Yahoo Shareholder Pushes New Plan

From Search Engine News by Terri Wells:

The press have been calling it “Yahoo’s Plan B.” Proposed by Eric Jackson, who posted a video to YouTube about it, the nine-point plan has been gaining some grassroots support. But does a turnaround plan promoted in such an unorthodox manner by a minority stockholder really have any hope of success?

Eric Jackson reportedly owns only 45 shares of Yahoo stock, but he’s making a huge splash with them. It’s a tribute to his ability to use community-building tools – the same kinds of tools that Yahoo has been trying to leverage with its web 2.0 acquisitions – that his campaign has been gaining steam. He says he has a group of like-minded Yahoo shareholders backing him up that together own close to a million shares of the beleaguered company.

He started in early January with an appeal to other shareholders to present ideas for a “Plan B” to save the company. His outreach tools include a blog, YouTube videos and a wiki. He seems to have received a lot of input. In late February he submitted a finalized version of “Plan B” to Yahoo’s corporate secretary with the intention of presenting the plan at the company’s annual meeting in May.

Jackson isn’t simply web savvy, if his biography can be believed. He has a PhD from Columbia University Graduate School of Business in New York, where he specialized in strategic management and organizational behavior. His thesis would seem to be right up the alley of trying to turn Yahoo around; it covered “how the composition and processes of top management teams and boards are linked to longer-term firm performance,” to quote the bio directly. He has several publications on corporate management performance to his credit, and has served as vice president of strategy and business development at VoiceGenie, which is now part of Alcatel. He is currently the CEO of his own consulting firm, Jackson Leadership Systems.

So are the nine points of Plan B going to save Yahoo, or is something a little more self-serving at work here? Let me paraphrase Star Trek's Dr. McCoy and say I’m a writer, not a business analyst. On the other hand, I’ve spent about seven years covering technology and technology-related companies. I’ve looked at my share of financial results, and for the last two years I’ve followed the search field pretty closely. So what you’re about to read is coming from a somewhat informed layman. Keeping that in mind, let’s see what Jackson’s plan offers Yahoo.

The first point is the immediate replacement of Terry Semel as Yahoo’s chairman and CEO. Jackson lists a number of missteps Semel made during his tenure, including the failure to purchase Google in 2002, MySpace in 2005, and YouTube in 2006. He also argues persuasively that Yahoo’s loss of shareholder value is a cause for dismissal. While acknowledging that Semel’s defenders will point to a rise of 227 percent since Semel started at Yahoo in 2001, Jackson points out that most of that gain, which occurred over a one-year period, “had to do with a general recovery in the Internet Advertising market, which benefited Yahoo and its two main rivals – Google and Microsoft – during this time.” Jackson also points to Yahoo’s eroding market share in search as evidence that Semel’s tenure has been toxic to Yahoo. With Terry Semel already 64 years old, it might make more sense to seek his immediate retirement rather than his head.

The second point concerns Yahoo’s board of directors. Jackson and his fellow shareholding sympathizers want to see six out of the ten directors replaced: Terry Semel, Robert Kotick, Roy Bostock, Ron Burkle, Eric Hippeau, Arthur Kern, and Gary Wilson. The only members they want to see stay include Jerry Yang (co-founder of Yahoo), Ed Kozel, and Vyomesh Joshi.
From the explanation given, Jackson holds those six board members as most responsible for Yahoo’s recent missteps (because Semel reports to the board) and believes they must be held accountable. As for the ones favored by Jackson, Kozel and Joshi have directly purchased Yahoo shares, but the other board members “have only exercised stock options of late.” It’s worth pointing out at this juncture that Eric Jackson has nominated himself to the board, so he might have more than just the other shareholders’ interests at heart.

The third point involves the Yahoo Media Group and campus in the Los Angeles area. Jackson wants to see it closed because “There are no meaningful outputs from the group to speak of which have had any positive shareholder value-creating impact.” The Yahoo Media Group was created a little over a year ago and run by former ABC TV executive Lloyd Braun. The goal, apparently, was to enhance Yahoo’s content and therefore attract more visitors. It was part of a larger strategy to be a bigger player in the entertainment field, which seems a natural move given Semel’s 24 years at Warner Brothers. It’s a move, Jackson insists, that hasn’t worked for Yahoo.

