Yahoo! Inc. [YHOO] late Thursday, May 15, released its response to Carl Icahn and his decision to lead a proxy fight for control of the company's board of directors. The letter is quite good, providing some detail that up until this point was not known regarding its conversations with Microsoft Corp. [MSFT] (most notably the two companies met in person on seven occasions). Reading the letter, you would have little doubt that Yahoo!'s board of directors not only met their fiduciary duty to shareholders in negotiations with Microsoft but even bent over backward to try and reach an agreement.

There's just one problem -- no one's buying it.

Had Yahoo! spent as much time negotiating with Microsoft as it did trying to find alternatives to making a deal, headline writers would right now be plastering that silly Microhoo combination name wherever they could. Yahoo! shareholders would still be teary-eyed, wondering how they were able to sell their shares for $33 when they were trading at $19.18 before Microsoft stepped in (that's a 72% premium for those paying attention). Microsoft shareholders, meanwhile, would be asking their management the same questions Yahoo! shareholders are asking their management -- how are you going to make this work.

Instead, Yahoo! is facing a proxy fight with one of the most wily and well-connected corporate antagonists around. It will still be a challenge for Icahn to persuade Yahoo! shareholders to elect his slate of candidates to the board, let alone get Microsoft back to the bargaining table, but the distraction of a proxy fight on top of the distractions from Microsoft's pursuit is the last thing Yahoo! needs right now. --David Shabelman

See May 15 response to Icahn from Yahoo!
See May 16 post on Yahoo!'s response from Alley Insider
See May 16 post from Dealbreaker.com