Icahn has bought 50 million Yahoo shares over the past week, according to The Wall Street Journal and CNBC, and is considering trying to force the Yahoo board to do a deal with Microsoft.
Microsoft chief executive Steve Ballmer officially withdrew the bid nearly a week ago.
Icahn could force a proxy fight with the Yahoo board, and nominate four directors of his own who would raise the buyout issue again. Icahn used a similar tactic in March to force Motorola to spin off its mobile phone arm.
Microsoft initially offered US$31 per share for Yahoo, then upped it to US$33, but the Yahoo board was holding out for US$37.
Yahoo chairman Jerry Yang said that he was confident of his company increasing its revenues by 25 percent in the next two years, and that Microsoft's offer was therefore too low.
The bid attracted the attention of Icahn, whom Forbes rates as the 18th richest person in the world with a personal net worth of US$14.5bn. The magazine describes him as an "obsessive corporate raider".
Icahn specialises in taking large stakes in companies to push for the sell-off of assets or buying back of shares.
The investor now looks to be getting more involved with the technology sector overall.
In 2007 Icahn moved in on BEA Systems, buying an 8.5 percent stake in the company with a view to selling it off. He eventually upped his shareholding to over 13 percent before forcing a sale to Oracle.
Icahn bought his Yahoo shares after the stock price fell to around US$25 when the merger was called off, so both of Microsoft's offers would represent a significant profit.
However, analysts have warned that the Microsoft/Yahoo merger would be a disaster, predicting that key staff would desert in droves and that the merged company would get bogged down in government regulation.
Yahoo/Microsoft deal may be back on
By Iain Thomson on May 15, 2008 7:35AM