Carl Ichan has purchased roughly 50 million Yahoo shares since Microsoft withdrew its offer for Yahoo (no wonder Yahoo's stock dropped to only $25), and yesterday it was reported that Icahn will be launching a proxy context for control of the Yahoo board of directors. What is he thinking?

People close to the matter said Mr. Icahn failed to get a response from Microsoft about its interest in restarting acquisition talks. He elected to proceed because he views a deal with Microsoft as beneficial to both companies and one that executives would come to embrace.

Is it a good bet? The Merc quotes one analyst in the negative:

George Askew, an analyst with Stifel Nicolaus, said a proxy battle alone is unlikely to convince Microsoft to renew its offer. "Microsoft will not want to be viewed as the conqueror in a battle of mercenaries," Askew wrote in a research note on Wednesday.

"A successful proxy battle is a bit like a scorched earth policy -- you may win the battle but what you ultimately win will be so damaged that it wasn't worth fighting for. We believe this is why Microsoft didn't pursue a proxy battle, and we don't think the software giant's view will change with Carl Icahn doing the dirty work."

"Microsoft will not want to be viewed as the conqueror in a battle of mercenaries"?!? Why would Microsoft care about this? This started out as a battle between Redmond and Silicon Valley, and you can see why Microsoft might fear a Pyrrhic victory and back away from that battle. But when Yahoo overplayed its hand in the negotiations, the battlefield changed, and now Yahoo is fighting Wall Street.

Wall Street (with Icahn as its proxy) is telling Yahoo to get Microsoft back! Ballmer called your bluff. Stop trying to be cute and sell the company! That's a paraphrase.

Would a proxy battle involving Icahn damage Yahoo? A proxy battle is like a scorched earth only if the target turns it into a scorched earth. It's hard to imagine what Yahoo's management would gain from that strategy at this point. The ground is shifting under Jerry Yang's feet, but Yahoo is trying to convince people that it has a winning stand-alone strategy (listen to Yahoo President Sue Decker). But people aren't buying that. And Yahoo doesn't have many short-term strategic options.

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