Icahn has a "significant misunderstanding" of Microsoft's offer and the response of Yahoo's board, Yahoo Chairman Roy Bostock said Thursday. Icahn, who owns the equivalent of 59 million Yahoo shares, named a slate of 10 nominees to replace the board at Yahoo's July 3 annual meeting.

Yahoo Chief Executive Officer Jerry Yang faces mounting pressure to reconsider his decision to rebuff Microsoft's advances. John Paulson, who runs the New York hedge fund Paulson & Co., said Thursday that he will support Icahn's directors and that he was disappointed Yahoo didn't reach a deal with Microsoft. Paulson & Co. owned 50 million Yahoo shares at the end of March.

"We do not believe it is in the best interests of Yahoo stockholders to allow you and your hand-picked nominees to take control," Bostock said in a letter to Icahn. Yahoo also said there is no offer on the table from Microsoft or any other company.

Bostock said Yahoo is willing to consider any proposals, including from Microsoft, that offer shareholders full value. He said Yahoo's board met more than 20 times to review Microsoft's offer and other options, keeping an "open mind and an open ear."

Yahoo, based in Sunnyvale, California, rose 61 cents to US$27.75 Thursday in Nasdaq Stock Market trading. The stock had fallen 32 percent in the 12 months before Microsoft announced its bid on Feb. 1. Microsoft, the world's biggest software maker, gained 52 cents to US$30.45.

Icahn said in a letter to Yahoo's board Thursday that a combination with Microsoft "is by far the most sensible path" if the Internet company wants to take on Google Inc.

"The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft," said Icahn, 72. "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 didn't return a phone message seeking comment on Yahoo's letter Thursday. Microsoft spokesman Frank Shaw had no comment.

Yang rejected Microsoft's US$33-a-share offer this month, saying his company was worth at least US$4 more. Buying Yahoo, owner of the second-most popular search engine, would have helped Microsoft compete with Google in online advertising, a market Microsoft expects to almost double to about US$80 billion by 2010.

Bostock said in the letter that Microsoft didn't deliver its higher US$33-a-share offer in writing and failed to specify the mix of cash and stock. Within hours of Yang proposing a price of US$37 a share, Microsoft walked away, Bostock said.

Senior executives of Yahoo and Microsoft and their advisers had frequent contact and met in person seven times, Bostock said. Yahoo asked Microsoft to discuss the regulatory implications of a deal and never got a response, he said.

Yahoo's letter "seems like a pretty boilerplate response," said Sachin Shah, a merger-arbitrage analyst at ICAP Securities in Jersey City, New Jersey. Still, Yahoo's board appears to have carried out a lot of its fiduciary duty, he said.

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