Billionare activist investor Carl Celain Icahn, it seems, bought a cool 50 million Yahoo! shares in the past week alone, worth about $1.3 billion which gives him a 3.5% stake in Yahoo! Inc., and is now said to be considering a proxy fight with the Yahoo Board, in an attempt to get control of seats on the Board. Photo courtesy & copyrights Icahnreport.com

He has also sent out feelers to Microsoft, trying to get them to reopen negotiations. Yahoo! Inc. shares (NASDAQ: YHOO) rose 5.2% to $26.56 (and another 13 cents in after hours trading) based on speculation about the impact of this development. Before we analyze the 'why' and the 'what-happens-now' part, here's some more details about Icahn's move from media reports.

WSJ report cites a source who says that Mr. Icahn is expected to decide Wednesday whether to launch a proxy contest. A Yahoo deadline for board nominations looms Thursday. He currently has no assurances from Microsoft it would reconsider a Yahoo purchase, according to the person. The person said that Mr. Icahn was unsure whether he would nominate a full or partial slate of candidates to try to replace Yahoo's 10-person board. A shareholder vote on nominees is scheduled to take place at Yahoo's annual shareholder meeting on July 3. Even without any certainty of an eventual Yahoo sale to Microsoft, Mr. Icahn considers its shares an attractive value and is willing to hold them for an extended period. - Icahn Buys Yahoo Shares; Mulls Board Proxy Contest, Gregory Zuckerman and Kevin J. Delaney, Wall Street Journal, May 14, 2008.

(Update 1: WSJ reports Icahn will launch proxy fight and nominate 10 directors to replace Yahoo's board, and also that he has hired D.F. King, a proxy firm, to work on a proxy solicitation. Also, that Yahoo's Google ad deal may be in hot water. Stay tuned for more on this.)

(Update 2: Bloomberg News report has some interesting stuff. Icahn said he has sought regulatory clearance to buy as much as $2.5 billion in Yahoo stock, about 6.7 percent of the company's outstanding shares as of April 30....John Paulson, who runs the New York hedge fund Paulson & Co., said today that he will support Icahn's directors...Paulson & Co. owned 50 million Yahoo shares at the end of March.)

Ok, time to bring out the Yahoo-MS crystal ball again. Here's some background info for the Yahoo-MS Takeover bid. So Carl Icahn wants to nominate his own candidate slate for the Yahoo Board. That would mostly make sense if wither of two things happen - First, Microsoft joins hands with him and re-enters the fray. Or, Icahn uses his new found clout to force the rest of the board to reopen negotaitions with Microsoft.

The first assumption is DOA. There's no way Steve Ballmer, having just played the part of jilted lover, is now going to change his stance again. Microsoft will, without any doubt, stay away from this particular fight. Ballmer will prefer that Yahoo!'s shareholders do all the dirty work for him, take control of the board, and then ask Microsoft to step in and takeover at a price somewhere in between the last offered price of $33 and Yang's expected price of $37. So let's say, under this scenario, that Yahoo investors stage a mutiny, lynch the Board, take control, and then invite Microsoft to buyout Yahoo, at say a price of about $35.

Now this isn't going to happen in a day, but if Icahn does jump in, then other Yahoo shareholders are going to take a wait and see approach. They'll see how the Yahoo Board responds to Icahn's pressure, and then decide whether there's any realistic chances of staging a successful mutiny. This process could take anywhere between 15 to 20 days, and by the time the Yahoo annual sharholder meeting on July 3 draws closer, you'll see a steady buildup of pressure, with both sides trying to make sure the shareholder meet is just a formality. Meaning that either Yahoo will already be taken over by activist investors before that, or Jerry Yang's crowd will have beaten them back before the share holder meet up.

The situation is made worse because the current Yahoo Board itself is ridden with factionalism. New York Times report by Andrew Ross Sorkin and Miguel Helft notes that at last year’s annual meeting, shareholders representing 35 percent of Yahoo shares voted against the re-election of two directors, Ron Burkle and Arthur Kern, while those representing 34 percent of shares voted against another director, Roy Bostock, who has since become chairman. Shareholders owning 6 percent or more of the company’s shares also voted against the re-election of other directors, including Mr. Yang, who became chief executive shortly after the meeting.

In summary, here's what my crystal ball says is going to happen, going forward. Icahn, if he decides to go forward with the proxy fight, will be alone, at least to start with. If it looks like he's making progress, some more powerful Yahoo! shareholders will jump in to join hands with Icahn. Microsoft, for the most part, will remain out of the fray. The proxy fight will be resolved, one way or the other, sometime in mid-June. On July 3, the date of Yahoo's annual shareholder meet, Yahoo will be sold to Microsoft, with or without the current Board, for about $35. All of which makes Carl Icahn one smart cookie, cause he's about to make half a billion dollars in a little over one month.

Bio: Carl Icahn's net worth, as of 2007, was $14.5 billion, making him the 18th richest in the United States. He is ranked 46th on the Forbes billionares list . He has a BA from Princeton University and lives in New York. He is married and has two children. He is the CEO of Icahn Management LLP, and Chairman & President of Icahn Associates Corp., and Chairman of Starfire Holding Corporation (formerly Icahn Holding Corporation). Read his full executive profile at Businessweek and here's Icahn's Forbes 2008 listing.