Yahoo directors made a "grave mistake" in rejecting Microsoft's latest advances, billionaire investor Carl Icahn said as he pressed shareholders to oust the Internet company's board.

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Yahoo directors made a “grave mistake” in rejecting Microsoft’s latest advances, billionaire investor Carl Icahn said as he pressed shareholders to oust the Internet company’s board.

Yahoo rejected a breakup proposal from Icahn and Microsoft over the weekend, saying it would be “ludicrous” to sell the search business to Microsoft and leave the rest of the company in Icahn’s hands. Icahn on Monday accused Yahoo of distorting the terms of the offer, telling investors not to be “fooled.”

Both sides are preparing ammunition for the Aug. 1 shareholder vote to decide who controls the board. Compromise between Icahn and Chief Executive Officer Jerry Yang is probably impossible now, and investors may vote to throw out the current team, analyst Jeffrey Lindsay said.

“Investors have made their minds up,” said Lindsay, at Sanford C. Bernstein & Co. in New York. Yahoo doesn’t have “any realistic alternative” to boost the stock as high as a buyout from Microsoft would have, he said.

The stock of Sunnyvale, Calif.-based Yahoo dropped $1, or 4.2 percent, to $22.57 Monday. Microsoft’ stock fell 10 cents to $25.15.

Microsoft disputed Yahoo’s account of the talks, saying it only asked for a quick response on whether the terms of the offer could form a foundation for negotiations.

Yahoo spokeswoman Tracy Schmaler and Icahn representative Sue Gordon didn’t return phone messages seeking comment.

Yahoo would get at least $2.3 billion in shared revenue from the search assets annually over five years. The Microsoft offer would have generated about $300 million a year in cash, Yahoo said. That compares with the maximum of $450 million annually that Yahoo expects to get from its search advertising partnership with Google, owner of the most popular Web search engine.

“I actually for the first time feel that the Yahoo board was on strong grounds for rejecting this offer the way it did,” said Larry Haverty, an associate portfolio manager for Gamco Investors in Rye, N.Y. “The only thing that really makes sense here is for Microsoft to buy the whole company.”

The deal would have helped Yahoo cut research costs by billions of dollars, Icahn said. He disputed Yahoo’s claim that directors received only 24 hours to decide on the deal, saying they would have had more time had they agreed to delay the Aug. 1 meeting. Icahn and Microsoft also were willing to discuss keeping some board members, he said, countering Yahoo’s claim that the deal was conditioned on replacing the board.

“I have yet to see a company distort, omit and twist events and facts in the manner that Yahoo has done,” Icahn said in a statement. He filed a definitive proxy statement Monday, seeking to replace Yahoo’s nine-member board with his own nominees, including himself.