By Dane Hamilton
NEW YORK (Reuters) - MICROSOFT (MSFT.NQ)Corp
Microsoft, which broke off months-long talks in early May to buy the Internet company for $47.5 billion, said it would resume talks immediately if a new board were elected at Yahoo's August 1 stockholder meeting. Yahoo shares leapt 12 percent.
The Microsoft statement came after Icahn, a billionaire who owns more than 4 percent of Yahoo, issued an open letter saying he had "spoken frequently" to Microsoft CEO Steve Ballmer over the last week. Previously, the two had not spoken.
"This is the first concrete confirmation we have that Microsoft is willing to come back to the table," UBS analyst Ben Schachter said. "It gives Icahn a much stronger hand going into the shareholder vote. It significantly raises his profile and his likelihood for success."
Ballmer told Icahn that a big impediment to any Yahoo deal was his concern that the current board could "mismanage" the company while the deal awaits regulatory approval, a process that could take nine months or more, according to Icahn.
In an interview, Icahn argued that his proposed dissident board slate would make Microsoft feel more secure in risking a large sum of capital to complete the deal during the regulatory approval process.
"You don't have to be Sherlock Holmes to realize there is no great comfort zone between the current Yahoo board and Microsoft," Icahn said. "During this waiting period for regulatory approval, any acquirer -- not just Microsoft -- would want a steward they would feel comfortable with."
In response, Yahoo issued a statement saying it continues to be willing to reopen talks with Microsoft, but "we feel strongly" that any deal negotiated between Icahn and Microsoft "would not lead to an outcome that would be in the best interests of Yahoo stockholders."
"If Microsoft and Mr. Ballmer really want to purchase Yahoo, we again invite them to make a proposal immediately," Yahoo said.
Yahoo is still talking to Time Warner Inc's
NEW BOSS SEARCH
Icahn also said he was actively interviewing replacements for Yahoo CEO Jerry Yang and its management team. "I am moving towards getting a potential new management team for Yahoo, including a new CEO," he said in a phone interview.
The long-awaited signals that the Microsoft-Yahoo talks could be revived sent Yahoo shares up $2.56 to $23.91 on Nasdaq, while Microsoft added 5 cents to close at $26.03.
Sanford C. Bernstein senior Internet analyst Jeffrey Lindsay said that if Microsoft is serious about resuming talks, "there is rationale for voting for the Icahn slate and essentially ousting the current Yahoo board and probably the management too.
"At the end of the day, you would have to expect that the big institutional shareholders would go for a deal with Microsoft," Lindsay added.
Mithras Capital partner Mark Nelson, whose firm controls 1.7 million Yahoo shares, said management change at Yahoo "has to happen."
"They've had plenty of time to right the ship," Nelson said. "The record over the past two or three years speaks for itself. They blew it and new management is needed to better exploit all the assets there."
Talks between Yahoo and Microsoft broke down in early May. Microsoft originally offered $31 per share and raised it to $33, but Yahoo demanded $37 per share.
After talks collapsed, Icahn amassed a stake in Yahoo and launched a proxy war to replace the Yahoo board and management, claiming they "botched" the Microsoft talks.
In his letter, Icahn said: "Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo," including purchasing either its "search" function with large financial guarantees, or an outright purchase of Yahoo.
Microsoft said it would be premature to discuss details, such as the price it might offer for Yahoo.
Icahn said he would immediately move to replace Yang if his board slate were elected at the August meeting.
Yahoo's biggest investor, Capital Research, has told Yang it may vote against the board in the proxy fight, the blog AllThingsD reported on Monday.
(Additional reporting by Robert MacMillan and Yinka Adegoke in New York, Dai Wakabayashi in Seattle, and Eric Auchard and Anupreeta Das in San Francisco; Editing by Derek Caney and Braden Reddall)