Yahoo!

Now the rebellion

Enraged shareholders and activists are pushing Yahoo!’s board to revive takeover talks with Microsoft

YAHOO!’S co-founder and boss, Jerry Yang, and his board had this coming. For three months they did everything they could to rebuff Microsoft, which was offering to buy the internet company at a big premium to its value before the bid. They succeeded, if that is the word, when Microsoft walked away in frustration this month. Yahoo!’s shareholders were livid, and have been saying so. The proxy fight that Microsoft itself shied away from now appears likely to start anyway.

The person to launch it is Carl Icahn, a shareholder activist who is feared by boards across America that he has taken on or threatened. Since Microsoft dropped its bid for Yahoo!, Mr Icahn has bought 59m shares, worth more than $1.5 billion, in the company and has applied for regulatory permission to buy lots more. And his first action as a shareholder has been to send Yahoo!’s board a letter that amounts to a public flogging.

Yahoo!’s board, Mr Icahn wrote, “acted irrationally” in its response to Microsoft. It has “lost the faith of shareholders,” he continued. To him it is “obvious” that Microsoft’s bid was “superior” to any value Yahoo! could create on its own. He is “perplexed” by the board’s behaviour, he said, which is “irresponsible” and “unconscionable.”

One pictures Yahoo!’s wounded fiduciaries gulping. They may indeed be on their way out, because Mr Icahn is nominating his own slate of ten directors in their stead. It is a cheeky line-up, consisting of himself and several private investors who have been his partners. There is also a corporate-governance professor and a media tycoon turned investor. Above all, there is Adam Dell, the brother of Michael, founder of the eponymous computer company, who once sold a company to Yahoo!; and Mark Cuban, who got rich by selling Broadcast.com to Yahoo! at the height of the dotcom bubble and now owns the Dallas Mavericks, a basketball team.

Mr Icahn does not always succeed in his attacks on boards he considers soft, but often. He recently played a big role in forcing another technology company, BEA Systems, a neighbour of Yahoo!’s in Silicon Valley, to resume negotiations with Oracle, another software company in the valley, that led to its acquistion.

In Mr Icahn’s favour is that he has a good point. The overwhelming logic for a combination of Microsoft and Yahoo! is that this appears to be the only way that the two can put up a good fight against the new superpower of web search, online advertising and the Internet in general, which is Google. As a reminder, on the day of Mr Icahn’s letter, Hitwise, an online-measurement firm, released the latest market-share numbers in American web searches. Google’s share once again went up, to 67.9%, and both Yahoo! and Microsoft fell, to 20.28% and 6.26% respectively.

And what has been Mr Yang’s proposed alternative so far? To do a deal with Google, in which Yahoo! would outsource part of its search-advertising technology. Mathematically, this could indeed boost Yahoo!’s profits somewhat, and thus raise its technical value, because Google is better at placing ads next to search results that consumers actually click on, and collects more revenue for each such click. But for Yahoo! this would amount to total capitulation in its effort, after years and billions spent, to catch up with Google in precisely this technology. Yahoo! would in effect resign to becoming a second-tier internet player, not unlike Ask.com, another search engine that uses Google’s advertising technology.

Even assuming that Mr Yang and his board now feel the pressure, would Microsoft come back to the table? Mr Ballmer, its boss, may just be playing the game tactically, but his frustration appears to have been real. Engineers in both companies have been griping about a combination. In the bigger battle against Google to attract and retain the brightest geeks—ultimately the crucial factor in the search wars—the uncertainty of an acquistion cannot help. Mr Yang had better become very co-operative indeed, and quickly.

McCain Iraq, Iran Policies Make Him Favored Candidate to Saudis

-- John McCain, who is trying to strike a distance from the policies of President George W. Bush, accuses Saudi Arabia of sponsoring insurgents in Iraq and condemns it for human-rights violations, including imprisoning people whose ``only crime is to worship God in their own way.''

