to Microsoft for $49.5 billion, or 11 percent...

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Billionaire Carl Icahn said Yahoo’s board should “stop dancing around” and offer to sell the Internet company to Microsoft for $49.5 billion, or 11 percent more than the software maker’s original bid.

Icahn, who threatened to oust directors if they didn’t reach a deal with Microsoft, escalated a spat with Yahoo Chairman Roy Bostock over a severance plan that Icahn says drove its suitor away. He suggested a price of $34.375 a share, compared with the $31 Microsoft offered in January.

“I again call upon you to honor your fiduciary duty to your shareholders,” he said in a letter to Bostock released Friday.

Icahn, backed by shareholders such as hedge-fund manager John Paulson and BP Capital Chairman T. Boone Pickens, contends a combination is the only way the two companies can compete with Google, the leader in Internet search traffic.

Icahn criticized Chief Executive Officer Jerry Yang’s efforts to complete an alternative transaction with Microsoft, saying he will refuse to negotiate a deal worth less than $33 a share.

“Icahn is saying to Microsoft, ‘You want to be in the advertising business, you need to buy the entire Yahoo company,’ ” ICAP analyst Sachin Shah said in an interview. “A full acquisition is in the best interest of both companies.”

Yahoo rose 8 cents, or 0.3 percent, to $26.44 Friday. The stock has risen nearly 14 percent this year. Microsoft dropped 81 cents, or 2.9 percent, to $27.49.

Yahoo responded Friday by saying that Icahn’s suggestion to publicly offer itself up is “ill-advised,” and that the company is open to any deal, including a takeover by Microsoft, if it’s in the best interest of investors.

Microsoft spokesman Frank Shaw declined to comment.

Icahn owned 10 million shares of Yahoo and options to buy an additional 49 million as of May 15. He has claimed that the board sabotaged Microsoft’s attempts to take over the company, and he has nominated nine directors to replace them in the Aug. 1 annual meeting.

In Friday’s letter, Icahn accused Yang of using an employee severance plan to deter Microsoft, saying the move would have cost the software maker a “staggering $2.4 billion” if it had pursued a bid at $35 a share.

“You neglected to mention that the true cost to an acquirer may be even higher as the perverse change in control-severance incentives may diminish the work effort of Yahoo employees,” Icahn said.

Microsoft’s initial cash-and-stock bid was 62 percent more than Yahoo’s stock price at the time. CEO Steve Ballmer later offered as much as $33 a share, which Yang deemed too low, prompting Microsoft to scrap the bid May 3.