The move, rumored since earlier this week, is intended to ultimately reignite merger negotiations between Yahoo and Microsoft.
In the letter, distributed this morning to the press and addressed to Yahoo's board Chairman Roy Bostock, Icahn charges the board with acting irrationally and losing the faith of shareholders and Microsoft.
"It is quite obvious that Microsoft's bid of $33 per share is a superior alternative to Yahoo's prospects on a standalone basis. I am perplexed by the board's actions. It is irresponsible to hide behind management's more than overly optimistic financial forecasts," Icahn wrote.
Microsoft declined to comment. Yahoo did not immediately respond to a request for comment.
Microsoft announced its $44.6 billion bid for Yahoo on Feb. 1, but walked away from the deal three months later, on May 3, saying the companies couldn't agree on a price. Microsoft's last offer was for $33 per share, or about $5 billion more than its original offer, but Yahoo wanted $37 per share.
Icahn said it is "unconscionable" that Yahoo's board didn't alllow shareholders the option to accept Microsoft's latest offer, which he pointed out represented a 72 percent premium over the closing price of Yahoo's stock -- $19.18 per share -- on the day before the initial Microsoft offer.
"I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet," Icahn wrote.
Icahn decided to launch a proxy fight because in the past week "a number" of shareholders asked him to lead such an effort to oust the current board members and attempt to revive merger negotiations between Yahoo and Microsoft.
"I believe that a combination between Microsoft and Yahoo is by far the most sensible path for both companies," he wrote.
Gearing for Battle
Nonetheless, Microsoft officials have said repeatedly since withdrawing the offer that the company is no longer interested in acquiring Yahoo, something Icahn doesn't address in his letter. All along, Microsoft had indicated its readiness to launch a proxy fight to oust Yahoo's board and replace it with its own candidates, but eventually Microsoft decided against that option, saying that it wasn't interested in engaging in a hostile and potentially long process.
Over the past 10 days, Icahn has bought about 59 million shares and share-equivalents of Yahoo and assembled a 10-person slate to replace all Yahoo directors. He has also sought antitrust clearance from the Federal Trade Commission to buy about $2.5 billion worth of Yahoo stock.
Icahn also requested of Bostock that the board not engage in any actions that might "in any way impede a future Microsoft merger" before allowing shareholders "to opine on them."
This is likely a reference to so-called poison pill maneuvers or to partnerships that Microsoft has indicated it would find undesirable, like the possible outsourcing of a part of Yahoo's search ad business to Google.
"I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary," Icahn wrote in closing the letter.
Various big Yahoo shareholders have expressed their displeasure with Yahoo's board and management for, in their view, not negotiating in good faith with Microsoft and causing the talks to collapse. Yahoo formally rejected Microsoft's original offer on Feb. 11, saying it undervalued the company.
On Monday, May 5, the first day of trading after Microsoft's offer withdrawal, Yahoo's stock lost significant value, closing down 15 percent at $24.37, after dropping as low as $22.97 during the day.
Last week, Yahoo co-founder and CEO Jerry Yang and other top Yahoo executives tried to shift the blame to Microsoft, alleging that the $33-per-share offer was never put in writing and that Microsoft unexpectedly walked away at a time when Yahoo was still open to negotiating.
Meanwhile, a much-publicized deal in which Yahoo would outsource part of its search advertising business to Google -- the possibility of which Microsoft CEO Steve Ballmer cited as a major reason to withdraw the offer -- has yet to be finalized, and, according to recent anonymously sourced press reports, has lost steam.
Icahn is well-known for taking to task the CEOs of companies he invests in when he feels they aren't doing a good job of delivering shareholder value.
Icahn's slate is made up of himself -- chairman and a director of privately held Starfire Holding, and chairman and a director of various Starfire subsidiaries -- and the following people:
-- Lucian A. Bebchuk, the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance, and director of the Program on Corporate Governance at Harvard Law School.
-- Frank J. Biondi, Jr., senior managing director of WaterView Advisors, an investment advisor organization and a former chairman and chief executive officer of Universal Studios.
-- John H. Chapple, president of Hawkeye Investments, a privately owned equity firm investing primarily in telecommunications and real estate ventures.
-- Mark Cuban, Internet entrepreneur and majority and controlling owner of the NBA's team Dallas Mavericks.
-- Adam Dell, managing general partner of Impact Venture Partners, a venture capital firm focused on information technology investments.
-- Keith A. Meister, principal executive officer and vice chairman of the board of Icahn Enterprises and a managing director of Icahn Capital, the entity through which Icahn manages third-party private investment funds.
-- Edward H. Meyer, chairman, CEO and chief investment officer of Ocean Road Advisors, an investment management company.
-- Brian S. Posner, a private investor who from 2005 through March 2008 served as CEO and co-chief investment officer of ClearBridge Advisors, an asset management company.
-- Robert K. Shaye, co-chairman and co-CEO of New Line Cinema.