a little note from Mr. Icahn:

little note from Mr. Icahn for mutually beneficial enjoyment:\


008\00528125v1}
ICAHN PARTNERS LP
ICAHN PARTNERS MASTER FUND LP
ICAHN PARTNERS MASTER FUND II LP
ICAHN PARTNERS MASTER FUND III LP
HIGH RIVER LIMITED PARTNERSHIP
767 Fifth Avenue, 47th Floor
New York, New York 10153
Tel (212) 702-4300
July 14, 2008
Dear Fellow Yahoo! Shareholders:
Over the years I have attempted to make changes at many companies but I have yet to see a
company distort, omit and twist events and facts in the manner that Yahoo! has done in their press
release issued Saturday night, July 12th.
During the last week, Goldman Sachs called me a number of times asking me to relate to them
any transaction that Microsoft might be interested in transacting with Yahoo! I discussed with
them the possibility of doing a “Search only” deal wherein Microsoft would purchase “Search”
from Yahoo! and pay Yahoo! for any searches that would originate from a Yahoo! content page.
Yahoo! felt that a deal of this nature would be very interesting, but only if Microsoft would
guarantee the revenue that Yahoo! now received. This would obviously be a great deal for Yahoo!
because Yahoo! would, for five years, receive a minimum of the $2.3 billion they are currently
receiving as long as they continued to supply the page views and affiliate traffic they now had.
Heretofore, Microsoft had been unwilling to even come close to making this guarantee. However,
after I negotiated with Steve Ballmer for the better part of a week, he agreed to the guarantee. He
also agreed to commit $7.7 billion dollars to the transaction (consisting of a $1 billion payment
for “Search”, a $2.8 billion loan and a $3.9 billion tender offer to Yahoo! shareholders). Under the
transaction, Yahoo! shareholders would receive $16.25 per share in distributions (consisting of
cash and securities) and be left with a content company which would have a minimum guarantee
of $2.3 billion per year of “Search” revenue from Microsoft and cost saving synergies from
exiting the “Search” business that Yahoo! has publicly stated would be $750 million per year
(excluding the benefits from reduction of stock compensation and other non-cash items).
However, Microsoft believes the synergies from Yahoo! exiting “Search” would be far superior
and that Yahoo!’s 2009 GAAP operating income would exceed $2 billion. Microsoft would be
making a substantial equity investment in the remaining company at a valuation of $19.50 per
share. Furthermore, Yahoo! would be spared the great expense of maintaining “Search” as well as
having to spend billions in developing new technology to compete with Google and Microsoft -
which it is highly doubtful they would be able to do successfully. Additionally, Yahoo! would be
able to avoid the great risk of seeing “Search” continue to lose market share and eventually melt...EDIT EDIT

 

Friday call Yahoo!, instead of being interested in the Microsoft offer, seemed to me to be focused
on who would be running Yahoo!. Finally, Steve Ballmer suggested that we not spend the rest of
Friday afternoon on corporate governance. “First tell us if you like the deal,” he said.
The Yahoo! Press Release
a. Yahoo! in their Saturday night press release makes much of the fact that they were only
given 24 hours to decide on the Microsoft offer because of the time constraints relating to
the proxy fight, but neglects to mention that they were offered more time if they would be
willing to postpone the annual meeting for a short period.
b. Yahoo! conveniently neglects in its press release to tell you about the extremely important
above mentioned guarantees that Microsoft was willing to make;
c. Yahoo! tells you in their press release that a condition of the deal was the immediate
replacement of the current board and removal of top management. Yahoo! neglected to
mention we were willing to discuss keeping a number of the current board members and
Jerry Yang as Chief Yahoo!
d. Yahoo tells you the Microsoft proposal precludes the potential sale of all Yahoo! however,
they neglect to tell you that that train has left the station in that Microsoft is no longer
willing to buy all of Yahoo! with the current board overseeing the company.
e. Yahoo!’s press release states that “this odd and opportunistic alliance of Microsoft and
Mr. Icahn has anything but the interest of Yahoo stockholders in mind”, raising the
innuendo that I am on Microsoft’s side in this manner. That is patently ridiculous. Since
Yahoo! failed to consummate a transaction with Microsoft this year, I have spent hours
and hours attempting to get the parties together because I believe that it is beneficial to
Yahoo! shareholders to have a deal with Microsoft and I have worked hard trying to make
it happen. It is important to note that my funds and affiliates own 70 million shares of
Yahoo and own no shares of Microsoft or Google while the current board outside of Jerry
Yang owns only the shares they have received from Yahoo for being directors. My
interests are aligned with yours and not Microsoft and I think it is in our interest to have
this transaction consummated so that we can get value much in excess of the recent and
current market for Yahoo! shares.
In June, Microsoft apparently made a $33 per share offer for all of Yahoo! which was met with
Yahoo countering at $37, thereby rejecting the $33 offer. Amazingly, before Microsoft decided
that it would not buy all of Yahoo! with this board in place, it offered $33 and was turned down.
The Yahoo! press release indicates that Yahoo!, in rejecting the current Microsoft proposal, stated
that it would do a deal in which the entire company was sold to Microsoft for $33 per share. It is
hard to understand why it turned down $33 and is now willing to accept it. It is the same
obfuscation that is so prevalent in the rest of the press release. DON’T BE FOOLED.
I believe that, just like the $33 per share offer that was refused by Yahoo! in early June, refusing
the Microsoft offer for the Yahoo! search business is also another grave mistake that will be
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deeply regretted. Our company is on a precipice and our Board seems ready to take the risk of
seeing it topple – ARE YOU, THE REAL OWNERS OF YAHOO!, WILLING TO TAKE
THE SAME RISK?
The following are the details of the offer that was presented by Microsoft to Yahoo! on Friday.
$/share should:
Value to Yahoo! Shareholders No Shares Tender All Shares Tender
1. Yahoo! distributes $12.5B in Asian Assets $9.00 $9.00
2. Yahoo! distributes $3.5B in cash to shareholders
Comprised of $1B from Microsoft for search,
$2.5B of cash on hand $2.50 $2.50
3. Microsoft offers $2.8B in preferred debt at 5% $2.00 $2.00
4. Microsoft tenders $3.9B for Yahoo! shares at $19.50 - $2.77
5. Remaining Shares
$16.73 = effective value of shares after tender
(86% x $19.50) $19.50 $16.73
Total Value To Yahoo! Shareholders $33.00 $33.00
----------------------------------------------------------------------------------------------------------------------
Search Deal Would Increase Yahoo! EBIT to over $2B in CY09 – remaining share valuation
represents 14.5 x GAAP pre-tax income
• Microsoft acquires Yahoo! search assets for $1B in cash
• Microsoft is the exclusive provider to Yahoo! and its partners of paid search, contextual
search and algo search for the term of the deal
• Microsoft guarantees Yahoo! the greater of:
(a) 85% net revenues for the first three years, and 70% of net revenues thereafter,
or
(b) $2.3B per year of after-TAC revenues scaled down in event of
underperformance of Yahoo! US Homepage views and affiliate rev.
• At the end of 5 years, the agreement expires unless Microsoft or Yahoo! exercise one of
the following:
- Microsoft may extend the agreement for 5 years should Microsoft guarantee $3B
net revenues per year
- Yahoo! may extend the agreement for 5 years with Microsoft bound to guarantee
$1.6B per year
• Yahoo! no longer needs to support the costs of employees or infrastructure of the search
business.
• Microsoft will cooperate with Yahoo! to allow Yahoo! to collect data from its web
search to support its display advertising business.