That should make the prospect of a McCain presidency a nightmare for the Saudi rulers, who have enjoyed close ties to the Bush family. Instead, Saudis are privately rooting for the presumptive Republican nominee, discounting some of his rhetoric because he's the only candidate to promise to keep U.S. troops in Iraq and to deter Iran.

``The royal family and other elites would like to see McCain,'' Mai Yamani, a visiting scholar with the Carnegie Middle East Center in Beirut, said yesterday in a telephone interview from London.

``He would keep the troops in Iraq, and that is their main worry, that the U.S. may withdraw or minimize its presence,'' said Yamani, whose father, Sheikh Ahmed Zaki Yamani, was the kingdom's oil minister from 1962 to 1986. U.S. forces are needed to counter the spread of Iranian influence from Iraq, which many Saudis believe ``now is ruled by Iran,'' she said.

Oil Prices

Bush today will visit King Abdullah's horse farm to mark the 75th anniversary of U.S.-Saudi ties, which have been strained by what the Saudis view as mismanagement of the war in Iraq and soaring oil prices. Bush is set to discuss oil prices with the Saudis, the world's largest producer, during his visit.

As former Texas oilmen, Bush, 61, and his father, President George Herbert Walker Bush, 83, were both known quantities to the Saudis. McCain has no business experience, though the Saudis appreciate his military and national-security credentials.

The Saudis, like other Gulf Arabs, are comforted by McCain's repeated commitment to stay in Iraq. Campaigning in Columbus, Ohio, the Arizona senator said yesterday that he envisions a successful outcome to the war by 2013, when Iraq will be ``a functioning democracy.''

For the Saudis, that is preferable to the positions of either of the Democratic candidates -- Senators Barack Obama of Illinois and Hillary Clinton of New York -- who both have vowed to undertake an Iraq withdrawal as one of their first acts in office, analysts said.

`Very Nervous'

``They are worried about any deal the Democrats may cut with Iran,'' said Henri Barkey, a foreign policy adviser to Obama and former State Department policy planner, who now heads the international relations department at Lehigh University in Bethlehem, Pennsylvania.

The Saudis are preoccupied by Iranian influence in their region. The McCain campaign points to Obama's pledge to engage in direct talks with Iranian president Mahmoud Ahmadinejad as evidence that the Democratic candidate lacks the experience to become president.

``Unconditionally meeting Ahmadinejad would fatally undermine any chance that we have of building a coalition of Arab states willing and able to contain Iranian power,'' said Randy Scheunemann, a McCain foreign-policy adviser.

Obama, 46, is eager to debate Iran policy with McCain, said Denis McDonough, an Obama foreign-policy adviser.

`Status Quo'

``What's evident is the status quo as it relates to Iran, and which John McCain seems to support, has resulted in an expanded Iranian nuclear program and expanded Iranian influence,'' McDonough said.

McCain has encouraged the perception that he would restore the pragmatist tradition of the first President Bush, and resolve conflicts with Saudi Arabia behind closed doors.

A McCain administration would practice a policy of ``speak softly and press firmly,'' Scheunemann said.

McCain's signals to the Saudis, however, haven't been consistent. On the one hand, he said this month that his personal connections would allow him ``to manage our strategic relationship'' with the Saudis, while also pressuring them on other subjects.

McCain said May 6 aboard his campaign bus that he knows Prince Bandar bin Sultan, the former Saudi ambassador to U.S., ``very well,'' citing a 25-year relationship and the bond they share as former military pilots. McCain's campaign co-chairman, Tom Loeffler, is a registered lobbyist for Saudi Arabia, which earned his firm, the Washington-based Loeffler Group, close to $10 million in the last two years.

`They Know' McCain

The Saudis ``feel like they know John McCain,'' said Hady Amr, the director of the Brookings Institution's Doha Center.

