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Major Yahoo Stockholder Urges Board toSalvage Microsoft Deal

Ivory Investment Management Says It Believes Yahoo Could Receive $15 Billion Upfront From Microsoft and Increase EBITDA by $500 Million/Year; Says Deal Should Result inValue of $24-$29 Per Share

Los Angeles – Dec. 10, 2008 – Ivory Investment Management LP, one of Yahoo’s largeststockholders with 21.4 million, or 1.5% of the shares outstanding, today proposed in aletter to Yahoo’s Board of Directors that the company salvage a deal with Microsoft “andnot miss another value maximization opportunity.”Noting Microsoft’s renewed interest, Ivory proposed that the company sell its searchbusiness to Microsoft, with Microsoft becoming the search provider for all Yahooproperties. Under the Ivory proposal, Microsoft would own and operate the combinedsearch platform, with Yahoo becoming an affiliate that retains 80% of the revenuegenerated through searches on its own site. Finally, Microsoft would become the searchengine for Yahoo’s existing search affiliates.We believe a search deal with Microsoft could deliver value to Yahoo shareholders of $24-29 per share, or more than double yesterday’s closing price of $12.19.”Ivory stated in its letter that it believed Yahoo could “receive more than $15 billionupfront from Microsoft for its search business and increase EBITDA by more than $500million per annum.”“On an after-tax basis, the $15 billion payment from Microsoft would be $9 billion forYahoo shareholders, leaving Yahoo with $21.2 billion of cash and investments (up from$12.2 billion today) and annual EBITDA of $2.4 billion (up from the midpoint of currentguidance of $1.9 billion). Applying a 5x EBITDA multiple on the “new Yahoo” wouldresult in a value of $24 per share. If Yahoo were to go a step further and deploy the $9billion in new cash for its own shares at a $16 offer price, it could reduce its share countby 40% which would leave the remaining shareholders with a stock approaching $30 pershare (amazingly close to the original bona fide bid from Microsoft).”

Noting that Yahoo and Microsoft each may be spending well over $1 billion a year ontheir respective search businesses, Ivory said that combining the two could save $800million in duplicate operating costs. In addition, due to the increased economies of scalein the search business, Ivory believes that the combination could increase total searchrevenues by at least 20% or $500 million per year.Ivory stated that its assumptions and estimates were based on publicly available data andstatements from both companies. “Even accounting for a reasonable margin of error inour estimates and assumptions, there is no question the proposed deal would significantlyincrease shareholder value (up to a 140% increase compared to the current tradingprice.)”Ivory noted that both companies need to act now because they continue losing ground toGoogle, and that “it is widely acknowledged that neither company has kept pace withGoogle’s innovation and investment spending.”“This deal would offer Microsoft the unique opportunity to immediately gain criticalmass to better level the playing field with Google, while it would simultaneously allowYahoo to both receive a sizable upfront cash payment and increase its prospective cashflow,” Ivory said.Ivory said it sent the proposal to directors “to express serious concern regarding thefailure of the Board of Directors to maximize shareholder value of the company.” Ivorynoted that Microsoft’s spurned $31-a-share offer earlier this year for all of Yahoorepresents a 150% premium to Yahoo’s current stock price.

The following is the text of the letter:

December 10, 2008Board of DirectorsYahoo! Inc.701 First AvenueSunnyvale, CA 94089To Members of the Board:We are writing to express serious concern regarding the failure of the Board of Directorsto maximize shareholder value of the company.We would even go so far as to argue that certain members of the Board, in repeatedlyrejecting or neglecting various attractive offers from Microsoft, may have obstructed therealization of Yahoo’s intrinsic value for its shareholders. As a large shareholder (wecurrently own 21.4 million shares, or 1.5% of the company’s outstanding common stock),we have closely followed Yahoo over the past couple of years. We have regrettablywatched the company not only mis-execute operationally, but also mishandle, in our

opinion, a bona fide offer from Microsoft to acquire the entire company for $31 pershare, which now represents an over 150% premium to the current stock price. In light of Microsoft once again publicly reaching out to explicitly express interest in entering asearch deal with Yahoo, we feel compelled to write this letter to ask the Board to takeappropriate and prompt action and not miss yet another value maximization opportunity.

We believe a search deal with Microsoft could deliver value to Yahoo shareholdersof $24-29 per share, or more than double yesterday’s closing price of $12.19.

Over the last several years, the market has witnessed Google grow its search market shareand profits at the expense of both Yahoo and Microsoft. Microsoft was an affiliate of Yahoo in the search business until 2005 when each company decided to part ways in anattempt to compete with Google’s search business on its own. Since then, it is widelyacknowledged that neither company has kept pace with Google's innovation andinvestment spending. As a result, both companies appear to have fallen further behind ina business area they have each repeatedly referred to as a top priority. To us, the problemis obvious – it’s all about scale economies and critical mass. Specifically, we estimatethat Microsoft and Yahoo may each spend well over $1 billion per year on thepredominantly fixed costs of operating a search business, yet each company individuallydoes not have the proper audience scale to optimize the return on that investment. Thesolution seems equally obvious - combine the search businesses of the two companies toeliminate duplicative costs and increase revenue scale.We envision a deal whereby Microsoft would acquire all of Yahoo’s search assets andenter into a perpetual agreement for Microsoft to be the search provider for all Yahooproperties. In this deal, Microsoft would own and operate the combined search platformwhile Yahoo would become an affiliate that retains 80% of the revenues generated fromthe search traffic on its own sites. In addition, Microsoft would become the searchengine for Yahoo's existing search affiliates. This deal would offer Microsoft the uniqueopportunity to immediately gain critical mass to better level the playing field withGoogle, while it would simultaneously allow Yahoo to both receive a sizable upfrontcash payment and

increase

its prospective cash flow (i.e., EBITDA). There are two keyreasons why we believe this proposed deal is extremely beneficial to both parties:1) Approximately $800 million of duplicate operating costs could be eliminated.This estimate is based upon benchmarking Yahoo’s and Microsoft’s OnlineServices Business’ operating costs versus Google’s cost structure. At theMicrosoft analyst day earlier this year, Steve Ballmer described the coststructure in their search business: “I think you've got to think of it as sort of almost more of a fixed expense…We won't have to be as high as Google's $2.3billion because they're serving up so many more queries, but our COGSpercentage will need to be quite a bit higher than theirs will, just to keep up inthe ante to index the largest volume of documents on the Web.”; and2) The combined search platform and marketplace would have a much greater“network” effect, resulting in 20% higher monetization rates. Again we quoteMr. Ballmer at the Microsoft analyst day: "We’d like to increase our revenue