Two weeks ago, Yahoo Chairman of the Board and co-founder Jerry Yang rebuffed Microsoft’ $47.5 billion (or $33 a share) bid, sending shares down $4.43 (or 15%) to $24.24. That of course didn’t bode well for Icahn, who said he owns 59 million Yahoo shares.

“The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,” Icahn said in his letter. “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.”

If necessary, Icahn’ strategy is to seek antitrust clearance from the Federal Trade Commission to purchase up to $2.5 billion worth of shares – about a 6% stake. Also, with all of Yahoo’ 10 board members up for re-election on July 3, Icahn will move to nominate his own list of board candidates, one being Mark Cuban.

Reviving talks with Microsoft won’t be easy, as rhetoric increasingly intensified between Yang and Microsoft CEO Steve Ballmer during takeover negotiations.

But if anyone has the experience and moxie to push talks further, it’ Icahn, who has used his clout to push action at struggling mobile phone pioneer Motorola Inc. (MOT) and drugmaker ImClone Systems Inc. (IMCL).

Most recently, Icahn has been at the forefront of Blockbuster Inc.’ (BBI) up-to $1.35 billion bid for Circuit City Stores Inc. (CC). If that deal falls through, Icahn said he would acquire the struggling electronics retailer.

In his letter to Yahoo, Icahn said the board “completely botched” a successful merger with Microsoft and that he is acting on shareholders’ behalf to establish a new board.

Icahn also penciled his name in as one of the nominees for Yahoo’ board.
“I think he’ playing his cards pretty smart here,” Troy Mastin, an analyst at William Blair & Co., told Bloomberg Television. “I wouldn’t be surprised to see Microsoft and Yahoo together in the next few months.”

Source: Yahoo ‘Completely Botched’ Microsoft Merger 

But with Yahoo! stock tanking and rival search engine company Google continuing to out pace Yahoo! the question is whether Yang’s “what doesn’t kill you makes you stronger” is enough to revive the flagging internet giant.

Jerry Yang, who co-founded Yahoo! with David Filo, did at least say something about the failed Microsoft bid. He said:

The last 13 weeks have been a remarkable time here at Yahoo!. We’ve been living under the microscope in a way we never have before. There has been greater attention than ever on our strategy and our ability to execute against it. Some even questioned whether Microsoft’s unsolicited proposal would distract us from our mission, just as we were beginning to really push the pedal on our strategy.

Those people underestimated the determination of Yahoo!’s incredible people, spirit and culture.

But Yahoo! watchers note that “spirit doesn’t keep your stock around $30.”

The bottom line is that Jerry Yang and Yahoo! are facing some painful realities this morning after spurning Microsoft CEO Steve Ballmer.

According to Bloomberg, “Citigroup Inc. and ThinkPanmure LLC analysts cut their ratings on Yahoo’s stock to “sell” after Microsoft withdrew its offer. Microsoft said this weekend it walked away when Yahoo demanded $37 a share after the $44.6 billion bid was raised by about $5 billion to $33 a share.”

It’s important to remember that Yahoo’s troubles didn’t start with the failed Microsoft bid. Yahoo! shares fell 32% on the Nasdaq in the year before Microsoft’s offer. And rival Google expanded revenue more than three times faster than Yahoo last quarter.

Click here for a in-depth analysis of Microsoft’s bid for Yahoo!

• Ambec Financial Group Inc. (ABK), the world’s second-largest bond insurer, posted a wider-than-expected loss of $1.66 billion, or $11.69 a share, after more than $3 billion in charges for subprime-mortgage securities, Bloomberg reported. The company has lost 96% of its stock value in the past year.

• Liberty Mutual Group announced that it will buy insurer Safeco Corp. (SAF) for $6.2 billion deal, which would make Liberty the fifth-largest U.S. property and casualty insurer, Reuters reported. Each share of Safeco will be exchanged for $68.25 cash, more than a 50% premium to Safeco’s closing stock price of $45.23 on Tuesday.

• Microsoft Corp. (MSFT) is prepared to walk away from its $43.6 billion bid for Yahoo Inc (YHOO) if the two sides can’t agree on a price, Chief Executive Steve Ballmer said yesterday (Wednesday). “We’re prepared to move forward without a merger with Yahoo,” Ballmer said at a technology conference in Italy. “We think the best way to move forward quickly is to come together with Yahoo. Hopefully that works. But if it doesn’t, we go forward. Time is money,” he said.

• U.S. mortgage applications plunged last week as interest rates soared, the Mortgage Bankers Association said yesterday (Wednesday). The group said its seasonally adjusted index of mortgage applications for the week ended April 18 fell 14.2% to 637.6. Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.04%, up 0.3% from the previous week.

• Susquehanna Bancshares Inc. (SUSQ) reported first-quarter net earnings of $28 million (33 cents a share) up 35% from $20.7 million (40 cents a share) last year, Thomson Financial reported. The company posted net interest income of $98.2 million versus $63 million a year ago.

• The warehouse club, Sam’s Club, part of Wal-Mart Stores Inc. (WMT), has had to limit the amount of rice its members can purchase, The Associated Press reported. Customers will be limited to four bags of Jasmine, Basmati and long grain white rice. The price of rice has reached record highs lately due to supply concerns.

• Shares of bond insurer MBIA Inc. (MBI) plunged yesterday (Wednesday) after its chief rival, Ambac Financial Group Inc. (ABK), announced a first quarter loss of $1.66 billion. MBIA shares dropped over 30% with a decline of $4.49 to close at $8.79. MBIA will not release first quarter earnings until May 13.

• Shares of Level 3 Communications Inc. (LVLT) gained over 20% after the company announced first quarter revenue of $1.09 billion, beating analyst expectations. Despite a quarterly loss of 12 cents per share, the stock jumped 54 cents to close at $2.91 on a positive outlook for the remainder of 2008.