At the same time, however, McCain has used some tough language toward Saudi Arabia. He has promised to bring more pressure on the country on human rights and has accused the Saudis of sponsoring the Sunnis who are attacking U.S. forces in Iraq. Last week, McCain lumped Saudi Arabia with Iran, Burma, Sudan and North Korea, describing them as nations that have imprisoned ``tens of thousands of people'' for their religious beliefs.

Wyche Fowler Jr., a U.S. ambassador to Saudi Arabia from 1996 to 2001 who is now chairman of the Middle East Institute in Washington, said the criticism may not matter to the Saudis. Fowler met in Riyadh last month with senior Saudi officials, including King Abdullah.

``They are used to a certain amount of Saudi bashing every four years,'' he said.

Fed, BOE Foreshadow End of Rate Cuts as Prices Rise (Update2)

-- The world's most powerful central banks are telegraphing the end of interest-rate cuts, and traders already anticipate the first steps in the opposite direction.

Federal Reserve officials this week flagged inflation risks after slashing borrowing costs seven times since September and Bank of England Governor Mervyn King unveiled Britain's worst price outlook in a decade. Faster growth is vindicating European Central Bank President Jean-Claude Trichet's refusal to cut rates in response to the credit crisis.

``The central banks are taking a pause, but that could turn into a permanent end to rate cuts,'' said Thomas Mayer, co-chief economist at Deutsche Bank AG in London. ``The risk we won't see more cuts from the Fed and Bank of England has grown, and markets have pushed out expectations of ECB easing.''

The danger is that food and oil prices are rising so fast that inflation will replace costlier credit as the chief threat to the global economy. That may force the Fed to turn a deaf ear to what King labels the ``siren'' calls for rate cuts and perhaps consider raising them instead.

Fed Chairman Ben S. Bernanke, 54, and his team reduced their benchmark rate by 3.25 percentage points to 2 percent. The Bank of England has cut its main rate three times to 5 percent and Canada's central bank has moved on four occasions to 3 percent.

Now, Merrill Lynch & Co. forecasts global inflation will accelerate to 4.7 percent this year, the fastest pace since 1999, from 3.4 percent in 2007.

Tying Hands

``Inflation is constraining the hand of central banks,'' said Tim Drayson, global economist at ABN Amro Holding NV in London. ``They are starting to realize that they will have to see weaker economies to control inflation.''

Some traders are increasing their bets the Fed will reverse recent cuts later this year. Fed funds futures traded at the Chicago Board of Trade signal a 22 percent probability the Fed will raise its main rate to 2.25 percent by the Sept. 16 policy meeting, compared with 7 percent a week ago.

While U.S. consumer prices rose less than forecast in April, signs that financial markets are improving have prompted policy makers to reappraise the risks facing the economy. Bank of San Francisco President Janet Yellen said May 13 that rate cuts to date ``could lead to higher inflation expectations and an erosion of our credibility.''

Former Fed Chairman Paul Volcker warned on May 14 that ``there is some resemblance to where we are now in the inflation picture to the early 1970s,'' when central banks failed to contain a pickup in prices.

Siren Call

In the U.K., King warned on May 14 against the risk of lowering borrowing costs too much, suggesting the Fed may have overdone it. ``We did not fall prey to the sirens to cut interest rates further as some other central banks have done,'' the 60-year-old King said.

Still, his proclaimed prudence failed to stop U.K. inflation from jumping the most in six years in April as it accelerated to the government's upper limit of 3 percent. The rate on the December rate futures contract has risen 63 basis points to 5.74 percent this week, suggesting traders have abandoned bets on rate cuts this year.

Nevertheless, a further deterioration in credit markets will deal another blow to the global economy, requiring more policy action. Vincent Reinhart, a former Fed economist and now a scholar at the American Enterprise Institute in Washington, cautions against a ``premature'' end to rate cuts.

Reinhart's Warning

If credit markets deteriorate again and growth falters, ``central banks will have to roll back talk of future tightening and may even ease,'' he said.

King on May 14 said it's ``quite possible we may get the odd quarter or two of negative growth'' and further ``shocks'' could make matters worse. While Bernanke said this week that tensions in markets have eased, conditions are still ``far from normal.''

