Tuesday, January 30, 2007

Parsing Yahoo!'s Fourth Quarter and its Future

Last week’s Q4 earnings from Yahoo! were overshadowed (initially at least) by the market’s excitement over a moving up of the full US launch of Panama. The sooner the launch, the sooner Yahoo! can close the profit optimization gap in search with Google, market observers figure.

As Mark Gongloff has said, this move-up announcement to placate dissatisfied investors has been used by Terry Semel before – most recently last Fall during the Q3 earnings call. But the announcement belies some disappointments in (what Anderson Cooper refers to as) the “raw data” of the quarter.

As Henry Blodget pointed out, Yahoo!’s growth is slowing. It was up 15% overall and only 8% in the US. Tomorrow, we’ll be able to truly compare the health of that pace relative to Google. Yahoo! has a preeminent position in the Internet (as management is eager to tell us), but slowing growth and a dearth of new ideas to capitalize on bringing in new users/viewers.

Yahoo! management’s biggest response to this criticism is that “Panama is coming, Panama is coming.” Yet, Panama is not the cavalry and will not solely save this company or its investors. Even if Panama works as planned and if the transition goes seamlessly (2 big ifs; Kevin Delaney had some news of the transition and other info came yesterday), Panama will – at best – help Yahoo be a stronger #2 to GOOG. The market doesn’t reward strong #2s; they reward market niche dominance.

(And, it's interesting to note, as 24/7 Wall Street did, that YHOO's short interest swelled 6MM to 84.1MM shares in January. Google's current short interest is 6MM shares.)

How is Yahoo! going to be preeminent in non-search? That’s the clear strategic question facing this company.

Yahoo needs to make as much money for its shareholders as possible, and Panama is the best hope the company has for closing the profit chasm relative to Google, so let’s all hope it works, but delivering Panama on time is not a strategy.

What is Yahoo!’s strategy? According to Terry Semel during last week’s conference call, Yahoo! has a “clear strategy.” It is to capitalize on the growth of the Internet with a premier advertising network. Those are my words - not his. I had to piece together several different sentences from Terry during the call to make that sentence (not a good sign of a “clear strategy”).

Terry seems intent on communicating to the market that Yahoo! has a strategy. To do this, he puts out 3 components that he would like the market and shareholders to measure him and the company on: (1) how well it’s monetizing search, (2) how well it’s doing at display/graphical ads, and (3) how well Yahoo! is growing in new “Growth Areas” (i.e., social media, video, and mobile).

Also this week, in response to a Red Herring reporter’s question about “Plan B,” a Yahoo! spokesman held up their acquisitions of Bix.com and MyBloglog, and partnerships with eBay, Vodafone, and a newspaper consortium as evidence of a “clear strategy.”

(God help all Yahoo! shareholders if Bix.com and MyBloglog are going to save the company. I love MyBloglog but how does a $10MM tuck-in acquisition help move the needle for a $40B company?)

Yahoo! is a destination first and foremost. You can search there too, but it is a place to connect with others. It is a powerful channel for information/ entertainment/ communications with an advertising network paying for it.

Terry’s (and this also goes for most of the business media covering Yahoo! of late) single-minded focus on Panama as the cure-all for Yahoo!’s problems overlooks one important fact: Yahoo!’s content has become less interesting for the Yahoo! user and non-user. Users/viewers are simply going elsewhere for their information/ entertainment/ communications needs. Also curious is that how the December 5th reorg, designed to help Yahoo! be closer to the customer according to Terry, at the moment, has no one at Yahoo! is in charge of making this area (i.e., Audience) better.

There are three legs to Yahoo’s stool as a business: (1) the users/viewers who come there to get information/ entertainment/ communication, (2) advertisers who pay Yahoo! to market to those users/viewers, and (3) the technology that underlies it.

All three areas need improvement. Yet, you only hear discussion by management and analysts of the 2nd leg of the stool. Panama is important. It will help Yahoo! “catch up” (at best) to Google. It is unlikely to surpass Google with Panama.

Most distressing to investors is leg #1. Without #1, Panama could be the greatest advertising search system in the world and it wouldn’t matter. Yahoo!’s growth in users is slowing. Google is growing its users faster. We’ll find out how much later tomorrow.

