In a letter sent Thursday to Yahoo Chairman Roy Bostock, Icahn wrote that outraged Yahoo shareholders had urged him to lead a campaign to replace Yahoo's 10 directors at the company's July 3 annual meeting in hopes of bringing Microsoft back to the bargaining table.
"I believe that a combination between Microsoft and Yahoo is by far the most sensible path for both companies," Icahn wrote.
To give him leverage in the looming battle, Icahn revealed that he has spent more than $1 billion snapping up about 59 million Yahoo shares to give him a roughly 4 percent stake in the Sunnyvale-based company. He plans to seek approval from the Federal Trade Commission to acquire up to $2.5 billion in Yahoo stock.
A Yahoo representative said the company would respond to Icahn's attack "soon."
Besides himself, Icahn's alternate board of directors includes Internet entrepreneur Mark Cuban, who became a billionaire by selling Broadcast.com to Yahoo during the dot-com boom. Cuban used part of that windfall to buy the Dallas Mavericks, an National Basketball Association franchise that he still owns.
Icahn's other notable nominees include: venture capitalist Adam Dell, whose brother, Michael, founded Dell Inc.; and Frank Biondi Jr., the former chief executive of Viacom Inc.
The revolt threatens to jettison Jerry Yang from the company that he started with David Filo 14 years ago. Yang is one of Yahoo's directors and has been trying to engineer a turnaround since taking the job of CEO 11 months ago.
Yang and the rest of Yahoo's board are on hot seat for rejecting Microsoft's initial bid of $44.6 billion, or $31 per share, and taking measures that finally drove away the software maker.
Microsoft Chief Executive Steve Ballmer orally offered to raise the offer to $47.5 billion, or $33 per share, earlier this month. He withdrew the bid May 3 after Yang and Filo, acting on behalf of the Yahoo board, held out for $37 per share - a price that Yahoo's stock hasn't reached in more than two years.
Yang has argued Yahoo eventually will be worth more than $50 billion if it can expand its share of a rapidly growing Internet advertising market that so far has been dominated by rival Google Inc. In a forecast released while Yahoo tried to thwart the Microsoft bid, management predicted net revenue growth of at least 25 percent in 20009 and 2010 - well above its recent pace of 12 percent.
"It is irresponsible to hide behind management's more than overly optimistic financial forecasts," Icahn wrote. "It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72 percent premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer."
Yahoo shares rose 30 cents to $27.44 in morning trading Thursday.