Yahoo! is currently in the midst of a potential proxy battle from activist shareholder Daniel Loeb. Loeb is working on a new slate of directors on his own. Recently Yahoo! hired Scott Thompson as the new CEO.

“I got it. I got it,” she told Bostock. “I thought you were classier,” she added. Carol Bartz was made Yahoo! CEO in January 2009. Yahoo! expected Bartz to be able to turn the company around even though she was able to slash costs and improve profit margins.

Bartz said that Yahoo! wanted revenue growth even though they were told that revenue growth would not be seen until 2012. Yahoo! has been paying Microsoft 12% of its search revenue, which limits growth. This deal is expected to help Yahoo! in the long-run. Bartz said that the Yahoo!’s board is growing impatient due to criticism faced when turning down Microsoft’s lucrative acquisition offer in 2007.

“The board was so spooked by being cast as the worst board in the country,” stated Bartz. “Now they’re trying to show that they’re not the doofuses that they are.”

After Bostock called Bartz, she was given the option as to whether she wanted to resign or let the board fire her. She learned that Yahoo!’s lawyers went to the St. Regis hotel to hand her papers, but she ditched that hotel and booked herself into another hotel. Then she pulled out her iPad and wrote an e-mail to all 14,000 of Yahoo!’s employees. The e-mail said:

To all,
I am very sad to tell you that I’ve just been fired over the phone by Yahoo’s Chairman of the Board. It has been my pleasure to work with all of you and I wish you only the best going forward.
Carol

“I want to make sure that the employees don’t believe that I’ve abandoned them. I would never abandon them,” said Bartz. “I have way too many purple clothes.”

[Fortune]

From: Jerry Yang [redacted]
Sent: Tuesday, September 06, 2011 8:37 PM
To: [redacted]
Subject: today’s news

All –

Moments ago we announced a leadership reorganization under which Tim Morse has been appointed interim Chief Executive Officer, effective immediately, replacing Carol Bartz, who has been removed by the Board from her role as Chief Executive Officer.

We want to thank Carol for her service to Yahoo! during a critical time of transition in the Company’s history, and against a very challenging macro-economic backdrop. We wish her all the best in her future endeavors. In the meantime, we are commencing a search for a permanent Chief Executive Officer and expect to engage the services of a nationally recognized executive search firm to help us identify candidates for the position as expeditiously as possible.

We believe Tim is an excellent choice to serve in this interim role and lead the Company. As most of you know, he has a very strong operational and financial background and will serve as an excellent chief executive and guiding voice for Yahoo!.

The Board has also named key senior Yahoo! executives to a newly formed Executive Leadership Council (ELC) tasked with supporting Tim in managing the Company’s day-to-day operations until a permanent chief executive is appointed. We have great confidence in Tim’s abilities and in those of the other executives who have been named to the ELC. In addition to Tim, who will also continue in his role as Chief Financial Officer of Yahoo!, the ELC will consist of Michael Callahan, Executive Vice President, General Counsel and Secretary; Blake Irving, Executive Vice President and Chief Product Officer; Ross Levinsohn, Executive Vice President, Americas; Rich Riley, Senior Vice President & MD, EMEA Region; and Rose Tsou, Senior Vice President, APAC Region. David Filo and Jerry Yang will each continue as Chief Yahoo and will provide counsel to Tim and the ELC.

In addition, the ELC will support a comprehensive strategic review that the Board has initiated to position the Company for future growth. We are confident that we have talented teams in place and see enormous opportunities on which Yahoo! can capitalize, and right now we are focused on leveraging the Company’s leadership and current business assets and platforms to execute against these. We fully intend to return the Company to a path of robust growth and industry-leading innovation. We are committed to exploring and evaluating possibilities and opportunities that will put Yahoo! on a trajectory for growth.

Thanks to your hard work and dedication, we have created something extraordinary here at Yahoo!. These changes will position us for future growth and will enable Yahoo! to continue building on our success.

We don’t want to lose any of our momentum during this time, and we know we can count on all of you to continue doing your jobs to the best of your abilities. We should all remain focused on delivering the high level of service and innovation that our customers, advertisers and partners have come to expect from us.

In case you have not already seen it, please look over the press release we just issued. We hope you will join us at an all-hands meeting tomorrow, where Tim, the ELC, David and Jerry will be happy to answer any questions (look for the invite shortly).

As you might expect, these developments may generate considerable interest from the media. If you are contacted by a reporter, please refer them to our corporate communications team.

We want to thank you again for your commitment to Yahoo! and continued hard work. We appreciate all you do.