Inflation concerns in the U.S. and U.K. chime with those often sounded by Trichet and central bankers from Brazil to Taiwan since markets seized up in August. With the Middle East and Asia still driving the global economy and pushing food and oil prices higher, inflation threatens to become entrenched.

The ECB has left its rate at 4 percent since June. Data released yesterday showed the 15-nation euro economy growing faster than expected in the first quarter, while inflation held above the ECB's ceiling for an eighth month.

Risks Undiminished

Trichet, 65, said in a speech in Brussels today that ``there is no place for complacency'' amid clear inflation pressure. In an interview in Vienna, ECB Governing Council member Klaus Liebscher signaled the bank may leave rates unchanged throughout this year.

Asked if the bank could lower rates in 2008, he said, ``given the risks for price stability, I think the answer is a clear one. The risks have not diminished.''

Eonia swap contracts, a widely used market gauge of rate expectations for the euro-area, rose to 4.05 percent yesterday from around 3.2 percent in mid-March, showing traders no longer expect cuts from the ECB.

``Trichet is sitting pretty,'' said Jean-Michel Six, chief European economist at Standard & Poor's in Paris. ``He's been against the consensus in saying of the twin evils inflation is a bigger threat than a slowdown.''

Fed's Lockhart Says Slowdown to Reduce U.S. Inflation (Update1)

May 17 (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economic slowdown may moderate inflation that has been spurred by rising prices of energy and commodities.

``We expect inflation to abate somewhat in the second half and going into 2009 based upon our forecast of weak economic growth,'' Lockhart said in response to a question following a speech today in Atlanta. ``There is some early indication that the strength of inflation has softened.''

Lockhart's comments contrast with remarks this week by Kansas City Fed President Thomas Hoenig and Richard Fisher of the Dallas Fed, who warned about rising prices. Hoenig said inflation was at an ``unacceptable level,'' while Fisher said the economy may recover from its slowdown ``at much higher base rates of inflation than we would want.''

Policy makers indicated last month they may take a breather after lowering the benchmark U.S. interest rate by 3.25 percentage points since September. The reduction in rates this year has been the most aggressive in two decades.

U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs, the Labor Department said May 14. Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March.

Energy Prices

``The U.S. economy is in the midst of a pronounced slowdown, with very little growth recorded for two consecutive quarters,'' Lockhart said in the text of his speech. At the same time, ``the United States has experienced elevated inflation levels partially driven by a run-up of energy and other commodity prices.''

Lockhart didn't discuss the path of interest rates. The Federal Open Market Committee next meets June 24-25.

U.S. weakness, initially concentrated in housing, has undermined consumer spending, which generates about two-thirds of U.S. gross domestic product, Lockhart said.

``Personal consumption has softened,'' Lockhart told the Southern Center for International Studies at an event at Emory University. ``To the extent the world relies on strong U.S. consumer activity, this weakness could pose a threat to continued global expansion.''

For now, ``growth appears to be softening but still growing nicely'' in emerging economies, he said. While the U.S. slowdown will be felt worldwide, it won't as severe as predicted by some forecasters, he also said.

Lockhart in the question period said the U.S. economy wasn't ``technically'' in recession, adding the second quarter may show economic growth.

Global Problem

Increasing prices have become a global problem, Lockhart said, citing ``unrest'' over food prices in several countries.

``Recently inflation in many parts of the world has begun to pick up,'' he said. That ``is a growing issue for emerging economies.''

U.S. consumers expect an inflation rate of 5.2 percent over the next 12 months, according to a Reuters/University of Michigan survey on May 16, compared with 4.8 percent in the April survey. Longer term, Americans projected prices would increase 3.3 percent, up from a 3.2 percent estimate last month.

Lower demand for energy could bring a reduction in those prices, Lockhart added in the question period, saying prices were likely to be ``somewhat lower but relatively high.''

