Under Icahn's plan, Yahoo would sell its search business to Microsoft for $1 billion in cash. Microsoft would also become the exclusive search provider on all Yahoo sites for a term of five years. In return, Microsoft would guarantee Yahoo $2.3 billion per year as compensation for search queries generated from Yahoo properties, as long as Yahoo continued to meet certain traffic requirements.
Microsoft would have the option of exercising an additional, five-year extension to the deal under which Yahoo would be paid $3 billion per year. If the option is exercised at Yahoo's request, Microsoft would be bound to pay it $1.6 billion per year.
Icahn is waging a proxy fight in which he is seeking to oust Yahoo's board and broker a transaction with Microsoft -- either a sale of the search business or an outright acquisition of Yahoo.
In an open letter to shareholders published Monday, Icahn revealed that he presented his search deal to Yahoo's board on Friday in a conference call that also included Microsoft CEO Steve Ballmer. Yahoo rejected the offer.
"To my surprise and consternation, on the Friday call Yahoo, instead of being interested in the Microsoft offer, seemed to be focused on who would be running Yahoo," Icahn wrote. "Finally, Steve Ballmer suggested that we not spend the rest of Friday afternoon on corporate governance."
Icahn has said previously that he would replace Yahoo CEO Jerry Yang if he wins control of the Internet company.
In its own letter to Yahoo shareholders, also released Monday, Yahoo's board said Yahoo's recent deal to outsource some search advertising to Google will generate more revenue for the company than the Microsoft-Icahn proposal.
Yahoo also accused Icahn of being more concerned with his own interests rather than those of the broader shareholder community. "We believe that this odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo's stockholders in mind," Yahoo's board said.
The board also claimed that it was given only 24 hours to evaluate the search deal proposal on a take-it-or-leave-it basis. Yahoo called those terms "completely absurd and irresponsible given the complexity of the deal."
Icahn claims Yahoo was offered more time to evaluate the deal if it was willing to push its annual shareholder meeting, at which investors will have the chance to vote on Icahn's proxy slate, back from its current date of Aug. 1.
Ballmer initially broke off merger talks with Yahoo in May after its board rejected his $33 per share offer for the company, which represented a 72% premium over Yahoo's closing stock price prior to Microsoft's Feb. 1 announcement that it would attempt to buy Yahoo.
Also on Monday, Icahn filed a proxy statement with the Securities and Exchange Commission nominating his own slate of directors to replace Yahoo's nine-member board.