The Cost of a Yahoo Severance Package

June 16, 2008

Since Microsoft rescinded its bid for Yahoo, Yahoo has initiated a severance package for its employees. Under the severance package, employees who are fired, leave following a reassignment, or leave with “good reason” can get their severance package. This package consists of previous benefits, as well as more cash and accelerated vesting of stock options. The estimated cost for the new severance package is approximately $2.4 billion.

While many, including Carl C. Icahn, claim that this package is a deterrent to the renewal of Microsoft’s bid for the company, it also stands in the way of Mr. Icahn’s proxy battle for control of Yahoo. Following the rescission of Microsoft’s bid, Mr. Icahn began an attempt to replace the current board of Yahoo because they did not hold the views of the stockholders.

The validity of the new severance plan is being pushed to a trial before the August 1 shareholders meeting to ensure that its validity is not determined by whichever side wins the battle Mr. Icahn has instigated. The proceedings of the trial may also bring to light certain aspects of the Microsoft and Yahoo dealings that had not previously been known. The new information has the potential to greatly affect the shareholders’ meeting as well.

The biggest stir concerning the severance package, however, is the fact that it may also apply if Mr. Icahn is successful in gaining control of Yahoo. Such a turn of events would qualify as the first trigger of a double trigger plan for the severance package. The first trigger is a new board controlling Yahoo. The second trigger is of course the firing or leaving of the employee. If Mr. Icahn were to gain control of the board of Yahoo, there are plans, over a course of two years, which would cause many to either leave or be fired from Yahoo. The restructuring plan, though necessary according to its proponents, has the potential to cost Yahoo the same amount it would cost Microsoft if the severance package were to remain in place.

So what does all this mean? The new severance package is a deterrent to Microsoft to gain control of Yahoo, keeping the market open a little wider and keeping Yahoo on its own. If, however, Mr. Icahn controls Yahoo, the company itself would potentially lose $2.4 billion. This is, of course, bad for business because it eats into revenues and could severely damage the viability of Yahoo.

Written By: James Blackburn, Website Office Staff Writer

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