David Filo
Co-founder and Chief Yahoo

Jerry Yang
Co-founder and Chief Yahoo

Roy Bostock
Chairman of the Yahoo! Board of Directors

[BusinessInsider]

According to a tipster at Valleywag:
“On my way down the elevator, I was stopped on the 5th floor and in walk Roy Bostock and Steve Ballmer. Kind hellos were exchanged. As we entered the lobby they both walked out and seemingly proceeded to lunch together.”

Valleywag came up with several plausible conclusions out of the meeting here.  The first is that Microsoft is still interested in buying Yahoo!’s search business, but Bartz said that she wasn’t interested in getting to that right away.  Another possible reason is that Ballmer said he was ready to come back to the negotiation table when Yahoo! got a new CEO and both executives may have been in New York around the same time.

Given that they were meeting in the Time Warner building, my guess is that executives there may have wanted to arrange a deal between AOL, Yahoo!, and Microsoft.   Time Warner clearly wants to unload AOL somehow and Microsoft has a big enough wallet to take possession of AOL.  You never know what could happen when you put these three outfits in the same room.  More details as this story unfolds.

[via Valleywag]

Dear Mr. Bostock:

I have long been cynical about the effectiveness of many of the boards and CEOs in this country and as a result the inability of our companies to compete. I have constantly complained about how far CEOs and boards will go in order to retain their jobs, yet even I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft.

According to details in a complaint that I became aware of yesterday (details Yahoo fought to keep under seal), Jerry Yang and a majority of the board went to inordinate lengths to sabotage a Microsoft bid. The complaint states: “Viewing employee retention as Microsoft’s Achilles heel, Yang engineered an ingenious defense creating huge incentives for a massive employee walkout in the aftermath of a change in control. The plan gives each of Yahoo’s 14,000 full-time employees the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover, by claiming a “substantive adverse alteration” in job duties or responsibilities.” The damage to Microsoft “is compounded by the fact that Yahoo’s thousands of engineers, known as “Technical Yahoos!,” have detailed job responsibilities and qualifications.”

Most importantly, Microsoft might never be able to trust a CEO and board who, while claiming to be negotiating in good faith, went behind their back and adopted a “plan” which not only sabotages any Microsoft acquisition but went so far as to completely disable its own ability to rescind the “plan” as long as Microsoft’s offer remains pending. Until now I naively believed that self-destructive doomsday machines were fictional devices found only in James Bond movies. I never believed that anyone would actually create and activate one in real life. I guess I never knew about Yang and the Yahoo Board. In my opinion, it will be extremely difficult for Microsoft or other companies to trust, work with and negotiate with a company that would go to these lengths.

It is insulting to shareholders that Yahoo for the last month has told us that they are quite willing to negotiate a sale of the company to Microsoft and cannot understand why Microsoft has walked away. However, the board conveniently neglected to inform shareholders about the magnitude of the plan it installed which made it practically impossible for Microsoft to stay at the bargaining table. Could this have been the problem?

Even more deceitful are Yahoo’s actions toward its own employees, for whom you claimed to have set up the “plan”. Management neglected to mention to these same employees that Microsoft in its proposals had earmarked $1.5 billion of retention incentives (representing over $100,000 per employee) meant to allay any employee concerns.

Ironically, according to the complaint, this is not the first time that Yahoo has denied shareholders the opportunity of selling to Microsoft at a large premium. According to the complaint, in January 2007 Microsoft offered to purchase Yahoo at $40 per share but the company rejected that proposal. On January 31, 2008, Steve Ballmer emailed a letter to Jerry Yang and Roy Bostock making a new proposal of $31 per share. The letter recounts Microsoft’s prior efforts to acquire Yahoo and noted that Microsoft had given Yahoo time to implement business strategies designed to turn the company around. These strategies obviously didn’t work. The letter went on to state: “Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008.” Yahoo not only turned down this proposal but sabotaged it. An article in CNET News cited in the complaint sums it up by stating, “Yahoo may indeed agree to Microsoft’s [offer], but it will be over Jerry Yang’s dead body”.

I and many of your shareholders believe that the only way to salvage Yahoo in the long if not short run is to merge with Microsoft. However, because of HSR considerations, to complete a merger of this magnitude will take a period of time. Even if by some stretch of the imagination the Yahoo board finally determines to do the rational thing and sell the company, I fear that, in light of Yang and the board’s recent actions in response to Microsoft’s overtures, it may be too late to convince Microsoft to trust Yang and the current board to run the company during that period while Microsoft sits on the sidelines with $45 billion at risk. Therefore, the best chance to bring Microsoft and Yahoo together is to replace Yang and the current Yahoo board with a board that will negotiate in good faith with Microsoft and in whom Microsoft will have trust to operate the company during the long period between signing and closing.

