All Things Digital

Unless there is an 11th-hour change of heart from Time Warner, former AOL head Jon Miller will still not be Carl Icahn’s choice for the two other seats he will select–which also requires Yahoo’s consent–to the board of the Internet company, set to be announced by Friday.

Instead, several sources with knowledge of the situation think Icahn is more likely to choose Edward Meyer and Frank Biondi (pictured here, left to right), both of whom were on the alternative board slate when the activist investor was waging his now-defunct proxy fight against Yahoo (YHOO).

Another possibility is someone BoomTown had previously picked–former Nextel exec John Chapple (pictured here)–as a personal favorite, noting in late July:

Thus, overall, from good-fit perspective, I like another former exec, John Chapple of Nextel best of all because mobile will be increasingly important to Yahoo in Web 3.0 (frankly, it better be, as Web 2.0 has not been too kind to Yahoo).

Via Sprint (S), Chapple knows from big mergers and he knows how to makes deals. He has been the operator of a digital company, unlike many of the others. And he is also an entrepreneur, which is a plus.

Longtime media exec Frank Biondi is a longtime Icahn crony, and Meyer definitely has the advertising chops Yahoo needs, as former Grey Global Group head.

Icahn has already been seated as a board member of Yahoo.

Presumably, Icahn will now begin to try to figure out ways to goose Yahoo’s lackluster stock from the inside, in order to recover the hundreds of millions of dollars in paper losses he has endured since he started his still fruitless quest to change Yahoo’s management and/or get it to sell to Microsoft (MSFT).

One possible scheme was to eventually install Miller as Yahoo CEO.

In any case, both Icahn and Yahoo CEO Jerry Yang strongly supported Miller for the board.

But Miller was unexpectedly nixed because of a noncompete agreement still in place that he had signed with Time Warner after he was tossed from AOL in late 2006.

After tacitly agreeing to waive the noncompete, Time Warner’s CEO Jeff Bewkes told Miller he could not be considered for the slot.

Thus, Yahoo is limited to the list of possible members of Icahn’s director slate.

Please see this disclosure related to me and Google.

Yesterday, in a quarterly regulatory filing, Google stated what everyone and their mother and their sisters and their cousins and their aunts have known for about, say, years now:

That its $1 billion investment in AOL, made in 2005 at a $20 billion valuation, “may be impaired.”

While that makes it sound like AOL has had a few too many beers, actually, this is accounting-speak for: Our investment has tanked big time.

“There can be no assurance that impairment charges will not be required in the future, and any such amounts may be material,” Google (GOOG) said in its filing.

Indeed and coincidentally, in a piece about AOL’s downward valuation and its negative implications for its ability to sell itself to Yahoo (YHOO) or Microsoft, which was published yesterday before Google essentially wrote off a lot of its AOL investment, BoomTown wrote:

Of course, $10 billion is about half as much as AOL was valued in late 2005, when Google forked over $1 billion for five percent of the unit.

At the time, no one actually believed the $20 billion was a real figure, but that it was due more to Google’s incentive to overpay in order to clinch a renewal of its search deal with AOL and ward off Microsoft’s aggressive efforts to steal that business away.”

The Google filing is the company’s official warning that its AOL payola will now have to be accounted for and could result in a charge to future profits.

For a moneymaker like Google, that might not be a problem.

More interesting, of course, are the geopolitics of the whole thing. As part of its investment, Google got the right to demand that the AOL unit be spun off in an IPO or Time Warner (TWX) would have to buy back Google’s stake.

If Time Warner managed to get Microsoft (MSFT) to buy AOL, one wonders what Google might demand.

After all, while its AOL investment might be a dog, it’s still Google’s flea-bitten mutt.

How much is AOL really worth?

Well, its own owner, Time Warner, has been trying to put a big, shiny $10 billion price tag on the much- beleaguered online unit for months now, as it dribbles out tiny leaks about hot-and-cold- running acquisition talks with both Yahoo (YHOO) and Microsoft (MSFT).

