Friday, June 13, 2008

US News & World Report: At Yahoo, America's Most Endangered CEO

June 13, 2008 12:05 PM ET Rick Newman Permanent Link

A lot of CEOs these days get criticized—and sometimes prosecuted—for overinflating the value of their company's stock. One prominent exception: Yahoo CEO Jerry Yang, who seems intent on depressing the value of Yahoo shares.

The mission Yang sees for himself, of course, is to keep Yahoo independent, or at least keep it out of the claws of archrival Microsoft, which has now made two attempts to buy all or part of Yahoo. OK, three cheers for the little guy battling Goliath, but seriously: How in the world does Jerry Yang hold onto his job?

When Yang rebuffed Microsoft the first time, he forfeited a premium of about 40 percent that shareholders would have earned had Microsoft bought Yahoo. The share price fell to the low 20s, compared with Microsoft's offer of $33 per share.

Now Yang has driven down Yahoo's value again. Microsoft came back, looking to buy a smaller portion of the company for about $35 a share. After negotiations broke down, Microsoft walked away from that deal too, as Yahoo, meanwhile, announced a partnership with Google that has dubious prospects of being approved by regulators. The stock, which had drifted up a bit on renewed hopes of a Microsoft deal, is down once again, knocking around in the low 20s.

In addition to optimizing the value of the company, a CEO is also responsible for articulating a strategic vision and putting people in place who are capable of executing it. Except, apparently, at Yahoo. The company has invested a lot of money to develop a proprietary search tool able to compete with Google's. But if the Google deal goes through, Yahoo would basically be outsourcing search to its biggest competitor. So is Yahoo in the search business or not? And if it isn't, what is its core business? "It would be helpful if Yahoo could finally articulate what it is and where it thinks it's going," says Eric Jackson, an activist Yahoo shareholder who advocates a shakeup of the board of directors. "They've failed to do that."

One outcome may inadvertently help Yahoo refine its focus. Google and Yahoo are the No. 1 and 2 search engines, and if Google took over Yahoo's share it would fortify what is already close to monopoly power for Google. So regulators may not approve the deal, leaving Yahoo back in the search business. But that's like backing into a business strategy, or worse—letting the government define it for you.

There's a lot more to come in this saga, especially with corporate raider Carl Icahn trying to replace Yahoo's board with one that will overrule or oust Yang, in order to engineer a sale to Microsoft or another buyer. Yang has continually tried to buy time, and surprised many analysts by managing to fend off Microsoft and keep his company independent. But time is going to run out. Top talent has been leaving Yahoo, the company's drift is strengthening its competitors, and shareholders are getting impatient. "Jerry Yang will be fired soon," predicts Silicon Valley consultant and blogger Sramana Mitra. It's an exit that is becoming the most melodramatic spectacle in corporate America.

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