You stated in a press release yesterday that, “Yahoo’s board of directors including Jerry Yang has been crystal clear that it would consider any proposal by Microsoft that was in the best interests of its shareholders.” However this is not crystal clear to me. You have allegedly turned down a $40 offer. You have turned down and sabotaged a $33 offer. Instead, you appear willing to negotiate an “alternative” deal that in my opinion will be worth less than $33 but will entrench the board and Jerry Yang. I understand how these actions are in the best interests of management and a board whose members each receive $40,000 per month for several days work, but it is hard for me to understand how these actions are in the “best interests of the shareholders.”

However, despite your actions to date, there is still some possibility that you can resuscitate a Microsoft offer for the company. The board can rescind the “severance plan” that is the largest impediment to a Microsoft deal. You currently can do this because Microsoft withdrew their bid 30 days ago. It is time for you to stop misleading your shareholders with respect to Microsoft. It has been reported today that when asked to talk about the Microsoft bid, Sue Decker indicated that Microsoft made an offer which Yahoo’s board didn’t feel was at an attractive enough price. However, one doesn’t have to be a rocket scientist to realize there is a simple method to possibly achieve a higher price. Simply rescind the poison pill “severance plan”, which would free up approximately $2.4 billion and possibly even more which could be added to the bid. It is also time to admit to your shareholders that the severance plan was not done for your employees (who you conveniently neglected to inform that Microsoft had earmarked $1.5 billion in retention incentives for), but rather was done simply as an entrenchment device and to impede a Microsoft bid. If you are not completely disingenuous in your protestations concerning doing “the right thing” for shareholders, you should rescind the severance plan expeditiously and determine if Microsoft is still willing to purchase our company and thereby create a true competitor for Google. I can only hope that you will finally do what is in the “best interests of the shareholders.”

Sincerely yours,

CARL C. ICAHN

[Source: WSJ: Icahn's Letter to Yahoo!]

Although this is no laughing matter, the James Bond comparison was witty on Icahn’s part. 

Roy Bostock, Chairman of Yahoo! Inc. responded to the above letter that Icahn sent yesterday.  Bostock accused Icahn of manipulating facts of the negotiation that took place between Microsoft Corporation (NASDAQ:MSFT) and Yahoo! Inc. (NASDAQ:YHOO)

“I know you are aware that we have reached out to Microsoft proactively and met with them many times in the last several weeks,” stated Bostock. “During this period, their message to us and to the markets has been and remains that they are not interested in pursuing a full acquisition of Yahoo.”

From what I understand, the problem here is that Icahn wanted Yahoo! to get bought and allow Yahoo! shareholders to get a solid payout.

That could have happened if Yahoo! accepted the full acquisition bid when Microsoft offered it back in February.  Since Yahoo! declined for a higher price, the deal didn’t happen and the shareholders didn’t get that solid payout.  Now Icahn wants Microsoft to come back to the negotiation table for a full acquisition, but Microsoft is no longer interested in that.  Microsoft is interested in some sort of partnership or an acquisition of Yahoo!’s Search Ad business.

Here is Roy Bostock’s letter to Carl Icahn:

Dear Carl: 
  
We are in receipt of your letter of June 4th and take issue with its content. 
  
Your letter seriously misrepresents and manipulates the facts regarding the recent events pertaining to Microsoft and Yahoo!. You rely on, as “facts,” a series of unsubstantiated allegations from a complaint filed in a Delaware court which grossly misstate the very clear record and position established by the Yahoo! Board. Let me elaborate: 
  
You make reference to our employee retention plan but you significantly mischaracterize its purpose and its effect. In fact, you refer to it as a “Poison Pill” which could not be further from the truth. To set the record straight, the employee retention program is designed to protect the Company’s assets and value during a time of uncertainty. The claim that the plan gives each of Yahoo!’s employees “the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover…” is just plain wrong. In fact, our plan has a “double trigger” which means that in order for an employee to be eligible for benefits under our plan, there would need to be a change of control AND the employee would need to be terminated “Without Cause” or resign for “Good Reason.” That means that in contrast to your assertions, an employee who simply quits his or her job would receive nothing under our plan.
 
  
The retention plan is intended to help us preserve and enhance shareholder value by allowing Yahoo! to continue to attract and retain the industry’s best talent, and to allow employees to stay focused on implementing Yahoo!’s business strategy. In fact, the plan was adopted in order to protect the value of Yahoo! in anticipation of a possible acquisition by Microsoft which would have resulted in a lengthy regulatory review and a significant period of uncertainty for our employees. In adopting this plan, we believe Yahoo! did the right thing for its employees and its shareholders alike. 
  
