Hedge fund pushes Yahoo to sell search unit

Meanwhile, Yahoo agreed to water down an employee severance plan that had been criticized as extravagant, raising speculation that the company was shopping itself for a sale. The changes were made to settle a lawsuit in which shareholders accused Yahoo of devising the severance plan to foil Microsoft's takeover bid earlier this year.

Ivory Investment Management, a hedge fund that owns a 1.5 percent stake in Yahoo, sent a letter to board members that said a sale would garner $15 billion and help restore the company's tumbling finances.

Curtis Macnguyen, managing partner for the fund, said that Yahoo's board is "acting unreasonably" in spurning Microsoft given, he said, that it has no viable alternative. He said a deal would help boost Yahoo's profit and double its slumping share price to $24, according to his calculations.

The proposal echoes what many investors have been demanding that Yahoo do for months, including Carl Icahn, the investor activist and new Yahoo board member. Microsoft CEO Steve Ballmer has said he remains a willing buyer of Yahoo's search business, but denies any interest in buying all of the company.

Under Ivory's plan, Yahoo would cut costs by outsourcing its search business to Microsoft, which would become second in search only to Google Inc. If Yahoo were to retain 80 percent of the revenue from Microsoft's search ads, it would boost its profit by $500 million annually, excluding certain expenses, according to Ivory's projections.

In amending its employee severance plan, Yahoo made it more difficult for employees to collect large cash and stock payments in the event of a takeover. A takeover is therefore potentially cheaper, addressing complaints that the plan was prohibitively expensive.

Yahoo implemented the severance plan in February, in the early stages of its takeover drama with Microsoft.

The plan had offered Yahoo's 14,000 employees generous pay packages if they were fired or quit their jobs for "good reason" for two years following a takeover, including reasons such as a reassignment to a new job or transfer to a more distant office. Based on a takeover price of $31 per share, the cost was expected to be up to $2.1 billion, according to internal Yahoo estimates that were made public as part of the lawsuit in Delaware Chancery Court.

With the changes, Yahoo employees are eligible only if their job duties or pay are substantially reduced during the first year after an acquisition. Additionally, the board can choose to suspend the severance plan, a possibility that wasn't previously an option.

The severance plan does not kick in if Yahoo sells only its search business.

Under the settlement, Yahoo will not make any payments to the plaintiffs, who first filed their suit in February. Brad Williams, a Yahoo spokesman, said the company reached the agreement to get the legal distraction behind it.

The developments came on a day when Yahoo was carrying out a plan it announced in October to cut 1,500 jobs. The majority of the affected employees were notified Wednesday, part of a series of layoffs in the technology industry and elsewhere amid the economic turmoil.

As part of the cuts, Yahoo plans to shutter an office in San Francisco called Brickhouse, opened last year as an incubator for innovation. Offices in Dusseldorf and Hamburg, Germany; Stockholm, Sweden; Amsterdam; Oslo, Norway; and Copenhagen, Denmark, also are closing.

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.

This article appeared on page C - 1 of the San Francisco Chronicle