Why are users going to Yahoo! less? Why do people watch NBC less on Thursdays today compared to 5 years ago? There are more interesting options elsewhere. Yahoo!’s response to this problem to date has been to refresh the home page and it recently trumpeted an update to Yahoo! Finance. Hardly a fix or a “clear strategy” to solve this problem. Yahoo! has also said it will dominate social media, video, and mobile as a fix here (which presumably means a lot more Bix- and MyBloglog-type acquisitions to come). However, “letting a thousand flowers bloom” is again not a strategy and is an MO which led to the Peanut Butter Manifesto last Fall.

On the Technology front, it remained untouched in the last reorg. As Valleywag pointed out, some current employees from this group believe that there are significant issues to be addressed here. I have spoken to former Yahoo! employees who defend Zod Nazem and believe he brings a lot of strengths to the group, but they acknowledge that improvements are needed here. Some discussion by management on this issue is warranted.

Yahoo! shareholders deserve a clearer strategy for strengthening its 3 legs of the stool. This is why I and several others back a “Plan B” for Yahoo! which, among other steps, includes making several changes to the composition of the board (because, after all, the board has tacitly accepted the status quo for two years of market under-performance) and setting up a special committee of the board to examine and articulate a clear strategy for Yahoo! to dominate its lead in non-search as a premier Internet destination.

The stakes are high. We all know the Internet moves at light-speed. Without moving quickly to address these issues, Yahoo! risks relegating itself to a Lycos-, Excite-, and AltaVista-like fate: being ignominiously acquired at scrap-heap prices instead of driving its future and forcing others to play catch-up (as it always has during the bulk of its history).

I don’t “bleed purple and yellow,” but I love this company and ask fellow Yahoo! shareholders to sign-up and support “Plan B” in order to improve future quarterly results. We see as recently as this morning (with Carl Ichan’s involvement in Motorola) that when shareholders get active and demand answers from boards and management they are rewarded with better performance. Get involved with "Plan B" for the betterment of Yahoo! and its shareholders.

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Monday, January 29, 2007

Is Your Office a Petri Dish?

From last week's Globe and Mail:

Corporate culture comes in many guises. As companies merge or evolve, it can be a challenge getting employees from divergent backgrounds operating on the same page, WALLACE IMMEN writes

Take a look around your workplace. It's likely that, even if there are no written rules, your fellow employees have learned there's a way things are done and they try to fit in.

In some offices, people not only adopt similar ways of working and conducting meetings, they may find themselves sharing opinions and tastes in clothes.

The initial reason is that managers tend -- unconsciously or not -- to hire people who think and act like them, says Glenn Carroll, professor of organizations at Stanford University and author of Culture and Demography in Organizations.

Once on the job, people want to be liked and fit in, he adds. They pick up clues from those around them about what behaviour makes bosses and co-workers most comfortable.

Corporations, like countries, develop ingrained cultures -- ways of doing things that persist even though the members of the group change, Prof. Carroll and co-author University of Dallas professor J. Richard Harrison conclude. That can make it easier for managers, because it means new employees learn how to perform based on observing others around them and there is less need to micromanage.

But it can present a huge challenge when a manager has a mandate to create change, or -- as happened at a record pace last year in Canada -- two organizations with different cultures are combined in a merger or acquisition.

"If people don't understand the need to adapt to a new culture, there's a continual resistance to change. It's like sand continually in the gears," Prof. Carroll says.

That resistance is something Ted Bonertz faced when he became business director of Mississauga-based BASF Agricultural Products Canada last February. He inherited an organization that was the result of a series of mergers that had put employees from four different corporate cultures onto the same team.

"I came in and recognized fairly quickly that we weren't humming as a team," Mr. Bonertz says.
He found people in each of the legacy companies had developed different ways of doing things in their previous companies that they perpetuated in the new organization.

Notably, people who had teamed up in previous organizations tended to continue to try to work together, which limited co-operation across the organization. The teams also didn't share ideas with people who came from other groups, which stifled innovation, Mr. Bonertz says.

"It was clear that I had to get people to agree on shared goals and have actions everyone could follow so people could help each other achieve the goals."

However, saying things have to change is one thing; it takes persistence to get people out of their entrenched habits, Mr. Bonertz says.

But he believes he had an advantage: at least people were willing to try to change. "They all felt frustrated, so it wasn't a very difficult sale to make to the team."