The U.S. should take a ``realistic'' view of sovereign wealth funds, Lockhart also said, echoing comments made May 15 by Fed Chairman Ben S. Bernanke. The funds have accounted for about one-third of the capital raised by financial companies during the credit crisis, the Fed chief said.

``There has been a fair amount of hand-wringing recently about sovereign wealth funds accumulating U.S. assets,'' the Atlanta Fed official said. ``I believe our posture has to be realistic. One country's trade deficit -- ours, in this case -- is another country's investment surplus.''

Lockhart, responding to questions, said the U.S. dollar would remain ``the dominant currency'' in the world even though some countries may diversify their reserves.

Dollar Falls Most Against Euro in Seven Weeks on Sentiment, Oil

May 17 (Bloomberg) -- The dollar fell the most against the euro since March as a drop in consumer confidence and record crude oil prices raised concern U.S. economic growth will slow.

The dollar's second consecutive weekly decline against the euro pared its increase from the all-time low reached last month to 2.7 percent. The Australian dollar rose to the strongest level against the greenback since 1984 as oil pushed up prices of other commodities. Mexico's peso rose to a five-year high, while the Brazilian real strengthened to the most since 1999.

``The economic backdrop in the U.S. argues against the continuing gains in the dollar,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.

The dollar fell 0.6 percent to $1.5577 per euro this week, from $1.5482 on May 9. It touched the record low of $1.6019 per euro on April 22. The yen declined 1.2 percent to 104.04 per dollar this week, from 102.87. Japan's currency fell 1.8 percent to 162.27 per euro, from 159.21, the biggest decline since the week ended April 18.

Crude oil rallied to the all-time high of $127.82 a barrel yesterday as Goldman Sachs Group Inc. raised its forecast for the second half of this year to an average of $141 a barrel, citing supply constraints.

The correlation coefficient between oil and the euro-dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time. The correlation is calculated based on the price changes of oil and the currencies.

`Higher' Oil

``There is no fresh catalyst to mount a successful rally in the U.S. dollar,'' said Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp. ``Oil prices are significantly higher.''

The Australian dollar increased 1.1 percent this week and touched 95.60 U.S. cents yesterday, the highest level since 1984, on higher commodity prices. Exports of raw materials, such as iron ore, account for 17 percent of Australia's economy. The Brazilian real rose to the nine-year high of 1.6402 versus the dollar, while Mexico's peso appreciated to 10.3912 the strongest in almost five years.

Iceland's krona was the best performer against the dollar among emerging-market currencies, increasing 6.9 percent to 74.69 after the central banks of Denmark, Sweden and Norway pledged as much as 1.5 billion euros ($2.3 billion) in emergency funds yesterday. The krona jumped 3.5 percent to 116.17 per euro. Before yesterday, it had slumped 24 percent against the euro this year.

Weaker Yen

Japan's currency fell against all of the major currencies this week as global stock gains and lower volatility increased carry trades, in which investors borrow funds in countries with low interest rates and buy assets where returns are higher.

The yen fell 4.9 percent to 13.95 against South Africa's rand and 4 percent to 63.48 against Brazil's real. The Bank of Japan is forecast by 35 economists surveyed by Bloomberg to hold the target lending rate at 0.5 percent next week. That compares with 11.75 percent in Brazil and 11.5 percent in South Africa.

Implied volatility on one-month dollar-yen options fell to 11.26 percent yesterday, from 12.70 percent on May 9, approaching the lowest since Feb. 27. Lower volatility tends to encourage carry trades by making it easier to predict profit. The Standard & Poor's 500 Index rose 2.6 percent this week, the biggest gain since mid-April.

The dollar weakened yesterday as a report showed confidence among U.S. consumers fell in May to the lowest level in almost 28 years. The Reuters/University of Michigan consumer sentiment index dropped to 59.5 this month, from 62.6 in April.