But after yesterday’s less-than-impressive results for AOL, which dragged down the crowing Time Warner CEO Jeff Bewkes could deservedly do over his company’s “The Dark Knight” and “Sex and the City” film successes, can it even hope to get that much?

Of course, $10 billion is about half as much as AOL was valued in late 2005, when Google (GOOG) forked over $1 billion for five percent of the unit.

At the time, no one actually believed the $20 billion was a real figure, but that it was due more to Google’s incentive to overpay in order to clinch a renewal of its search deal with AOL and ward off Microsoft’s aggressive efforts to steal that business away.

But AOL’s weakening performance in a tough economy makes figuring out a sale of AOL to Yahoo–its most sensible partner–more difficult than ever.

Let’s do the math, shall we?

(This analysis was suggested to me by someone familiar with both companies and makes a lot of sense.)

Let’s begin by assuming that Time Warner (TWX) would want to trade AOL for a stake in a merged newco entity, and by using the $10 billion value the media giant seeks.

This, by the way, does not include the profitable Internet access business, which Time Warner officially announced yesterday it would cleave from the AOL ad and content business and sell separately for $2 to $3 billion.

Next calculation: At $20 a share, Yahoo is worth $27.6 billion at yesterday’s close.

So with a new valuation of $37.6 billion ($27.6 billion plus $10 billion), Time Warner would then own 26.5 percent of the company, which is jokingly dubbed Yahol.

Maybe it is just me, but I can’t see Yahoo agreeing to this. Or its big and mighty disgruntled investors, such as Capital Research Global Investors’ Gordon Crawford, either.

To appease him and other shareholders, Yahoo might first, say, sell off those much-touted Asian assets and deliver a wad of cash to shareholders.

This move would yield about $8 billion, leaving a $19.6 billion market cap for Yahoo. In a combo in that scenario, Time Warner would then own 33.7 percent of the remaining company.

And while Time Warner could throw in some other assets to add value, like video rights or content from its other properties, it’s still a leap to imagine Yahoo would trade away that much of itself for a merger that has a 50-50 chance of succeeding.

That’s because both Yahoo and AOL have been feeling the pain of the downturn in the ad market and are each particularly vulnerable.

Yahoo’s second-quarter earnings, announced a few weeks ago, were weak, which management blamed on the economy.

And yesterday, Time Warner did the same, noting the ad business at AOL had stalled.

Revenue fell 16 percent in the second quarter to $1.06 billion, largely due to a massive fall-off in its subscription business, resulting in a 36-percent drop in net income.

But online advertising revenue grew only two percent, which is–let’s just say it–depressing, largely because of a 14-percent decline in the more lucrative display business, versus its healthier but lower-margin third-party ad business.

In addition, AOL still has to figure out how to properly monetize its newly acquired Bebo unit, which it woefully overpaid for, in an even more difficult environment for social networks.

And while turning to Microsoft for a better deal might seem a good idea, the software giant is also unlikely to want to overpay in this market.

Nonetheless, Time Warner must sell AOL, which was abundantly clear yesterday, as it does not fit in with the rest of its businesses and its weakness is dragging down the stock.

Unfortunately, it could turn out to be a fire sale. Using the old AOL catchphrase, to describe the odds of getting a huge pile of dough for AOL: You’ve Got Fail.

Oh, there had to be much, much gnashing of teeth in the corporate offices of the Time Warner Center in New York yesterday with news of the sale of DailyCandy to Comcast for $125 million.

Why?

Maybe because that tasty payment is going right into the hands of Bob Pittman’s Pilot Group Ventures, which bought the fashion and shopping newsletter business for $3 million in 2003.

Longtime media exec Pittman was the former star AOLer, whose nickname was Bob “Pitchman” for his smooth-as-silk selling and even more marked spinning skills.