Getting that buy-in is vital to changing a corporate culture, says Eric Jackson president and chief executive officer of Jackson Leadership Systems in Toronto, which coaches on corporate change.

Here are a few steps Mr. Jackson recommends leaders take when they need to steer a cultural change:

Know the players

It's a mistake to just walk into an organization and declare a new way of doing things without first understanding the assumptions and personalities that are behind the existing culture and what people believe are the strengths and drawbacks of the way things are done, Mr. Jackson says. His rule of thumb for a leader coming into an organization for the first time is to take the first 30 days to get to know the existing culture; but then impose the changes quickly as possible.

Set a clear vision

Explain what you are trying to accomplish and what outcome will come from being successful, Mr. Jackson says. This helps people understand the reason for the change and what is in it for them to make it a success.

Work with individuals

Don't just tell the team about the plan and expect them to change. People should be approached individually to discuss their understanding of the changes and the advantages to them of shifting their engrained way of doing things.

Encourage early adapters

The tendency to develop a corporate way of doing things is also a tool smart managers can use to achieve their goals, because once key people that others look to for guidance adopt the change, others will try to adopt it as well, Mr. Jackson says.

These are steps Mr. Bonertz took to get his organization of 100 people at BASF Agricultural Products Canada working together.

"What we decided to do is set goals and get people to take ownership of them and then make sure they follow up on them," he says. "That sounds so simple but trust me, it's not that simple."
One of the legacy companies had a dominant culture and some people from that group were resistant to change. So, he worked with individuals rather than trying to sway the entire group.
He set up a program of quarterly performance reviews of how well they are meeting business goals as well as their individual career goals. These are things that had been treated separately in the past, he says.

Linking personal and job performance goals got people thinking about their importance in the organization and how success can move their careers forward, Mr. Bonertz says.

The result, he says, is a notable improvement in the way the team interacts and pulls together. This has resulted in better customer relations as well, he says. And, fortunately, everyone seems to have accepted the need for the change.

But what should a manager do if there are some who continue to drag their feet?

Prof. Carroll of Stanford University says his research has found that the most effective way to deal with resistance is "to let people who don't fit in know that they don't fit. And tell them either to try to fit in or leave."

That my-way-or-the-highway prescription has landed him in hot water from critics, but it sounds more Draconian than it really is, he explains.

"I'm not saying you just fire the person, but rather the way to do it is explain to them that, if they don't change, they will not fit into the new organization," Prof Carroll says.

The message does have to be direct, he says. "For instance: 'Bob, it keeps happening. We're trying to get you to do it our way and you're not changing. You've got to accept that if you can't do it that way, there isn't going to be a long term future in this organization.'

"If you're direct, people will get the message and try to fit in," he says. If they can't, they will probably always be a negative influence and the corporate culture will be better off without them, he adds.

Clearing resistance doesn't have to lead to firing. Mr. Jackson advises that, if possible, try moving those who resist to other positions in the organization where they feel a better fit.
In either case, the task of leading change may be uncomfortable, but invariably the leader will find that the rest of the team appreciates taking action to remove friction, he says.

"Whenever you make changes, there is a period of disorientation and frustration. You have to get through that period and the sooner you can, the sooner the team will be moving smoothly in the new direction."

The four faces of culture

Culture is the personality of an organization and, just as some people tend to seek out communities of people with interests similar to theirs, so organizations find people who work better together if they "fit" the corporate culture.

Jeffrey Sonnenfeld, associate dean for executive programs at Yale University's School of Management, has identified the four most common types of cultures:

Academy culture. Employees are highly skilled and tend to stay in the organization while working their way up the ranks. Examples are universities, hospitals and large corporations.

Baseball team culture. Employees are "free agents" who have prized skills. They are in high demand and can rather easily get jobs elsewhere. This culture develops in fast-paced organizations, such as investment banking and advertising.

Club culture. The most important requirement for employees here is to be accepted by other group members.

Usually, employees start at the bottom and stay with the organization because it promotes from within and values seniority. Examples are the military and many law firms.

Fortress culture. This is common in organizations that have multiple divisions or face regular reorganization.

Employees stay loyal to their own team and develop protective measures to avoid being on the firing line. But, because change is frequent, these organizations also offer opportunities for fast advancement.

Wallace Immen

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Saturday, January 27, 2007

Council of Institutional Investors' Coverage of 'Plan B'

The Council of Institutional Investors is is the premier U.S. shareowner-rights organization. It is a not-for-profit association of 130 public, labor, and corporate pension funds with assets exceeding $3 trillion.

