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Yahoo Sends Shareholders Letter About Google, Microsoft

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Guess the wagon circling has begun over at Yahoo in preparation of the stockholders' meeting August 1. They sent out a letter to stockholders outlining the various events of the past few months and promoted voted for the existing board of directors.

The letter attacks Carl Icahn.

"It is time for Yahoo! to turn its undivided attention to implementing its key strategies, and we therefore urge you to reject Mr. Icahn's slate and his ill-defined agenda," the letter from Yahoo CEO Roy Bostock states.

The letter - posted below - is very slanted towards the actions of the existing executives. Right now the Microsoft offer of $31 to $34 looks good given the stocks major slump to the low $20s.

The letter read:

Dear Fellow Stockholders:

We are writing to update you on the latest developments here at
Yahoo!, including our recently announced commercial agreement with
Google and the outcome of our discussions with Microsoft regarding a
potential transaction.

On June 12, we announced a non-exclusive agreement with Google that we
expect will generate approximately $250 to $450 million in
incremental operating cash flow for Yahoo! in the first twelve months
following implementation. This cash flow will enhance our
profitability as well as help support achievement of our key
strategic objectives. Combined with continuing advances in our own
search capability, the agreement is an important step in our efforts
to capitalize on the high-growth online advertising opportunities
where we are best positioned to compete successfully and create more
value.

Let us explain why we find this new agreement so exciting.

The Yahoo!-Google Agreement is Financially Attractive and Strikes the Right Strategic Balance.

Under the agreement with Google, Yahoo! will continue to provide
algorithmic and sponsored search results, but now will also have the
ability to run sponsored search ads supplied by Google alongside
Yahoo!'s search results. Advertisers will pay Google directly for
each click on Google paid search results appearing on Yahoo!. Google
will then pay us a fee (in industry jargon, traffic acquisition cost)
based on revenue realized from click-throughs on ads supplied to
Yahoo! by Google.

This carefully structured agreement strikes the right strategic
balance, enhancing our financial results while advancing our
strategic objectives of being the "starting point" for the most users
on the Internet and offering such compelling value that advertisers
will see us as the "must buy" in online advertising.

One of our key strategies for achieving these objectives is to
capitalize on the increasing convergence of search and display
advertising, where we are especially well positioned to compete and
succeed. We have already accelerated our efforts to strengthen our
presence in display through a variety of initiatives and acquisitions
in recent months. Our new commercial agreement with Google enhances
our ability to pursue this strategy.

Another key strategy is to open our platform to other developers to
optimize monetization for our advertisers and publishers and provide
the best experience for our users. We see this agreement as a natural
extension of the efforts we have already made toward an open
marketplace.

The Google agreement is non-exclusive and provides strategic and
operational flexibility for Yahoo!. It allows Yahoo! to use Google's
services in those areas where Google monetizes our inventory more
effectively but also permits us to continue to use our own search
technology in areas where we believe we are most competitive. The net
result is that the agreement helps us accelerate one of our strategic
aims--closing the monetization gap. At the same time, it allows
Yahoo! to continue to compete aggressively in search and display
advertising.

Importantly, the agreement does not prevent Yahoo! from pursuing other
alternatives that could increase stockholder value. Because the
agreement can be terminated by either party upon a change in control,
it would not preclude a transaction with Microsoft or any other
potential acquiror in the future.


The Yahoo!-Google Agreement Does More for Stockholder Value than
Microsoft's Search-Only Hybrid Proposal.

We also want to update you on the conclusion to our discussions with
Microsoft regarding a potential transaction. As we explained in our
last letter, our board and management held numerous meetings and
conversations with Microsoft about its proposal to acquire Yahoo!,
both before and after Microsoft withdrew that proposal on May 3. On
June 8, our Chairman, Roy Bostock, other independent board members,
and members of Yahoo!'s management team again met in person with
Microsoft representatives. At that meeting, Microsoft stated
unequivocally that it has no interest in acquiring all of Yahoo!,
even at the price range Microsoft had previously suggested.

Microsoft did propose an alternative transaction. Rather than acquire
our whole company as it had been proposing for months, Microsoft now
proposed to acquire only our search business for $1 billion and a
share of future search advertising revenue. This proposal also
included an $8 billion investment in Yahoo! but required Yahoo! to
commit to a 10-year exclusive arrangement that would have made us
dependent on Microsoft for all of our search business. It would also
have given Microsoft veto rights on certain future Yahoo! actions,
including a sale of Yahoo!. Our board of directors and management
made a great effort--and conducted in depth negotiations--to elicit a
feasible proposal from Microsoft that made strategic and financial
sense for Yahoo!, but without success.

While Microsoft's search-only hybrid proposal may have been helpful to
Microsoft, our board and management concluded it would have had a
significant adverse impact on Yahoo! strategically, leaving the
Company without the operational control of search assets and
technology we view as critical to our objective of becoming a leader
in the converging search and display advertising business. The board
and its advisers also carefully studied the financial impact of
Microsoft's proposal and concluded that it would have provided no
meaningful improvement to our operating cash flow. In short, this
proposal would have generated substantially less value for Yahoo!
stockholders than Microsoft has suggested.

Based on all the key factors--strengthening our competitiveness,
protecting our strategic position, generating attractive financial
returns--the Google agreement is far better than Microsoft's search-
only hybrid proposal. That's why we moved forward with it.

Your Current Board of Directors Has the Knowledge, Experience and
Commitment to Best Represent Your Interests and Maximize Stockholder
Value.

The events of recent weeks underscore the fact that your board of
directors is far better qualified to represent your interests in the
effort to maximize stockholder value than the slate put forward by
Carl Icahn.

Based on Mr. Icahn's narrow agenda, it seems highly unlikely that
either he or his slate would bring added value to Yahoo!. Consider
the following:

-- Mr. Icahn put forward his slate so as to sell Yahoo! to Microsoft,
even though he had no knowledge of the sustained efforts made by your
current board and management to determine whether Microsoft was
willing to engage in a transaction that would provide appropriate
value and certainty of achieving that value. On June 8, Microsoft
once again made it perfectly clear that it is not currently
interested in acquiring Yahoo!.
-- Mr. Icahn publicly opposed any alternative form of transaction
with Microsoft. Your board and management, after thorough and
deliberate negotiations and evaluation, separately concluded on its
own that the alternative hybrid deal proposed by Microsoft was,
indeed, not in the best interests of the Company or its
stockholders.
-- Mr. Icahn urged, as an alternative to a Microsoft transaction,
that Yahoo! find a way to partner with Google that would not
preclude a transaction with Microsoft in the future. We have done
exactly that through the commercial agreement with Google we
announced on June 12.

Simply put, you can choose to vote for a slate of nominees with no
articulated plan for the future of Yahoo!--and who now have
essentially no alternative agenda to offer you--or you can choose to
vote for your existing board of directors which has the independence,
experience, knowledge and commitment to navigate the Company through
the rapidly-changing Internet environment, execute on our strategic
objectives and deliver value for Yahoo! and its stockholders.

It is time for Yahoo! to turn its undivided attention to implementing
its key strategies, and we therefore urge you to reject Mr. Icahn's
slate and his ill-defined agenda.

We strongly urge you to vote your WHITE Proxy Card today for your
current board of directors.

We look forward to sharing our progress with you as we move forward
and we thank you for your support.

Sincerely,

Roy Bostock Jerry Yang
Chairman of the Board Chief Executive Officer


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