Sales of previously owned homes probably dropped in April to an annual rate of 4.85 million, the all-time low, according to the median forecast of 46 economists surveyed by Bloomberg News. The National Association of Realtors is scheduled to release the report on May 22.

Fed Rate Outlook

Futures on the Chicago Board of Trade yesterday showed 88 percent odds that the Fed will hold the target lending rate at 2 percent at its next meeting on June 25. The balance of bets is for a reduction of a quarter-percentage point. There's a 21 percent chance of an increase to 2.25 percent in September.

The euro got a boost on May 15 as the European Union's statistics office said gross domestic product in the 15 countries that use the currency increased to 0.7 percent in the first quarter. The pace exceeded the 0.5 percent estimate of 32 economists surveyed by Bloomberg News. Germany's 1.5 percent expansion from the previous quarter was more than double what economists had expected.

European Central Bank President Jean-Claude Trichet said yesterday the bank can't relax in its fight against inflation.

``There is no place for complacency,'' he said in a speech in Brussels. ``Price stability in the medium term has to be'' ensured. It's ``a necessary condition to sustain economic growth, job creation and social cohesion.''

The ECB has held its main refinancing rate at a six-year high of 4 percent since last June to control inflation, which accelerated to the fastest pace in 16 years in March.

Bush Says Saudi Oil Boost `Not Enough' to Ease Prices (Update1)

May 17 (Bloomberg) -- President George W. Bush said Saudi Arabia's decision to raise oil output 300,000 barrels a day is ``not enough'' to ease U.S. energy prices and that more domestic oil exploration and refining capacity are needed.

``It's not enough, it's something but it doesn't solve our problem,'' Bush told reporters in Sharm el-Sheikh, Egypt today when asked about the Saudi decision, taken May 10 and announced yesterday, to increase crude production.

``Our problem in America gets solved when we aggressively go for domestic exploration,'' Bush said after meeting Afghan President Hamid Karzai ahead of a World Economic Forum conference. ``Our problem gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancement of alternative energy as well as conservation.''

Saudi Arabia, the world's largest oil exporter, said yesterday, while Bush was in Riyadh, that the country's daily output will rise to 9.45 million barrels a day in June. Saudi Oil Minister Ali al-Naimi told reporters the kingdom took the step in response to demands from customers.

Oil prices have doubled in the past year on surging demand, supply disruptions in places such as Nigeria and commodity purchases by investors as a hedge against a weakening U.S. dollar. The price surge threatens to accelerate inflation and curb economic growth.

Nuclear Power, Refineries

Bush voiced frustration with congressional blockades of Republican-led efforts to increase domestic drilling.

``One of the interesting things about American politics is, is those who are screaming the loudest for increased production from Saudi Arabia are the very same people who are fighting the fiercest against domestic exploration, against development of nuclear power and against expanding refining capacity,'' Bush said.

``So I was pleased that they increased production by 300,000, but I am also realistic to say to the American people that we've got to do more at home and we need a Congress who will be responsive to those requests,'' Bush said.

The U.S. Senate on May 13 defeated a Republican plan to increase oil and natural-gas drilling in the Outer Continental Shelf and Alaska's Arctic National Wildlife Refuge.

The measure failed by a 42-56 vote. Republicans argued that more domestic drilling may lower oil and gasoline prices. The measure also promoted alterative fossil fuels such as diesel derived from coal and oil shale.

Strategic Petroleum Reserve

Also this week, the Senate passed legislation that would halt oil shipments to the Strategic Petroleum Reserve in an effort to ease record oil and gasoline prices. Bush is likely to sign the bill.

Crude oil futures traded in New York rose yesterday to a record about one hour after Bush landed in Saudi Arabia. They later settled at $126.29, an increase of $2.17, or 1.7 percent, though below the day's high after the promise to boost production. Saudi Arabia is the world's largest oil exporter and the most influential member of OPEC.

OPEC, which pumps more than 40 percent of the world's oil, has kept output targets unchanged during its past three meetings, on March 5, Feb. 1 and Dec. 5.