Rosemary Lally edits their weekly newsletter ("Alert") to members on the current happenings in the corporate governance world. Last week, she covered our Yahoo! "Plan B" initiative. Here is the article.

Activist Shareowner at Yahoo! launches cutting-edge campaign using New Web Tools

One shareowner activist is using blogs, YouTube, and wikis to launch a cutting edge campaign to pressure Yahoo! to make changes that he believes will improve the company's slumping performance.

Eric Jackson, the CEO of a consulting firm and the creator of Breakout Performance, a blog that offers analysis of developments at Yahoo!, has his sites set on rallying enough Yahoo! investors via the Internet to pressure the company to adopt changes. Ultimately, the investor, who owns less than 1000 shares in Yahoo! himself, hopes to organize a huge bloc representing 10% of Yahoo! stock. "The company has 250 million registered users. If 10% of those purchased 50 shares and joined our group, we would easily hit our goal. There's nothing magical about 10%. However, it's large enough to give us a strong voice among shareholders," says Jackson on his website. So far, he reports that a collective ownership stake representing $2MM has signed on to support Plan B - a long way from his $3.9B target, based on Yahoo's $39B market cap. In the next phase, Jackson plans to enlist institutional investors. He says he has spoken to Barclays, Vanguard, T. Rowe Price, Legg Mason, and others with large ownership stakes in Yahoo! and they have promised to discuss the plan and respond. "I really want to get the collective wisdom of all investors to form the best plan to take to Yahoo!'s board and management," he says. In addition, Jackson acknowledges that rallying a block representing 10% of Yahoo! stock by contacting just individual investors would be a tough task.

Jackson has suggested changes in a Plan B that he presents in the form of a wiki, a platform that lets many users collaborate on an issue. The initial form of the plan included replacing CEO Terry Semel with CFO Susan Decker and consolidating overlapping divisions. Other components of the plan, which is still evolving under the wiki, include the following:

  • Restructuring the board immediately with more active outside directors who own stock they have purchased;
  • Introducing 10-year term limits for directors;
  • Setting up a special committee of the board to study and then articulate the company's vision/strategy and start executing it;
  • Stepping up the pace of the $3B stock repurchase plan announced in October 2006;
  • Beginning a modest cash divident immediately and;
  • Removing anti-takeover provisions that are not shareholder friendly.

"Once we finalize our Plan B, we will take it to Yahoo!'s board and management and suggest that they adopt the plan immediately; if they don't, we will use our ownership take in the company to effect change to Yahoo!'s board composition," Jackson declares on his blog.

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Friday, January 26, 2007

Web Warriors Taking on Yahoo!

Using media like wikis, blogs, and video, small investors join hedge funds in waging war on executives.
February 5, 2007 Print Issue
By Ken Schachter
On Sunday morning, January 7, management consultant Eric Jackson put on a dress shirt, sat in front of his webcam, and, after his third take, issued a call to arms to other Yahoo shareholders. That web-based campaign is believed to be the first of its kind by a lone investor, taking a quantum step beyond online message boards where investors congregate. Mr. Jackson wants Yahoo to make big changes, including ousting CEO Terry Semel.

Should his campaign gain traction, the implications could potentially be staggering. Connected by the web, small shareholders—until now the sheep of the investment community—could gain a voice loud enough to rattle the investing world.

In his video, Mr. Jackson says he is seeking to amass shareholders whose cumulative stake would total about 10 percent of Yahoo stock and, armed with that kind of clout, deliver to management his reform proposal called “Yahoo Plan B.” Plan B, posted at Mr. Jackson’s blog, http://breakoutperformance.blogspot.com , is currently under “wikiization” as he modifies it in response to shareholders’ suggestions.
In its early form, at least, Plan B’s goals are far from modest: institute a cash dividend, repeal anti-takeover measures, and replace current CEO Mr. Semel with CFO Susan Decker. Already, in December, Yahoo shuffled its executives and reorganized operations in response to investor concerns and an internal memo about excessive bureaucracy dubbed the “peanut butter manifesto.” But that’s not enough for Mr. Jackson.

The Naples, Florida, resident acknowledges that gaining control of 1.4 million shares worth about $4 billion won’t be easy, but he hopes that as Plan B gets fleshed out, institutional holders will get onboard as well.

