Hedge funds say Yahoo now faces more pressure

By Dane Hamilton

NEW YORK (Reuters) - Officially, a potential $47.5 billion (24.4 billion pound) deal for Microsoft Corp (MSFT.O) to buy Yahoo Inc (YHOO.O) is over, at least for now.

But longer term, hedge fund managers and analysts said the Yahoo board now faces more pressure than ever to deliver shareholder value in the wake of the collapsed deal and could be forced to reopen merger talks with the software maker.

"This board is toast with a capital T," said Herb Denton, a veteran shareholder activist and head of Providence Capital. "They managed to leave $14.5 billion on the table. Name one shareholder that can be pleased with this outcome, other than the insiders."

Yahoo shares fell more than 15 percent in the last two days after Yahoo and Microsoft disclosed that they had finally ended talks. The subsequent disclosure of a Yahoo-Google advertising deal failed to reverse the Yahoo decline built up over the last few months since Microsoft initiated talks.

With Microsoft out of the picture, at least for now, the big question is how much support billionaire investor Carl Icahn will garner for his proxy campaign to replace the Yahoo board and what effect it would have should he win.

Few expect the veteran activist to end the campaign, since Icahn regularly touts his tenacity in such battles. In addition, he has won significant support from other major hedge funds and stockholders, including Paulson & Co., Boone Pickens' BP Capital, Dan Loeb's Third Point LLC and others.

"This is the worst of all possible outcomes in the near term for Icahn," said the manager of one multibillion-dollar activist fund who asked not to be named. "But everything says he is going to march forward with the proxy campaign."

The investor, who holds Microsoft but not Yahoo shares, said he believes that "this is a game of cat and mouse" and that Microsoft will eventually rebid to acquire Yahoo, particularly if Icahn wins the proxy battle and replaces Yahoo CEO Jerry Yang, as he has said he would do.