But the Web 1.0 supernova fell quickly to earth, after the online service merged with Time Warner (TWX) in early 2001, in what is now considered one of the more significant world-class corporate disasters.

After being tossed out of AOL Time Warner in mid-2002, Pittman (pictured here), along with AOL head Steve Case, was blamed for the stock decline and other woes at the media giant by the Time Warner side, whose deep bitterness toward him has never really faded away.

Now, with Time Warner trying to make a deal to sell the AOL unit for up to $10 billion to Yahoo or Microsoft–despite it being valued at $20 billion only a few years ago–Pittman’s small but impressive score has got to grate.

“I have been associated with the start-up, turnaround or acceleration of many companies and major brands, and rarely have I seen the kind of creativity, commitment and passion I’ve seen day in and day out at DailyCandy,” said Pittman in a letter to DailyCandy staff yesterday about the sale. “And the results speak for themselves: Since we made our investment in 2003, subscriptions have grown from just over 200,000 to over 2.5 million.”

In the letter, Pittman said the company’s EBITDA was over $10 million this year on revenues of $25 million.

This is certainly different from the situation almost exactly six years ago when Pittman was driven out of the then-named AOL Time Warner on the proverbial rail.

If you want a taste of those once-grim times for Pittman, here is an excerpt from my book, “There Must Be a Pony in Here Somewhere: The AOL Time Warner Debacle and the Quest for a Digital Future,” which was published in 2003.

The section comes from Chapter Six, “Way, Way After the Goldrush,” as the deal imploded:

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Yesterday, in what feels to BoomTown to be a deeply petty move, Time Warner said that it had blocked former AOL head Jon Miller from being considered as a possible Yahoo board member.

The reason is a noncompete Miller (pictured here) signed, part of a severance agreement he reached with the media giant after it unceremoniously tossed him out in late 2006.

A Time Warner spokesman said Miller was barred from working “for a variety of competitors, including Yahoo, until March of 2009.”

Like it matters.

According to sources at Time Warner (TWX), the decision came from on high at corporate and not from the AOL unit. And it is not due to jealousy over attention Miller has received of late–Microsoft was also interested in hiring him to take over for departing exec Kevin Johnson.

Miller, sources said, was called by Time Warner CEO Jeff Bewkes (pictured here) last night and told by him, “We’ve changed our mind.”

Why?

Well, to be sure, Miller is no Time Warner favorite, even after being gone for almost two years.

But Miller, whom Time Warner and AOL execs never miss an opportunity to bash, off the record, is also no threat to AOL, which he actually helped revive from the ruins of the disastrous AOL-Time Warner merger.

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After its annual meeting today, as its board members had lunch together, Yahoo released the results of its shareholder vote and it seems we will still have CEO Jerry Yang to kick around some more.

Yang garnered 85.4 percent of the shares to stay on as a director of the Internet company, with 14.6 percent withheld.

While having almost 15 percent of your investors think you are not worthy is not good, it is also not nearly as bad as it could have been.

In fact, overall results are actually better than last year. Thus, being attacked by Microsoft (MSFT) and activist investor Carl Icahn has had a dulcet effect on Yang’s image.

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We’re posting all the interviews from the sixth D: All Things Digital conference that took place in late May.

But–as many readers have requested–they will all be available in their entirety over the next weeks in this column.

Here’s Part 4 of 4 of an interview I did with Time Warner’s CEO, Jeff Bewkes.

(I will be posting one video part of the discussion with Bewkes every day this week through today.)

As you will see, Bewkes is a live wire, sassing me about the hard time I was giving him about the rough road AOL has had as a Time Warner (TWX) property.

In this video, Bewkes takes questions from the audience about CNN, Glenn Beck and Lou Dobbs, Bebo, content, the greening of Time Warner and he also gets in a stats tussle with Yahoo’s media head Scott Moore (pictured here).

We’re posting all the interviews from the sixth D: All Things Digital conference that took place in late May.