“We’re shooting high, for sure,” says Mr. Jackson. “Ten percent would make us the largest investor in Yahoo.” Only five days after posting his talking-head video on YouTube, he says, Plan B had received informal commitments from holders of almost 2 million shares.

Until now, activist investors—typically hedge funds and institutions like the California Public Employees’ Retirement System (CalPERS), and rarely individual investors—have used more conventional weapons to battle management: costly proxy fights, media coverage, and U.S. Securities and Exchange Commission filings. By contrast, Mr. Jackson is relying on social media sites and blogs to amass a shareholder army. In his blog, Mr. Jackson calls on Yahoo shareholders to spread the word on the web, vote on and modify the elements of Plan B, and, in a bit of whimsy, contribute to a new Flickr group, making mash-up photos of the next ideal Yahoo CEO.

Yahoo executives are already feeling the heat from Mr. Jackson and others. Without commenting directly on Plan B, a company spokesperson cites the acquisitions of Bix.com and MyBloglog, and partnerships with eBay, Vodafone, and a newspaper consortium as evidence that the company under Mr. Semel has a “clear strategy.”
Hedge Activists
Mr. Jackson is hoping his web-based strategy will deliver the kind of results hedge funds have gotten used to. In particular, certain hedge funds have become particularly adept at using so-called “13D” letters filed with the SEC as a way to confront executives. The letters are required to report a 5 percent or greater interest in a company, but hedge fund managers discovered that they could attach letters to the filings, providing a soapbox to harshly critique management.

For instance, in a 2003 letter to Misonix CEO Michael McManus Jr., hedge fund manager Robert Chapman Jr., a 13D pioneer, said his company had accumulated 6.4 percent of the ultrasonic medical device maker by “mopping up the relentless vomiting of shares” by other stockholders.

“As is plain to see, MSON’s 50 percent degradation under Mike ‘Mc-Minus’ McManus greatly underperformed both the Nasdaq Industrial Index (down only 10 percent) and the less-than-all-star S&P 500 Healthcare Equipment Index (up over 30 percent) during your resume-wrecking tenure,” Mr. Chapman wrote in the letter.

In a letter dated July 7, 2006, to John C. Lewis, chairman of Vitesse Semiconductor—which has been enmeshed in a stock options scandal— Mr. Chapman wrote: “One wonders how you possibly can be trusted to wean Vitesse executives away from sucking on its own stock options areola.”

He went on to say: “In conclusion, Chapman Capital, on behalf of what it believes is a majority of Vitesse’s owners, demands that the Company’s Agents consummate an auction of Vitesse Corporation immediately following its financial restatements. As for you, Mr. Lewis, to quote you personally, ‘You live by the sword and you die by the sword.’ We suggest that, figuratively speaking, you draw yours and fall upon it before Vitesse’s owners are forced to do so themselves.”

Despite such needling, Mr. Chapman bristles at the notion that he is bullying executives. He cites less confrontational investors like Warren Buffett who also use activist tactics, such as when Mr. Buffett forced the sale of scandal-ridden Salomon Brothers to Citigroup.

The prose of 13D letters may be irreverent and sometimes border on the profane, but Ken Squire, founder of 13D Monitor, which tracks activist filings, says increasing numbers of institutions are adopting 13D tactics for one simple reason: because it works. “It’s an investment strategy that’s currently very successful,” he says. “When you have a successful investment strategy, more people attempt to do it.”

Mr. Squire says that since 13D Monitor started in April 2006, his company has tracked about 200 13D filings. The average return on the stocks within 13D Monitor’s universe from the closing price of the day the initial 13D was filed was 24.5 percent, he says, more than double the 11.1 percent return from the S&P 500 for the same period. “These guys know how to enhance shareholder value,” he says.

Nell Minow, co-founder of The Corporate Library, a research firm tracking corporate governance, says shareholder activism provides a reality check on the prices of securities. “Overall, it’s a great phenomenon,” says Ms. Minow. “Anything that makes the market more efficient is peachy with me.”

While Mr. Jackson may be relying on a huge herd to affect change at Yahoo, even Mr. Chapman realizes that he can’t make a big impact alone. He’s currently hoping to hire a team of professional rabble-rousers to help in his crusade against top brass.

