Yahoo! (NASDAQ:YHOO) won't take Carl Icahn's Extreme Makeover: Boardroom Edition lying down. The company spurned Icahn's board nominations yesterday, naturally suggesting that its current board is the right one for the job. However, if you see Yahoo! chairman Roy Bostock walking with a noticeable limp this morning, it may be because his own words shot him in the foot.

"Microsoft's proposal significantly undervalued Yahoo!," Bostock writes, referring to the software giant's original $31-a-share offer. Ouch. If Bostock feels that $31 leaves Yahoo! "significantly undervalued," what does that say for his board's performance? 

After all, the company's stock was trading for less than $20 when Microsoft (NASDAQ:MSFT) swooped in uninvited? Would Yahoo! shares even be trading in the $20s today, if not for the glimmer of hope that Microsoft hasn't completely sworn off a buyout? If $31 is demeaning, then the board and executives must have "significantly" underperformed -- to an obscene degree -- to get Yahoo! where it is today. 

There's no way to spin this differently, which may explain why the board might want to pack their belongings come July's shareholder meeting.

Countering the counter
Bostock provides his company's perspective of the sweetened $33-a-share deal that materialized earlier this month. The offer was only made orally, without clarification regarding how much of the $47.5 billion deal was in cash and stock. It was only on the table for a day; after that, Mr. Softy snatched back its engagement ring and walked away.

Yahoo! was "prepared to enter into a transaction that valued Yahoo! at $37 per share and that provided reasonable certainty of value and certainty of closing," Bostock claims.

Forget the nearly $6 billion difference between the two price points. Forget the roughly $20 billion difference between what Microsoft was orally offering, and what the market felt Yahoo! was worth before this all started. The term "certainty of value" -- a term that Bostock mentions three times in yesterday's letter -- is all you need to know in explaining why Microsoft walked.

Yahoo!'s request for a static value implies either an all-cash deal, or one that anchors its stock to a variable ratio that will equal $37 a share at the close. Microsoft can't afford the former literally, nor the latter figuratively.

With $26.3 billion in the bank, Microsoft would have to finance an all-cash deal. Since these are uncertain times in Microsoft's world, it can't afford to turn its cash mattress into a leveraged sinkhole.

Risking even more of its stock under a variable scenario is also a dealbreaker. Microsoft's stock surrendered tens of billions in market cap in the trading days that followed its original offer. A higher offer would pummel Microsoft's stock even more. A variable rate would bump the burden of uncertainty onto the already-strained shoulders of Microsoft's shareholders.

Can you believe that Yahoo! wanted certainty at $37, when it was punishing its own investors with uncertainty at $19 a few months earlier?

"Please may I remind you that there is currently no acquisition offer on the table," warns Bostock, explaining that replacing the board to usher in a Microsoft takeover is not a good idea.

I'll agree with Bostock there, though what's wrong with making a board liable for the offer's withdrawal in the first place? If a father scares off the suitor courting his daughter by firing a rifle in the air, you can't blame the daughter for being single.

The wishing well
"Our business is performing well as evidenced by our first quarter results," Bostock writes. Wellness is relative, I guess.

I certainly wasn't impressed by last month's report. Revenue inched just 14% higher during the period, and that was with the non-organic boosts provided by the company's many display-advertising acquisitions during the period. Other search-engine specialists like Google (NASDAQ:GOOG) and IAC's (NASDAQ:IACI) are growing more quickly, at Yahoo!'s expense.

The other grim exhibits of "performing well" this past quarter include:

  • Lower adjusted earnings.
  • Lower operating earnings.
  • Less free cash flow, if not for a one-time AT&T (NYSE:T) payment.
  • International revenue suffering an 11% decline.
  • Revenue from affiliated sites fell, in sharp contrast to healthy gains at rival Google's AdSense program.

I don't get it, Bostock. Perhaps this explains why you believe that the board is performing well. Maybe you shot yourself in the foot because you need new glasses. Those rose-colored ones just aren't working.