Wednesday, June 13, 2007

Conde Nast Portfolio: Dark Days for Terry Semel

From today's Conde Nast Portfolio:

by Russ Mitchell Jun 13 2007

Yahoo, once the internet high-flyer, has been lapped by Google and hears footsteps from MySpace and Facebook. How long can Semel keep his job?

Terry Semel took his glasses off, then he put them on again. Then he took them off. On again, off. On, off. On. He paced the stage. He paused to regard the crowd. About 150 of them out there, taking their seats. They looked pretty glum.

The colors didn't help. At Yahoo, which Semel runs as chairman and chief executive officer, the corporate color is purple. Here in this small banquet hall in Santa Clara, California, the bunting was purple, the draperies were purple, and the table skirts were purple, too. The signs purple, the balloons purple, the mood lighting purple. The thick, pleated curtain hanging behind Semel, however, was inky black, a kind of theatrical frame for the C.E.O., whose performance at this, the company's 2007 annual meeting, would later be webcast.

Perhaps the video would lighten the room's unfortunate funereal look. Semel set it rolling. It was the usual fare: edgy but squeaky clean young people performing odd but well-timed body movements to a sanitary no-threat hiphop beat. At regular intervals, Yahoo's many services were promoted. In one segment, Semel, who is 64, was shown close up playing the good sport, attempting the Yahoo yodel.

The real Semel grinned, amused at his televised image. The outside members of the company's board of directors, old men in dark suits, sat squeezed shoulder to shoulder in a tight row of chairs, stonefaced. The attendees—shareholders, executives, members of the press—remained expressionless.

Well, that didn't work. And what could? These are dark days for Yahoo. Once one of the Internet's highest flyers, the company has fallen so far behind Google—and social networks like MySpace and Facebook are coming up so fast from behind-that shareholders and industry analysts are already talking about Semel's replacement.

It's no wonder that Semel was not happy when Eric Jackson, owner of 96 shares, approached the microphone. Jackson had used a blog and a YouTube video to unite 100 investors holding 2 million shares in a pledge to vote against reappointing Semel and seven other directors to the board.

Two million is less than 1 percent of Yahoo's outstanding shares, but Jackson's grassroots quest attracted media attention, and one-third of the voting shares went against at least one of the directors. A 66 percent support level is a landslide in politics, but at public corporations, where nearly 100 percent is the norm, it is an embarrassment of the highest order.

The dissident Mr. Jackson asked questions like does Semel still have fire in the belly? Is he okay with settling for second place behind Google? And shouldn't he have apologized to shareholders for his performance over the last two or three years? Semel accused Jackson of being "cute." Eventually, Semel became so defensive that he declared "I feel very good about my capabilities."

Semel would not talk to Condé Nast Portfolio, nor would any other top executive at the company. A Yahoo spokeswoman says "Terry has no intention of leaving the company." And why should he? Yahoo's board of directors has lavished Semel with enormous wealth. Since he started work in May 2001, his total compensation totals more than half a billion dollars: that's billion with a b.

Last year alone he was paid $107 million, or 14.31 percent of the company's net income, making him one of the highest paid C.E.O.'s in the U.S. He's set to receive 6 million options worth $92 million in Yahoo stock through 2008 in a "retention" incentive granted by the board of directors in last year. That is not the kind of pay package granted by a compensation committee that's thinking about replacing someone.

Yahoo has lost to Google in every way it could possibly lose. Google search is crushing Yahoo in market share. The company fell years behind Google in Web advertising technology. The bleakest statistic: Google had $10.6 billion in revenue last year, most of it in advertising, nearly double Yahoo's $6.4 billion. When Semel took charge at Yahoo in 2001, Google was still a bit player.

Now social networks like MySpace and Facebook are grabbing Yahoo users and advertisers away, and, analysts say, average time spent on Yahoo is declining. Workers inside Yahoo describe it as a bureacratic mess that a December reorganization thus far has done little to fix. A few weeks after the annual meeting, in mid-July, Yahoo reported better earnings and that ticked up its depressed stock a bit. But the attitude of analysts and investors is still wait and see.

Employees are fleeing. Over the past year, eight of the company's top 26 executives have up and left. Some were shoved out in a reorganization, but others quit voluntarily. The company's top technology officer, Farzad "Foz" Nazem, "retired" in June. More worrisome has been the diaspora of talent level or two down. They include music chief Dave Goldberg, consumer search business head Andrew Braccia and Yahoo Hotjobs general manager Dan Finnegan.

Dozens of refugees have set up camp at Google and Microsoft and Facebook and venture capital firms like Benchmark and Sequoia and Accel Partners. Others are starting new companies.

Fearful of their futures, many Yahoo employees were willing to talk about the company but not on the record. They are worried about massive layoffs around the corner, and for good reason. Semel has finally acknowledged a surfeit of duplicative projects at Yahoo, and an intention to cut them back. Revenue per employee at Google last year was $1.3 million; at Yahoo, $606,000.

All this turmoil, perhaps, explains the dissident shareholders' problems with Semel. To his cheerleaders, the 325 percent runup in Yahoo stock in 2003 and 2004 justifies his worth. To detractors, Semel was just lucky, and the miserable swoon in Yahoo stock since then is more indicative of his talent.

It's impossible to disentangle how much of Semel's early success was due to the general recovery in Internet advertising during that period, which was considerable, and how much was due to executive brilliance. There is little debate, however, that the company has been asleep at the wheel for the last two years at least, and the question now is whether Semel is capable of rousing the company from its self-induced torpor.