Eric Jackson seems to think Yahoo has lost its way, which is why the fourth point of Plan B calls for the company to make additional research and development investments in the Technology Group. Certainly, it can be argued that Yahoo’s competitors (particularly Google) have moved much more quickly to implement more interesting technologies. Indeed, some of Yahoo’s problems can be attributed to this slowness; for example, more than one observer has pointed out the irony that Google’s AdWords and AdSense were “inspired” by Yahoo’s search engine advertising (an expertise Yahoo gained from purchasing Overture) to the point of Yahoo filing a lawsuit…and that Yahoo’s Panama is now very much like Google’s search advertising. The increased investment in research and development is supposed to come in part from closing the Yahoo Media Group and campus.

The fifth point of Plan B is a call for efficiency. Yahoo has never properly streamlined many of its purchases, nor rolled them together as would be expected. Jackson gives several examples: Flickr is still distinct from the homegrown Yahoo MyPhotos, and del.icio.us is still separate from MyWeb. Jackson believes that it makes sense to roll these similar groups together, and that it should have been done a long time ago. This would increase the company’s profitability by saving some money. Jackson would also like to see some clarification as to who has “distinct ownership and accountability” for these key services. The now-famous Peanut Butter Manifesto made it clear that this kind of restructuring is sorely needed at the search company.

The idea behind the sixth point of Plan B seems to be emphasizing accountability going forward. It calls for a pay-for-performance plan for all of Yahoo’s management. “Bonuses should be tied to preset goals for increases in revenues, cash flow, and EPS.”

The seventh point is concerned more directly with the company’s stock price. Jackson wants to see Yahoo step up the pace of the $3 billion stock repurchase plan that the company announced in October 2006. Interestingly, the company’s stock price bottomed out on the same day that Yahoo unveiled its plan to repurchase that much stock over the next five years. According to Jackson, the stock’s price has been rising steadily since he went public with his work on Plan B on January 7, 2007. If the stock price continues to increase, it will decrease the number of shares that Yahoo would need to repurchase. So Jackson and his cohorts “strongly wish to see evidence that the board of directors is accelerating the share repurchase now, rather than when the stock increases in value substantially further months down the road.” One wonders if it isn’t just a little presumptuous to think that Yahoo’s rise in stock price is due to Plan B.

In the eighth point of Plan B, Jackson calls for Yahoo to pay a modest annual cash dividend on its stock. He thinks that five cents a share is about right; it comes to about $40 million a year, which should not inhibit the company’s ability to compete effectively. Why? “More important than the cash to shareholders (which does increase value in and of itself), the dividend would be an additional discipline to Yahoo! management to spend its cash wisely. It would also symbolize management’s confidence in the business, moving forward, that it will plan for and can sustain this dividend to shareholders.” In short, it’s another note in the theme of accountability and taking responsibility that runs through the plan.

The ninth point of Plan B is almost icing on the cake, a slap in the face of management trying to protect itself from the slings and arrows of outrageous fortune. Jackson notes that Yahoo’s most recent 10-Q filing cites anti-takeover provisions which “could make it more difficult for a third party to acquire us” as a risk factor facing the company. But Jackson believes that “These anti-takeover provisions are not shareholder-friendly. They do not serve shareholders’ interests, but management’s. They should be swept aside immediately.”

While much of the buzz surrounding this grassroots campaign has been positive, Jackson has certainly received his share of heat. Some of the comments on his blog, especially in reply to the finalized version of Plan B, have accused him of being self-serving, to put it mildly. On the other hand, at least one observer thinks the plan doesn’t go far enough. With Yahoo being a weakening second to Google, the latter’s dominance of the field will only continue to increase, squeezing out the rest of the competition. This is bad for those of us who want to see continued search innovation.

Jackson may not have all the answers; his grassroots campaign may not even succeed. But he has brought a focus to Yahoo’s woes, and how deeply they need to be repaired, that not even the company’s own restructuring plan (released early in December) has been able to bring to bear. One way or another, Yahoo will be forced to find its way; let’s hope it leads to a stronger future for the search engine.

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