But–as many readers have requested–they will all be available in their entirety over the next weeks in this column.

Here’s Part 3 of 4 of an interview I did with Time Warner’s CEO, Jeff Bewkes.

(I will be posting one video part of the discussion with Bewkes every day this week through Thursday.)

As you will see, Bewkes is a live wire, sassing me about the hard time I was giving him about the rough road AOL has had as a Time Warner (TWX) property.

In this video, Bewkes talks about the digitization of its HBO premium cable channel and also its television and movie businesses and the making of original content online.

We’re posting all the interviews from the sixth D: All Things Digital conference that took place in late May.

But–as many readers have requested–they will all be available in their entirety over the next weeks in this column.

Here’s Part 2 of 4 of an interview I did with Time Warner’s CEO, Jeff Bewkes.

(I will be posting one video part of the discussion with Bewkes every day this week through Thursday.)

As you will see, Bewkes is a live wire, sassing me about the hard time I was giving him about the rough road AOL has had as a Time Warner (TWX) property.

In this video, Bewkes talks about AOL, Time Warner’s talks with Yahoo, online content and also outlines more detailed plans for Bebo.

We’re posting all the interviews from the sixth D: All Things Digital conference that took place in late May.

But–as many readers have requested–they will all be available in their entirety over the next weeks in this column.

Here’s Part 1 of 4 of an interview I did with Time Warner’s CEO, Jeff Bewkes.

(I will be posting one video part of the discussion with Bewkes every day this week through Thursday.)

As you will see, Bewkes is a live wire, sassing me about the hard time I was giving him about the rough road AOL has had as a Time Warner (TWX) property.

This video of the interview opens with a very funny spoof video Bewkes brought along using Time Warner’s TMZ unit, followed by his remarks on the continued impact of the rocky merger with AOL, the purchase of the Bebo social-networking site and how to best use content online.

Listening to all the birds-on-a-wire chatter about what will happen in the latest round of the never-ending Microsoft-Yahoo saga, it’s still hard to know what to think, given the ever-increasing noise around the proceedings, which will continue until Yahoo’s Aug. 1 shareholder meeting.

Yesterday, it got louder still as Yahoo Chairman Roy Bostock and CEO Jerry Yang sent out far and wide yet another stinkbomb letter, calling activist investor Carl Icahn a money-grubbing “corporate agitator.”

Well, yes–not that there’s anything wrong with that!

Unless you are shocked, shocked, that gambling is going on here, as Yahoo (YHOO) apparently is (not really, but it makes for a good story).

But not content to stop there, Yahoo spun a tale of what BoomTown can only describe as a sitcom paranoid fantasy about Microsoft (MSFT).

Essentially accusing Microsoft of trying to grab Yahoo on the cheap, Yahoo mocked its odd-couple “alliance” with Icahn.

“Microsoft’s flip-flops and inconsistencies over the past five months are so stupefying that one can only conclude that Microsoft was never fully committed to acquiring Yahoo,” they wrote.

Doubtless, today or tomorrow will bring a fresh retort from Icahn or Microsoft, full of the same not-so-sweet nothings (and by nothings, I mean nothing).

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So while all the attention on who Microsoft is hunting next–after its latest parry at grabbing Yahoo’s search business was foiled once again–has settled on Time Warner’s AOL (see BoomTown’s post on that interest from Monday), it would be a mistake to assume that the software giant is not still aiming directly at Yahoo.

Why?

Because it must, and not only for the reason–to get control of its Yahoo’s #2 search business–that has been much focused on.

It’s also Yahoo’s (YHOO) strong display advertising business that Microsoft (MSFT) is clearly after.

It has been obvious that Microsoft needs to get hold of Yahoo’s search market share to even begin to compete with its archrival Google (GOOG) in the Web’s goose-that-laid-the-golden-egg search business.

But the future hope, according to numerous sources within the company, is to gain a foothold at Yahoo in order to someday take over its much more impressive and potentially more lucrative online display business, which includes ads like banners.

