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All quiet on the western coast? A compromise agreement has brought activist investor Carl Icahn into the Yahoo fold, but not in the manner for which he would have hoped. He will be joined by two of his nominees on an expanded 11-strong board. But this looks like a climb-down on his part. With support from institutional investors gathering behind the existing board late last week – most notably Legg-Mason on Friday – it was clear that Mr Icahn’s attempt to take over and flog all or part of the group to Microsoft through a full-scale proxy battle would fail.

So Yahoo’s management gets to draw a line underneath the episode and can concentrate on trying to improve the business before Microsoft returns. But little has really changed. Jerry Yang has temporarily secured his position as chief executive. However, Mr Icahn’s choice – Jonathan Miller, former head of AOL – may now join the board, offering a ready replacement should Mr Yang slip up.

The alternatives to a Microsoft deal remain few and far between. A joint venture with AOL (owned by TimeWarner) is plausible, were it possible to agree terms for the two internet groups’ respective assets. Eliminating product overlaps and combining operations would mean plenty of cost savings. That said, it would be a high-risk manoeuvre, liable to unnerve advertisers, while providing competitors with the opportunity to steal customers and key staff.

Meanwhile, Yahoo’s chances of pushing its $22 share price up to the $33 Microsoft seemed prepared to pay in May are slim. The advertising environment is deteriorating rapidly, making the task of turning around Yahoo’s poorly performing display advertising business, or even manufacturing a few quarters of outstanding performance, a challenge. Microsoft needs an online strategy. But having proved his willingness to walk away, Steve Balmer, the software group’s chief executive, can afford to wait.

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