Curiously enough, the company's future and Semel's ultimate legacy rests on the shoulders of a woman named Sue Decker, who was put in charge of advertising and publishing, reporting directly to Semel. Fundamentally, it's now her job to attract boatloads more revenue to Yahoo.

Previously the company's chief financial officer, she is described by one recent Yahoo renegade as "the voice of the analytical side of Yahoo screaming out to take control." Although the company has taken no position on the matter, Decker is widely regarded inside the company and out as Semel's heir apparent.

Decker landed in the sweeter position than anyone the reorganization last December, which she helped plan. Out the door went the chief operating officer along with Lloyd Braun, a former TV executive brought in by Semel to bring Hollywood-style content to Yahoo, the results of which were mixed at best: The group's flashiest product to date is The 9, a quick video countdown of funny things whose quality is best left for viewers to judge.

Braun detractors say he was too Hollywood-abrasive for Yahoo's consenus culture. His supporters say Braun never got the support he needed: not enough money, not enough engineering time, not enough help from Semel when traditional Yahoos resisted his push for change.

The reorganization came quick on the heels of a memo by a Yahoo executive now famously known in Silicon Valley as the Peanut Butter Manifesto, which called for drastic action in the face of dismal Yahoo performance and a tendency to spread talent and resources over too many projects, like a dab of peanut butter over a lot of toast. The reorg didn't do much to pacify critics, however. Semel's new strategic plan: Focus on customers. The plan was accompanied by little sense of urgency. After Braun left the Hollywood group at Yahoo's Santa Monica offices, the place was left leaderless for four months before a Semel protege, Jeff Weiner, was put in charge.

The company was divided into three groups—advertising, audience, and technology—but as of mid-summer Yahoo still had not named an audience group head.

The challenge anyone put in charge of content was made clear by Ellen Siminoff, a former Yahoo executive and now C.E.O. of a company called Efficient Frontier. "Yahoo has some challenges," she says. "They need to come out with new product. I don't know what product it would be. They have to come out something other people haven't."

With someone leading the audience side or not, it's Decker who will determine the company's near term future, and possibly for a long time to come. Without a signficant boost in advertising revenue at Yahoo, nothing else matters.

So far, Decker has succeeded in getting the advertising technology system back on track, and even before the reorganization had struck two major deals: an exclusive arrangement to sell advertising for eBay, and an agreement to share content and online advertising revenue with a large group of newspaper publishers.

Decker keeps a low profile, but she's a businesswoman on the way up, and not just at Yahoo. A former analyst at Donaldson, Lufkin & Jenrette, tough in spunky Jody Foster kind of way, she serves on top-flight company boards, including Intel and Costco. In May, she was elected to the board of Berkshire Hathaway, the highly regarded Warren Buffet investment conglomerate. "She's a star, a rising star," gushes fellow Costco board member John Meisenbach.

Hamilton E. "Tony" James, vice chairman at the giant private equity firm Blackstone Group, Costco board member, and Decker's former boss, is equally effusive: "Is she C.E.O. material? Definitely. She's tough-minded. At DLJ, she managed a big group of prima donnas."

But for all the adulation, it's a big question whether Decker has the creative vision and technical chops to lead Yahoo. She'll have help on the numbers side from an old family friend, Blake Jorgensen, who came from the Thomas Weisel Partners investment bank in June to replace Decker as CFO. He was best man at Decker's wedding, and a Stanford classmate of Decker's husband, Michael Dovey, who met Decker at Harvard Business School. Dovey told friends he'd get rich by 40 and retire, which he did at Goldman Sachs. Now he takes primary care of the couple's three kids.

With all the financial talent at her beck and call, Decker surely realizes just how deep Yahoo's problems are. It's no mere coincidence that Yahoo's stock price began declining just after Google went public and transparent in 2004. Once Google started filing documents with the Securities and Exchange Commission, investors could see just hard Yahoo was getting kicked.

Yahoo's investment problems go much deeper than its stock price. Under a method of business valuation used by firms ranging from Goldman Sachs to McKinsey & Co., known as economic value added, and very familiar to people like James, Munger, Jorgensen and Dovey and Decker, Yahoo has been destroying shareholder value each year and every year since its creation.

EVA measures not only a company's return on capital; it puts a premium on a stock's risk. To earn positive returns, a company must top the return it would get by investing in a basket of stocks with similar risk. Otherwise, why have a company at all?

According to EVA Dimensions in Locust Valley, New York, companies like General Electric and Microsoft have been EVA positive since their records go back to 1989; Google and Costco have been EVA positive for their entire existence; eBay went EVA positive in 2002, Amazon.com in 2003, and the economic return on both companies has been rising since. Yahoo had one good year, in 1998; otherwise, the company returned no economic value in any year since.

If Decker succeeds in getting Yahoo back on track, her future is unlimited. At this point, Semel's star is so tarnished that she's likely to get credit for any victories while if things don't work out Semel could take the blame. But with a rich contract that runs through 2008, a compliant board of directors, half a billion dollars in the bank with more on the way, who cares?

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2 comments:

DomPierre said...

Decker seems like the bright spot on the horizon for Yahoo.

But IBM on the other hand . . . .

ilanit said...

Los Angeles private equity firms borrow new money into existence in order to take these companies private. They inflate the money supply and syphon off huge sums as personal compensation. All the while, the cost of everything goes up as the value of a dollar goes down.