In a recent posting on Internet bulletin board Craigslist.org, Mr. Chapman’s firm listed a range of jobs, including a few that require special talents. Take hedge fund private investigator: “Conduct both clandestine and covert intelligence operations to track movements of public company executives (e.g., Enron types) to gain deep intel of how their behavior and actions may be affecting the company’s Wall Street performance.”

In job postings at Navyseals.com, Mr. Chapman stressed his company’s military culture: “Chapman Capital L.L.C., considered by Wall Street to be the elite force of aggressive combatants in the battle for corporate control, is building its team of former military leaders for its L.A.-based investment research and trading team. Candidates must have verifiable expertise in the fields of reconnaissance or intelligence gathering. Chapman Capital is the Navy Seals of Wall Street.”

For his part, Mr. Jackson says he has long been a fan of activist investors such as mutual fund manager Michael Price. His inspiration to use online tools, however, came from a politician: Ned Lamont, whose online vlog helped propel his run for the U.S. Senate in Connecticut. Mr. Lamont upset Joe Lieberman in the Democratic primary, but lost to the incumbent in the general election in November.

Professor Jonathan Ezor, director of the Institute for Business, Law & Technology at the Touro Law Center in Central Islip, New York, says that if Mr. Jackson succeeds in bringing together enough shareholders, he could be required to file as a major shareholder by the SEC. “At some point, if you’ve got a large enough group of shareholders acting in concert, there are formal requirements,” he says.

Mr. Jackson acknowledges that he is in uncharted territory. “It will be interesting to see if we qualify as an institutional holder or a loose confederation of shareholders of like mind,” he says. In any case, he’s ready to tackle the future.

“In the right circumstances,” Mr. Jackson says, “a small shareholder can have a big impact.”

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Tuesday, January 23, 2007

Yahoo!'s Quarter to Forget

From today's Forbes by Rachel Rosmarin:

Burlingame, Calif. -

Beleaguered Yahoo! investors are desperately looking for a sign that the once-dominant Internet company is on the mend. But they're unlikely to get what they're looking for Tuesday afternoon, when the company releases its fourth-quarter results.

Instead, expect to hear many variations on this theme: "Trust us--things are going to get better."

That's because Yahoo!'s (nasdaq: YHOO - news - people ) Chief Executive Terry Semel's best-case scenario--that an improved ad sales and distribution platform, meant to help the company catch up to Google (nasdaq: GOOG - news - people ), actually works as intended--won't start to kick in until this summer.

In the meantime, Yahoo! has already prepared Wall Street for its current, grim reality. While Internet advertising continues to boom--online ad spending in the U.S. alone grew 26% in December--analysts expect the company to record about $1.22 billion in revenue, down 23% from the same period a year ago.

The company is expected to post earnings of 13 cents per share. Assuming Yahoo! hits these meager expectations, the best thing it will be able to say about its fourth quarter is that it was better than the third quarter, when the company surprised investors with underwhelming results.

This could-be-worse approach has had some benefits for the company: Its shares, down 20% over the past year, are actually up 11% since bottoming out at $24.60 last fall. Now Semel needs to impress investors listening keenly for hints about the coming year--particularly Yahoo!’s new Panama platform.

Google, at one time a Yahoo! acquisition candidate, now gets double the revenue from each search query on its engine. Panama is supposed to narrow that gap. But thus far, Yahoo! has been loath to divulge any numbers about its long-delayed technology, which it had rolled out to about 30% of advertisers by the end of the year, according to CIBC World Markets analyst Paul Keung.

A rough proxy for Panama's progress will come from the company’s earnings and revenue guidance for 2007. Analysts expect 2007 earnings before interest, taxes, depreciation and amortization of about $2.2 billion on and revenue of $5.47 billion.

Also a subject of much curiosity: The progress Yahoo! has made in its management reorganization, announced in December. It has yet to hire a new chief financial officer to replace Sue Decker, who has moved up the organization's chart and is now Semel's chief lieutenant; it also has an opening for what should be a crucial job running its new audience group.

In the absence of positive news, criticism of the company is only going to get louder. This month, for instance, investor Eric Jackson launched a blog campaign demanding other changes, such as immediately giving Semel's job to Sue Decker.

