May 15 (Bloomberg) -- Yahoo! Inc., defending itself against Carl Icahn's bid to take control of the board, said it was right to reject Microsoft Corp.'s $47.5 billion offer and that its directors are the most qualified to boost Yahoo's value.
Icahn's views reflect a ``significant misunderstanding'' of Microsoft's offer, said Yahoo, whose 10 directors will be up for re-election at the July 3 annual meeting. Icahn, who owns the equivalent of 59 million Yahoo shares, said today that he has drawn up a slate of 10 nominees.
Yahoo Chief Executive Officer Jerry Yang faces mounting pressure to reconsider his decision to rebuff Microsoft's advances. John Paulson, who runs the New York hedge fund Paulson & Co., said today that he will support Icahn's directors and that he was disappointed Yahoo didn't reach a deal with Microsoft. Paulson & Co. owned 50 million Yahoo shares at the end of March.
``We do not believe it is in the best interests of Yahoo stockholders to allow you and your hand-picked nominees to take control,'' Yahoo Chairman Roy Bostock said in a letter to Icahn. Yahoo also said there is no offer on the table from Microsoft or any other company.
Bostock said Yahoo is willing to consider any proposals, including from Microsoft, that offer shareholders full value. He said Yahoo's board met more than 20 times to review Microsoft's offer and other options. The board kept an ``open mind and an open ear,'' Yahoo said.
Yahoo, based in Sunnyvale, California, rose 61 cents to $27.75 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock had fallen 32 percent in the 12 months before Microsoft announced its bid. Microsoft, the world's biggest software maker, gained 52 cents to $30.45.
`Sensible Path'
Icahn said in a letter to Yahoo's board that a combination with Microsoft ``is by far the most sensible path'' if the Internet company wants to take on Google Inc.
``The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,'' said Icahn, 72. ``I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.''
Icahn didn't immediately return a phone message seeking comment on Yahoo's letter. Microsoft spokesman Frank Shaw said he's reviewing the statement and had no immediate comment.
$33 Offer
Yang rejected Microsoft's $33-a-share offer this month, saying his company was worth at least $4 more. Buying Yahoo, owner of the second-most popular search engine, would have helped Microsoft compete with Google in online advertising, a market Microsoft expects to almost double to about $80 billion by 2010.
Bostock said in the letter that Microsoft's $33-a-share offer wasn't delivered in writing and didn't detail the mix of cash and stock. Within hours of Yang proposing a price of $37 a share, Microsoft walked away, Bostock said.
Senior executives of Yahoo and Microsoft and their advisers had frequent contact and met in person seven times, Bostock said. Yahoo asked Microsoft to discuss the regulatory implications of a deal and never got a response, he said.
Yahoo's letter ``seems like a pretty boilerplate response,'' said Sachin Shah, a merger-arbitrage analyst at ICAP Securities in Jersey City, New Jersey. Still, Yahoo's board appears to have carried out a lot of its fiduciary duty, he said.
Board Nominees
Icahn's board nominees include Mark Cuban, owner of the Dallas Mavericks professional basketball team, and Frank Biondi Jr., former chief executive officer of Viacom Inc. Icahn said he has sought regulatory clearance to buy as much as $2.5 billion in Yahoo stock, about 6.7 percent of the company's outstanding shares as of April 30.
``If you're Yahoo right now, I would imagine shareholders are calling them up and saying, `Let's figure out if we can get a deal better than $33 if we make it friendly and make it before the proxy starts,'' said Heather Bellini, an analyst at UBS AG in New York.
Accepting Microsoft's offer is a better option than going it alone, Icahn said. The board ``completely botched'' negotiations with Microsoft, prompting Yahoo's shareholders to ask Icahn to step in, he said.
Icahn is acting as a surrogate for Microsoft by waging a battle for board seats that may persuade Yahoo to sell, Troy Mastin, an analyst at William Blair & Co. in Chicago, said in an interview with Bloomberg Television.
``He's playing his cards pretty smart here,'' said Mastin, who expects Yahoo shares to perform in line with the broader market. ``I wouldn't be surprised to see Microsoft and Yahoo together in the next few months.''
Google Partnership?
Should Microsoft CEO Steve Ballmer fail to re-emerge as a bidder, Icahn may have to find other ways to boost Yahoo's stock, such as aligning the company with Google or selling stakes in Yahoo's Asian operations, said Ross Sandler, an RBC Capital Markets analyst in New York.
Yahoo has held discussions to allow Google to sell some of its advertising for Internet searches. In a May 3 letter, Ballmer criticized Yahoo for exploring the partnership, saying it would hurt Yahoo's ability to keep customers and employees, making an acquisition ``undesirable.''
Icahn also nominated himself for Yahoo's board, along with Keith Meister, principal executive officer of Icahn Enterprises Inc. The other nominees are Lucian Bebchuk, a professor at Harvard Law School; John Chapple, the former CEO of Nextel Partners Inc.; Adam Dell, managing general partner of Impact Venture Partners; Edward Meyer, CEO of Ocean Road Advisors Inc.; Brian Posner, former CEO of ClearBridge Advisors LLC; and Robert Shaye, co-CEO of New Line Cinema.
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