Icahn says Microsoft deal could happen if Yang resigns

The war of words between Yahoo (NASDAQ: YHOO) and dissident shareholder Carl Icahn is intensifying. Last week, Yahoo attached a PowerPoint-style presentation to an SEC filing, bizarrely raising questions about Icahn's track record as a stock picker.

Now Icahn is back with a new letter, issued as a press release titled Icahn Issues Open Letter to Shareholders of Yahoo. Icahn confirmed that he has been in frequent communication with Microsoft (NASDAQ: MSFT) CEO Steve Ballmer over the past week. Icahn wrote that "Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected."

Lest you think Icahn is blowing smoke, Microsoft followed up with a response to Icahn's statement issued five minutes later, saying, "We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company."

This should sway a lot of investors over to Icahn's side in the proxy fight. With its stock having been a weak performer over the past five years, the company is clearly in a position where it needs to be considering strategic alternatives. Microsoft has made it clear that it is not interested in working with the current board on a possible deal and it's in the best interests of shareholders that the company be represented by people who are willing to do what is right for them.

I think we can start the countdown to CEO Jerry Yang's departure to spend more time with his family and charitable endeavors. The market seems to agree, with the stock up nearly 10% MOnday.