Monday, May 05, 2008

WSJ: Yahoo CEO Has a New Challenge:

By KEVIN J. DELANEYMay 5, 2008; Page A12
Wall St. Journal

Yahoo Inc. Chief Executive Jerry Yang got what he was hoping for Saturday, say people familiar with the matter, when Microsoft Corp. retreated from its threat to take over the company he co-founded in 1995.

But the 39-year-old Yahoo CEO now faces just as big a test: He needs to convince shareholders and staff that the company's future is just as attractive -- and likely to yield a higher share price -- without a purchase by Microsoft. That challenge is heightened by investor skepticism of
Yahoo's ability to deliver on its promises after several years of underwhelming results and management turmoil. Some staff are weary after the extended period of uncertainty around the company.

Yahoo shares had retreated to their 2003 levels just before Microsoft's offer Jan. 31, and analysts say they probably will fall again Monday on its withdrawal. Many analysts say the financial targets for 2009 and 2010 Yahoo released in March as part of its effort to remain independent were unrealistically high.

Despite the doubts outside the Sunnyvale, Calif., Internet company, Mr. Yang responded to Microsoft's walking away by exhorting his staff to stick to the same strategy. "We should focus our energies on continuing to execute the most important transition in our history," Mr. Yang wrote in an email to employees Saturday that was reviewed by The Wall Street Journal. "How will we do this? By executing against the strategies and priorities we already have in place, and by continuing to deliver indispensable experiences for our communities of users, advertisers, publishers and developers." (Read a blog post by Mr. Yang about the failed deal.)

Mr. Yang outlined those priorities after a roughly 100-day strategic review following his June appointment as CEO. They involved becoming the Internet starting point for the most consumers, becoming a "must buy" for advertisers and becoming an open-technology platform for developers.

People familiar with the matter say Mr. Yang and Yahoo directors were emboldened in their resistance to Microsoft by another key factor: the prospect of a deal to carry search advertising from Google Inc. Citigroup Global Markets analyst Mark Mahaney estimated that such an agreement could increase Yahoo's cash flow by more than $1 billion a year, because Google generates more ad revenue for each search query than Yahoo does. But antitrust officials -- with Microsoft's strong encouragement -- are likely to take a hard look at any such pact.

Yahoo and Google together will account for 83% of U.S. search advertising this year, according to research firm eMarketer Inc. Justice Department officials raised questions about a recent two-week search-ad test between them and expressed concern that a longer-term deal might not be in compliance with antitrust law, according to one person familiar with the matter.

Even if the deal got by regulators, it is unclear whether such an arrangement alone could enable Yahoo to meet its 2009 and 2010 projections, said Needham & Co. LLC Internet analyst Mark May. "We believe some large [Yahoo] shareholders are unhappy with the prospect of outsourcing a meaningful portion of the company's strategic business," he said.

Yahoo also has had talks to possibly merge with Time Warner Inc.'s AOL Internet unit as part of an arrangement in which Time Warner would get a roughly 20% stake in Yahoo, say people familiar with the matter. The two sides have been taking stock of the situation since Microsoft's withdrawal but continue to talk, according to the people.

All of the companies, including Microsoft and News Corp., have been talking to each other on some level in recent weeks, according to people familiar with the situation. News Corp. owns Dow Jones & Co., publisher of The Wall Street Journal. One combination that could come into focus now is Microsoft and AOL. AOL potentially presents a more-willing target for Microsoft.

The Microsoft approach and any fallout from its withdrawal will test the mettle of Mr. Yang, who assumed the unconventional title of Chief Yahoo for years as he let more-seasoned executives run the company. Mr. Yang took the CEO post in June after concerns about the business led some Yahoo directors to decide that former CEO Terry Semel needed to move on, say people familiar with the matter.

It has been a rocky road since then, as Yahoo has continued to grapple with employee departures and turned in financial results that failed to wow investors. In late January, Mr. Yang said the company faced "headwinds" in 2008 and announced plans for roughly 1,000 layoffs.

Now, having failed to reach a deal with Microsoft, Mr. Yang and his fellow Yahoo directors could be vulnerable to a revolt by shareholders. A few pension funds have sued Yahoo and its board, alleging that the directors breached their fiduciary duties by not responding in good faith to Microsoft's unsolicited offer. Activist investor Eric Jackson launched a campaign Sunday on his Web site to get shareholders to withhold their votes from Yahoo's directors at the next annual meeting in protest. "Our interests haven't been served by this outcome," Mr. Jackson, who holds 96 Yahoo shares, wrote on his site. "Hubris and pride got in the way."

A Yahoo spokesman declined to comment on Mr. Jackson's statement.

--Merissa Marr contributed to this article.

Write to Kevin J. Delaney at

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