A week later, Wired published a sharply critical article casting blame on Semel for failing to acquire Google in 2002, along with other missteps. Bloggers chimed in with nods of agreement. Yahoo! made an unusual public response to the piece, arguing that the company is in a better position than ever due to Panama and the reorganization. Yahoo! acknowledged that it would "continue to take bruises publicly," until Panama's full rollout.

But Yahoo! won't be able to block many more punches thrown by its critics until it begins to offer more substantial evidence of Panama’s success. Yahoo! should choose to increase transparency--soon--about the real potential of the ad platform, or risk further alienating investors.

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Sunday, January 21, 2007

Home Depot Directors to Visit Activist Investors

Several Home Depot Inc. board members are expected by midweek to visit with activist investor Ralph V. Whitworth, who has threatened to launch a proxy fight for a board seat if the company doesn't reassess its business strategy.
Mr. Whitworth, a principal of San Diego-based investment fund Relational Investors LLC, was a leading critic of former Chief Executive Robert Nardelli's performance. And the activist investor maintains that some big changes are needed to boost the company's stagnant stock price now that Mr. Nardelli is gone.
Even though Home Depot is extending the olive branch to Mr. Whitworth, future spats are likely. Mr. Whitworth, 51 years old, has said he wants Home Depot to spin off its lower-margin supply business and focus on its stores, while newly appointed CEO Frank Blake remains committed to continuing Mr. Nardelli's diversification strategy that Mr. Blake himself helped craft and implement.
Home Depot has spent $7 billion acquiring wholesale-supply businesses in the last several years. "They should sell them and get what they can for them, because they make no sense," Mr. Whitworth told The Wall Street Journal in December, after his efforts to raise a fuss at Home Depot became public. Mr. Whitworth, whose fund owns a 1.3% stake in the retailer, had alerted Home Depot that the fund planned to introduce a resolution at Home Depot's May shareholder meeting asking the board to establish a committee of independent board members to review the company's strategic direction, management performance and to explore possible alternatives, including a sale of the company.
Citing a recent visit to a San Diego Home Depot, where he couldn't find a salesperson to help him, Mr. Whitworth said in December that the company's flagging customer service was one reason competitor Lowe's Corp. was "taking them to the cleaners" and that the company shouldn't be pursuing acquisitions until it adequately invests in its stores.
Home Depot has been courting Mr. Whitworth ever since Mr. Nardelli abruptly resigned Jan. 2, after declining to curb his pay package significantly. The board members are meeting with Mr. Whitworth to signal that the board is anxious to hear Mr. Whitworth's ideas for improving the company, according to someone close to the board.
Whether the visit will succeed in quieting down Mr. Whitworth, who has a long track record of shaking up underperforming companies, is unclear. "Nardelli was a peace offering by the board, but they are not going to have peace" with Mr. Whitworth, predicts Randy Lampert, one of the two heads of the recently formed shareholder-activist group at investment bank Morgan Joseph & Co. The group advises firms that have been targeted by activist shareholders. Home Depot isn't a client.
What's more, Mr. Whitworth has already made up his mind to seek at least one seat on the Home Depot board regardless of what he hears from board members, according to a person familiar with the situation.
The Whitworth visit is the latest chapter in a charm offensive that began after the 57-year-old Mr. Blake suddenly was placed in command of the second-biggest retailer in the U.S. Mr. Blake has already talked to Wall Street analysts and impressed them with his down-to-earth manner, a big change from the imperious Mr. Nardelli.
Mr. Blake also stressed to analysts his interest in improving the store experience, hiring executives with the retail experience he lacks and restoring the company's entrepreneurial and fun culture.
While Mr. Blake is promising a new day at Home Depot, the board in numerous ways has strongly telegraphed that it is still committed to its previous strategic path. For starters, it selected as CEO Mr. Blake, who has no previous retail experience and was the chief architect of the wholesale-building-supply division. Mr. Blake recently told investors he is adamant about pursuing growth in that segment.
Meanwhile, on the same day it announced Mr. Nardelli's resignation, Home Depot said it was waiving mandatory retirement for a year for three directors who otherwise would have to step down because they are past 72 years old. The company said in a statement that it wanted the directors to provide continuity during this time of change, but others see it as a move to block
Mr. Whitworth's attempt to run for any seats.
Write to Ann Zimmerman at ann.zimmerman@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