This plan was fully disclosed at the time of its adoption and should be no surprise to anyone at this point. It was disseminated to employees, publicly filed and extensively covered by the media. Significantly, as you note, Microsoft had indicated that it was prepared to spend $1.5 billion on retention incentives indicating that they too recognized that the retention of Yahoo! employees would have been critical if there had been an acquisition. 
  
Finally, you significantly misrepresent the events of the recent past. Notably, you accuse us of turning down a $40 per share offer and “sabotaging” a $33 per share offer. Again, this is patently untrue. Yahoo!’s Board of Directors has at all times been focused on maximizing shareholder value. As has been well documented, Yahoo! has engaged in thorough discussions with Microsoft over a series of months culminating in Microsoft’s decision to walk away from a potential acquisition of Yahoo!. Throughout this process, which has included an exploration of multiple strategic alternatives with multiple parties, the Board has repeatedly stated that it is open to any transaction, including a sale to Microsoft, as long as it is in the best interests of shareholders. 
  
You seem to be under the impression that somehow Microsoft will come back to the negotiating table for a full acquisition of Yahoo!. This is puzzling as I know you are aware that we have reached out to Microsoft proactively and met with them many times in the last several weeks. During this period, their message to us and to the markets has been and remains that they are not interested in pursuing a full acquisition of Yahoo!. 
  
Conspicuously absent from your letter is any credible plan for Yahoo! other than a repetition of your insistence that the Company should sell itself to Microsoft. Indeed, your stated view that “the only way to salvage Yahoo! in the long if not short run is to merge with Microsoft” demonstrates that you have no other plan and causes one to wonder what exactly would happen to our Company if you and your nominees were to take control of Yahoo!. 
  
Sincerely, 
  
Roy Bostock 
Chairman of the Board

Below is the timeline of the Microsoft-Yahoo! saga:

June 2007: Former Yahoo! CEO, Terry Semel Resigns, Jerry Yang steps up.
July 2007: Yang makes a 100 day plan to get Yahoo! off the ground again.
February 1, 2008: Microsoft makes an unsolicited offer to Yahoo! for $44.6 billion.
February 9, 2008: Yahoo! passes on Microsoft offer.
February 11, 2008: Rumor is that Yahoo! may merge with AOL.
February 12, 2008: Microsoft CEO, Steve Ballmer sends a letter to Yahoo! “Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”
February 13, 2008: Layoff notices are given at Yahoo! Ryan Kuder Twitters the entire event.
April 4, 2008: Rumors begin to appear that Microsoft is deciding to pull the offer.
April 5, 2008: Microsoft sends a letter to Yahoo! stating that they may work out a separate deal with shareholders if a decision isn’t made.
April 7, 2008: Yahoo! Announces their AMP! advertising platform and stated that they want more money from Microsoft.
April 9, 2008: Yahoo! states that they may be interested in an ad outsourcing deal with Google.
April 10, 2008: Rumors appear that News Corp. AOL, and Google all want to arrange deals with Yahoo!
April 12, 2008: Capital Research & Management invests $2 billion more in Yahoo! shares giving them ownership of $6 billion worth of the company.
April 30, 2008: Rumor appears Microsoft increases the amount that they’re willing to spend.
May 4, 2008: Microsoft walks away from the negotiation table after YahoO! demands too much of a high price for Microsoft.
May 4, 2008: Yahoo! responds by saying that through this experience, Yahoo! emerged as a stronger, more focused company.
May 7, 2008: Yahoo! & Google become more serious about Google Ads appearing on Yahoo!
May 14, 2008: Major Yahoo! shareholder, Carl Icahn steps in and calls the Yahoo! Board irrational.
May 20, 2008: Microsoft makes an offer to buy Yahoo!’s Search Advertising Business for an undisclosed amount.
May 23, 2008: Yahoo! Director, Edward Kozel resigns to “spend more time with family.”
May 23, 2008: Yahoo! postpones shareholder meeting for the second time.
May 28, 2008: Jerry Yang claims company isn’t under siege and Microsoft is no longer interested in buying out the whole company at All Things D conference.
May 30, 2008: FTC officially approves Icahn’s large purchases of Yahoo! stock.
June 2, 2008: Yahoo! court documents state that Yahoo! was planning to turn down a deal with Google one day before the Microsoft bid.
June 3, 2008: Carl Icahn indicates if proxy battle is successful, he’d want Jerry Yang out of CEO position.
June 4, 2008: Yahoo! Board decides annual shareholder meeting date to be held on August 1. 
Icahn sends Yahoo! a letter explaining that he believes Yahoo! CEO, Jerry Yang sabotaged the Microsoft bid.  Roy Bostock responds to Icahn by saying that Microsoft is no longer interested in a full acquisition.