“This is not just about search,” said one source. “It is about scale in all aspects of a market that is going to be gigantic.”

In a way, it’s a reliable old Trojan Horse strategy, getting into Yahoo’s house in search and then moving onto display, an arena which many think will be the real moneymaker in the years ahead.

Read more »

Now, Time Warner CEO Jeff Bewkes is a very natty executive.

But Bewkes (pictured here) is definitely looking 333 percent prettier to both Yahoo and Microsoft this morning, as their 2,365th round of talks to partner in some way–if you could call them that–collapsed yet again with more he-said-he-said recriminations.

Now, both Yahoo (YHOO) and Microsoft (MSFT) have got to be hightailing it across the dance floor to block the other from making a possible move on AOL.

Why?

Because AOL is essentially–as one source close to the company describes the once-mighty-now- not-so-much company–”the number two choice of both of them.”

As the song goes, if you can’t be with the one you love/hate…

Thus, with its Platform A online advertising unit, along with still-strong communications and revived content assets, AOL is probably the best alternative both Microsoft and Yahoo have to each other.

The online assets of News Corp. (NWS)–specifically, its giant social networking site, MySpace–do fit nicely into a deal in which the content, communications and display advertising assets of Yahoo are spun off from the search unit that Microsoft would snap up.

But AOL has more substantive offerings, including overpaying for the Bebo social network recently, with either going it alone.

According to sources at all three companies–as usual–there are lots and lots of discussions going on. Microsoft likes AOL. Yahoo likes AOL.

And Time Warner (TWX) likes anyone who will take AOL off its hands and fork over about $10 billion.

Despite more aggressive efforts of late, AOL execs still struggle against the larger players to sell its large swaths of inventory, especially in the face of larger competitors.

And, no matter what it says, its corporate parent Time Warner would rather sell AOL than make the kind of investments and, more importantly, short-term revenue sacrifices it would take to truly compete.

If BoomTown had to pick, I think–despite the fact that some Yahoo execs have had disdain for AOL–that it is a better cultural and strategic fit for the company than Microsoft is.

That said, Microsoft could provide the company with a lot more investment and heft that the AOL brand needs to revive itself.

In any case, it will be interesting to see what Bewkes can do to take advantage of the continuing cold war between Yahoo and Microsoft.

Of course, even though this uncertainty probably makes this the best opportunity to make a deal, wading into the briar patch is also risky for Time Warner.

But one interesting scenario popped into my head: If Microsoft bought AOL before Yahoo’s annual meeting, it would likely cause Yahoo’s already volatile stock to tank, giving advantage to billionaire investor Carl Icahn’s proxy fight.

Once Icahn wins control of Yahoo, he could then merge the content and communications units with those of the online assets of the now-much-more-desperate News Corp. (owner of Dow Jones and of this site).

A full sale to Microsoft would be impossible, because of the massive regulatory issues around combining AOL-Yahoo-Microsoft dominant online communications products.

But Icahn could sell the search business to it and then do a commercial deal to allow Microsoft to deliver ad search revenue to them all.

And, best of all for Microsoft, who does that now?

For AOL, Google. For Yahoo (pending), Google. For News Corp.’s MySpace, Google again.

To get the chance to oust Google three times in a single move, perhaps makes Bewkes the one Microsoft should really be courting.

After all, tomorrow is another day.

Also, here are video highlights of an interview I did with Bewkes at the D: All Things Digital conference in late May:

Please see this disclosure related to me and Google.

If you want to get to the heart of the truly dysfunctional relationship between Yahoo and Microsoft, consider the alleged 24-hour deadline that Yahoo claimed Microsoft and its loyal sidekick, activist investor Carl Icahn, gave the company to respond to the pair’s most recent joint proposal to settle their differences.

I say “alleged,” because as in all things related to this takeover mess, the trio disagrees on exactly what even that meant.

