Will Icahn Pounce Again?

Microhoo isn't dead, apparently.

Billionaire investor and corporate shaker Carl Icahn has snapped up 50 million shares of Yahoo! (Nasdaq: YHOO  ) -- nearly a 4% stake -- since the company dismissed Microsoft's (Nasdaq: MSFT  ) offer for as much as $47.5 billion earlier this month.

Like most speculators buying shares of Yahoo! in the mid-$20s these days, Icahn's likely trying to get Microsoft back to the table, so that the two companies can sign off on a $33-a-share deal. Few outside of Redmond would value Yahoo! at more than $30 billion.

At today's prices, Yahoo! trades at a substantially healthier earnings premium compared with faster-growing search engines like Google (Nasdaq: GOOG  ) and Ask.com parent IAC (Nasdaq: IACI  ) . Even if you back out the value of Yahoo!'s Asian investments -- some of which the combined company may have to unload in a taxable event -- the stock is still trading at inflated multiples, considering the last few years of declines in earnings and market share.

Icahn knows he has to be quick. If he plans to launch a proxy battle to replace Yahoo! board members up for re-election this year, the nominations deadline is Thursday.

Then again, if he's dead serious about playing marriage counselor for Microhoo, there is something else he can do to make more than just the spread between Yahoo!'s market price and Microsoft's eventual purchase price.

I'm talking, of course, about shorting a boatload of Microsoft.

It would be risky, callous, and brilliant. It would also be profitable.

That's why they call it Mr. Softy
Microsoft shares took a hit when the company offered $31 a share for Yahoo! more than three months ago.

The proposed synergies are real, but the market isn't buying Yahoo! as dot-com savior for Microsoft's money-losing MSN. Two wrongs don't make a Google.

Yes, Microsoft needs to do something. The company's lackluster quarterly report last month begs for diversification away from its aging cash cows. Unfortunately, few see Yahoo! as Plan A, or even Plan B. It's more like Plan Y.

If Microsoft is going to burn through most of its $26.3 billion cash hoard on a single deal, it had better make sure that its one shot is a hit. A cold Yahoo! is a weak target for a heat-seeking missile.

So is Microsoft sure that it wants Yahoo! if the search giant comes back to it, crying? Is Icahn sure?

Plan Y from outer space
Icahn didn't make his fortune by being lucky. He wouldn't be jumping into this game if he didn't think that Microsoft could be talked back to the table.

The two parties just need a cooling-off period, period. For Icahn's sake -- and for the sake of those who are holding Yahoo! for the long term -- let's hope he's right.

If Microsoft really has no intention of coming back to Yahoo!, it would have made bold moves off the rebound. It would have tapped its greenbacks to snap up smaller players like Time Warner's (NYSE: TWX  ) AOL for the display advertising, or CNET Networks (Nasdaq: CNET  ) for the page views.

Since Microsoft quietly walking away instead, Yahoo! speculators feel that the dealmaking isn't over. Yahoo!'s stock is hovering between the high teens (where fundamentals dictate it should be) and the low $30s (where Microsoft's check was rebuffed). As long as Microsoft remains a possibility, the stock will be repelled at either extreme.

This brings us back to Icahn's brilliance. He wouldn't be buying today if he didn't think he could resell those shares at higher prices tomorrow to someone else. Those potential buyers are a very short list, including Microsoft and, well, Microsoft. That's why Icahn has to weigh the pros and cons of a proxy battle, because Microsoft's offer was based on friendly terms. If Yahoo! has to come out kicking, screaming, and biting, it would be worth less to Microsoft.

Icahn isn't perfect. His investment in Blockbuster (NYSE: BBI  ) has yet to bear fruit. However, he's right more often than he's wrong. For his sake, let's hope that Yahoo! proves to be more of a blockbuster than Blockbuster.

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