This week’s complaint in the Valley: Carl Icahn is an ugly capitalist. He only bought 3.9% of Yahoo! to extract profit from his investment and, in the process, he’ll destroy the company. Really? Isn’t this is a little rich coming from people who make money from stock options? You will recall Microsoft walked away from their Yahoo! bid writing Jerry Yang a nasty “protesting too much” letter on their way out. Monday morning quarterbacking rose to a new pitch and shareholders who hoped to cash out launched lawsuits – SOP, Standard Operating Procedure. More surprising was Carl Icahn’s decision to accumulate Yahoo! shares and start a proxy fight. Here, proxy fight means putting a proposal before shareholders against the board of directors’ party line. In this case, Carl Icahn tells shareholders to elect his “slate” (list) of directors at the coming July 3rd meeting. His pitch: Management and directors at Yahoo! are idiots. Before Microsoft’s offer the stock traded below $20. Those incompetents could have sold to Microsoft for $33 or so. Let’s kick them out. Our newly elected board will re-open negotiations with Microsoft and we’ll make you money. There are problems with that line of thinking but they’re not what the whiners and ankle-biters think.
Yes, there are good reasons to fear Carl Icahn. He is relentless, he takes no prisoners, sweeps in, shakes the company down (greenmail) or up (restructuring). He extracts a profit from his investment and goes on to his next prey. A vulture capitalist, say his critics (I thought this was us VC): he’s taking advantage of troubled companies. But how did these corporations get in trouble? The causes are commonplace: resting on one’s laurels, complacent Boards of Directors, failure to adapt to new competition, to strategize or just plain incompetent top executives. All this causing shareholders to lose money. The latest Icahn raid got Ed Zander out of the CEO job at Motorola as, year after year, the company failed to keep its leadership position in an industry they invented: cell phones.
So, Icahn waltzes in and the worriers worry: He’s going to do irreparable damage to Yahoo! The thing is, it’s already done, that’s why the stock tanked before Terry Semel got fired, sorry, before he “stepped down”. In 1994, Yang and Filo founded Yahoo! and, for a brief moment, made it the shining star of the Web, the place to go as a user, the place to be as an engineer. But, quickly, Yang and Filo decided that the dirty task of managing was beneath their creative level. They hired Tim Koogle to make the trains run on time, it didn’t quite work, then Terry Semel from Hollywood because “it” was all about media, about content. Never mind technology. Yahoo! failed to grow its server farms, to sharpen its search, to make shopping competitive, to fire the ones who needed to be fired. Google came and we know what happened: they shed a cruel light on Yahoo’s directors and management. So, Carl Icahn is doing what he’s known to do: pounce on poorly run companies, clean up messes and make money for shareholders. Unpleasant but healthy. Predators keeping the ecosystem in shape.
But, will it work? I doubt it. First, Microsoft made up its mind. Too messy. What were we thinking? They won’t be back at the bargaining table. Second, it’s the technology and the techies, Carl. It’s not a bricks and mortar business where the accountants, the attorneys and the investment bankers can rely on a stable set of formulae to remodel the house. This, the Web, is the new New Frontier, we make laws as we move forward. People, the real assets, users as well as engineers move around at will, creating and destroying value much quicker than at an auto parts company or a shopping mall conglomerate. Ask Terry Semel and, actually, ask any outsider who came to the Valley to try and mend its ways. Conversely, ask any outsider, hello J6M, who tried to run Hollywood.
Carl Icahn could end up being right about the diagnosis: Yahoo! needs a new Board of Directors and a new management. And he could be the wrong doctor because the patient is unlike any other he’s treated so far. Unless he manages to force Yahoo! to re-open talks with Microsoft — which seems to be the case .— JLG