NEW YORK (Reuters) - Yahoo Inc (YHOO.O: Quote, Profile, Research), whose shares fell as much as 20 percent on Monday after Microsoft Corp (MSFT.O: Quote, Profile, Research) dropped its $47.5 billion bid for the Web company, is likely to face pressure and possibly a proxy battle from activist hedge funds looking to revive the deal.

With billions of dollars in financial muscle, some activist hedge funds are already laying the groundwork for a campaign after the three-month talks between Microsoft and Yahoo collapsed last weekend. Microsoft walked away, saying it would not bid more than $33 per share for Yahoo, while Yahoo wanted $4 a share more to agree to the deal.

Experts say it would likely take one or more substantial, seasoned activists to buy a large stake in Yahoo and finance a credible multimillion-dollar proxy campaign. But at least one small firm, Ironfire Capital, is talking to other firms about running a director slate, according to Eric Jackson, who heads the firm.

"I'm mad," said Jackson, who was involved in a successful campaign last year to have former Yahoo Chief Executive Terry Semel replaced. "Yahoo's rejection was not in the best interests of shareholders, and the board needs to be held accountable."

Jackson's Naples, Florida-based firm has a minuscule holding in Yahoo, just 96 shares. But if other, larger hedge funds line up and buy at least 5 percent of the company's now-discounted stock and run a slate of director candidates that would favor a sale to Microsoft, the move could gain traction.

With 1.25 billion Yahoo shares outstanding, a stake of 62 million shares, or around 5 percent, could cost more than $1.5 billion at today's price of around $24 per share. That leaves such a campaign likely only for the largest activists, such as Carl Icahn, William Ackman of Pershing Square Capital, Nelson Peltz' Trian Partners, Jana Partners and a handful of others.

"There are not a lot of activists who can invest $1 billion," said Manny Pearlman, CEO of hedge fund Liberation Investment Group and veteran of numerous, smaller proxy battles.

Icahn, who led a high-profile campaign against Time Warner two years ago and has invested over $1 billion in Motorola in a current proxy campaign, is not currently a Yahoo investor and has no immediate plans to run a campaign, a person close to Icahn said.

But experts said the billionaire New York financier could be in a prime position to put pressure on Yahoo to revive talks with Microsoft, since he was successful last year in negotiations to get Oracle Corp (ORCL.O: Quote, Profile, Research) to return to the table to buy BEA Systems (BEAS.O: Quote, Profile, Research) after Oracle walked away.

"There is a clear path to victory for someone willing to buy the stock and deliver the company to Microsoft at $33 a share," said a senior executive at one multi-billion dollar activist hedge fund who asked for anonymity. "You need a lead dog that runs the campaign, however."

In all proxy campaigns, timing is critical, and in this case, it favors investor activists. Since Yahoo has yet to set the date for its annual meeting, expected in July, activists still have time this year to submit candidates for the board, rather than being forced to wait until next year.

Of course, by that time, Microsoft's interest in Yahoo may have cooled, leaving activists to demand other more speculative routes for Yahoo. If such a campaign collapses altogether and a fund has invested a large part of their assets in the hopes of a deal, "You have a real business franchise risk," said one hedge fund manager.

(Editing by Toni Reinhold)

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