Frankly, it’s enough to make one think former President Bill Clinton’s definition of what “is” is makes more sense.

Yahoo (YHOO), in a rather strong statement Saturday night, said Microsoft tried to jam the company into swallowing a semi-sweetened new search deal with a side order of Icahn control.

But Microsoft (MSFT) sources scoff at the notion, noting that they only wanted to try to move a deal forward more quickly than the previous interminable roundelays that have exhausted everyone.

Before we get to this latest disagreement, here are the terms of the new Microsoft/Icahn joint deal to take control of Yahoo’s search business and hand over the rest to Icahn, which, according to numerous sources from both sides, was quickly rejected by Yahoo Saturday.

The deal included:

– $1 billion for Yahoo’s search business and a five-year guarantee of $2.3 billion in search ad revenue, with an option to renew it for another five years at a $1.6 billion minimum;

– An offer by Microsoft to buy $3.9 billion of Yahoo shares, and lend the company $2.8 billion at a five percent interest rate, by taking over a part of its debt. The money would be used to give a special dividend to shareholders;

– An agreement to raise the TAC rate (a payout to Yahoo on each search query) to 85 percent from its former offer of 70 percent, for three years, and to 75 percent after that;

– A plan, unclear as to specifics, to spin off Yahoo’s Asian assets, with money going to shareholders;

– And, last of all and the obvious dealbreaker, Icahn would get control of the rest of the company, which includes the massive content and communications assets. Apparently, one or two current Yahoo board members could possibly stay on. Presumably, Icahn could then strike a deal to merge those with assets of News Corp.’s (NWS) MySpace or Time Warner’s (TWX) AOL. (News Corp. is the owner of Dow Jones and of this site.)

But, Yahoo rejected the proposal in strong terms, especially stressing that it would not negotiate such a big deal under a time constraint.

Here’s Yahoo’s official version, from a statement :

“The proposal was made on Friday evening and Yahoo! was given less than 24 hours to accept the proposal, the fundamental terms of which Microsoft and Mr. Icahn made clear they were unwilling to negotiate.”

And Chairman Roy Bostock piled on: “After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a ‘take it or leave it’ proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!’s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond. It is ludicrous to think that our Board could accept such a proposal.”

Microsoft sources consider the talks much less dramatic that that, noting that Yahoo had been talking to Icahn all week, and especially Thursday, about a new deal to take over Yahoo’s search business, and that an Icahn board was mentioned.

And, they add, Bostock was the one who insisted to Icahn that he needed to talk to Microsoft CEO Steve Ballmer directly, even though the software giant had publicly said it was unwilling to do so anymore.

But several times, the trio, along with a passel of bankers and lawyers, did just this, starting last Thursday night and, most significantly, Friday afternoon for 45 minutes.

It was in that call that the three sides discussed the proposal in detail, which included slides sent from Microsoft, although there was no term sheet.

Ballmer, a source close to both Yahoo and Microsoft said, did express being tired of the endless loop Yahoo and Microsoft were caught in and said that he did not want prolonged negotiations to go on.

This was not an ultimatum, according to Microsoft sources, but more of an expression of weariness at a new round of tedious back-and-forth.

“This has just gotten impossible,” said one Microsoft source. “We just wanted to have talks that went somewhere.”

When pressed, some sources close to Yahoo do confirm that they talked extensively to Icahn and then Microsoft. The 24-hour number came about because Ballmer asked Bostock to get back to him the next day, but that it was not exactly what one would call a threat.

“We felt he was saying Microsoft was not willing to put more on the table and, if we agreed to it, it would have been on their terms,” one source explained.

You get the picture–this is how wars start.

And that’s where Yahoo is now headed with Icahn–and by extension, Microsoft–as their proxy fight shifts into high gear heading into Yahoo’s annual meeting on Aug. 1.

What would it take to get Yahoo and Microsoft to come to some sort of rational agreement to strike a partnership of some sort before that?

Well, Sigmund Freud might be a start–or even Dr. Phil at this point–in this warped relationship.

Now, it seems, we’ll be moving directly to Judge Judy.

More on that later today.

When sources at Microsoft last week told BoomTown that it was going to use Carl Icahn as a kind of messenger for a new ad search proposal, I thought: Uh-oh.

And tonight, like clockwork, Yahoo (YHOO) rejected Microsoft’s (MSFT) latest bid to buy its search and advertising search business, which was delivered in conjunction with the billionaire activist investor, who is waging a proxy fight against the company.

Why? Well, it’s kind of like sending Pepé Le Pew to a garden party.

Sources tell me the bid included a $20 billion ad search revenue guarantee over 10 years, as well as other small improvements on Microsoft’s previous proposal.

Still, Yahoo turned up its nose at it.

“This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!’s stockholders in mind,” said Yahoo Chairman Roy Bostock in a statement.

He added later: “After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a ‘take it or leave it’ proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!’s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond.”

Actually, this new bid–made Friday with that 24-hour expiration date, which makes Microsoft and Icahn sound like the evil villains in James Bond movies–was similar to its last one, but definitely sweeter.

But, as it was described in the Yahoo statement, the bid also added Icahn into the mix by giving him control over the rest of Yahoo–which includes its powerful suite of communications and content assets–via a new board.

Presumably, Icahn would then turn around and merge into either News Corp.’s (NWS) MySpace or Time Warner’s (TWX) AOL. (News Corp is the owner of Dow Jones and of this Web site.)

Thus, Yahoo agreed to disagree, noting it was willing to sell the company for the $33 once offered by Microsoft in its now-dead takeover bid (which, of course, they must say).

“It is ludicrous to think that our Board could accept such a proposal,” Bostock said in the statement. “While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders.”

This strong sentiment should not come as a surprise for anyone who has talked to Yahoo CEO Jerry Yang lately.

In a conversation I had with him, I came away with one single impression about how he felt about Icahn.

And that would be complete and utter disdain. Plus one.

“I think handing over the company to Carl Icahn for the express purpose of hoping he can negotiate a complex deal with Microsoft is a big mistake for shareholders,” Yang said to me.

The Yahoo statement tonight went further.

“The major component of the overall value per share asserted by Microsoft/Icahn would be in Yahoo!’s remaining nonsearch businesses, which would be overseen by Mr. Icahn’s slate of directors, which has virtually no working knowledge of Yahoo!’s businesses,” it said.

Translation: Icahn is a Luddite.

And, even more, Yang is perhaps even more offended that Microsoft has hooked up with Icahn in its efforts to oust him and Yahoo’s board, considering the move to be a very dirty trick.

“[Microsoft's] motivations are suspect and there is simply no good reason to think they will actually show up at the end of the day,” said Yang in our conversation.

Another source close to Yahoo was even more clear: “This is a company with some dignity,” the source said. “And we would rather go down fighting than turn the keys over to people who will ruin it.”

For its part, Microsoft is just as completely exasperated with Yang and Yahoo’s board and feels it can move against it without its cooperation.

“It’s just impossible to deal with the Yahoo board or Yang,” said one source at Microsoft. “They have no intention of negotiating, so we’re just going to do what we have to do.”

While some might call it all corporate theater, these are very real feelings on all sides.

The August 1 board meeting is suddenly looking very, very ugly, as Yahoo, Microsoft and Icahn become more entrenched than ever.

And with only 20 days to go until it takes place near Yahoo’s HQ in Sunnyvale, Ca. and bad feelings all around, there’s not a lot time to work things out to everyone’s satisfaction, even though they all should.

Thus, it might actually fall to shareholders, who are irked at Yang and the Yahoo board, but who also don’t really trust Icahn and would have to hold their noses to vote for him.

Here’s an easier way to understand this situation now: It stinks.