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Saturday, January 20, 2007

From Plurality to Majority

On Tuesday, Yahoo!'s Nominating and Governance Committee met and changed its corporate bylaws to require a "majority" of votes be cast for all its directors at future Annual Meetings of Shareholders. If 50% + 1 shares are not voted in favor of a nominated director, that person will not return to Yahoo!'s board. The change was noted in a filing with the SEC yesterday and reported in MarketWatch.
The "majority" vote criterion is a change from a "plurality" vote criterion, which meant that only 1 vote needed to be cast in favor of a director for him to be returned to Yahoo!'s board.
The changes require all directors to provide an "irrevocable" letter of resignation to the Board prior to the elections and they will be accepted if they do not receive a majority of votes from shareholders.
This change only stands for "uncontested" elections. Plurality voting is still in effect otherwise.
Overall, this is a good move for Yahoo!, its corporate governance standards and its shareholders. If shareholders do not wish certain directors should return, they can simply withhold their vote.
In the current version of "Plan B" -- available here -- our community is recommending changes at the board-level and therefore suggest that Yahoo! shareholders withhold votes for Terry Semel, its Compensation Committee including Arthur Kern, Ron Burkle, and Roy Bostock, and Eric Hippeau at the next Annual Meeting of Shareholders.

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Friday, January 19, 2007

Global Proxy Watch: Will Yahoo! be Blogsmacked?

Stephen Davis, the editor of Global Proxy Watch -- the 11-year old bible for institutional investors with an interest in activism -- gave "Plan B" some coverage this week. Here's an excerpt:

Breakout Performance, a blog operated by Florida investor Eric Jackson, last week began stirring a netroots shareowner rebellion at Yahoo. "Activist investing has principally been the domain of hedge funds -- well, no longer," writes Jackson. Steamed at Yahoo's laggeing performance, he is using "blogging, vlogging, LinkedIn Answers, Flickr mash-up photos, wikis, and polling to force change." That's hardly your mother's money management. Jackson is proposing a "Plan B" -- in a wiki with reader input -- to restore Yahoo to growth. But he needs institutional fund support to gain clout.

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Thursday, January 18, 2007

How Yahoo! Blew it

Of course, what everyone is discussing is that Yahoo! passed on the opportunity in 2002 to buy Google for $5B when their stock price was near its all-time low of $7. It was relatively soon after Terry Semel's hiring and would have required him to do a "merger of equals."
What I find more interesting is how this account differs from Terry's own account made to Ken Auletta and a soft-ball NY banking/media crowd from this past May where he claims Google wanted $3B and he offered $1B:

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Tuesday, January 16, 2007

Video Update on "Plan B" Progress

Shareholder activism can make and is making a difference. Here's an update on how our "Plan B" community has progressed in our first week. This is a movement by Yahoo! shareholders for Yahoo! shareholders. There's tremendous value here. We just need to keep pushing hard to unlock it.

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Monday, January 15, 2007

Latest Version of Yahoo! "Plan B" Available on Wiki

On the newly created Yahoo! "Plan B" wiki available at http://yahoo.wikia.com, I've updated and modified our "Plan B" to encapsulate many of the comments received thus far. I'm printing the current version below. Of course, if you are a Yahoo! shareholder and interested in editing/adding to the plan, and getting involved with our community, you are welcome to go to the wiki and contribute to the plan. Looking forward to more of your comments.

Yahoo! is one of the greatest companies in the world. Our group of Yahoo! shareholders believes strongly that the company could create more value for all shareholders if it took quick and decisive steps to unlock that value. The following points represent, after input/suggestions/comments from all members in our syndicate, our proposed "Plan B" for Yahoo! Until this plan is formally presented to Yahoo! management and its board of directors, we continue to welcome additional comments/thoughts from all Yahoo! shareholders.

Yahoo! Requires New Leadership at the Top.

Terry Semel has overseen Yahoo! for almost 6 years. The company went through a significant contraction in valuation during the early part of his tenure, hitting an all-time low of $7. In the period of 2003 - 2004, Yahoo!'s valuation improved in conjunction with the general recovery of all Internet stocks. In the last 2.5 years, as the the valuations of other stocks in the sector (most notably Google) have continued to rise meteorically, Yahoo's stock has stubbornly remained in neutral and then fallen back over 30% in the last year. At the same time, Mr. Semel is about to turn 64. While we are not agists, we point our simply that the timing is right for new blood in the CEO's office with a new energy and strategy to take this company forward. We would like the Yahoo! board to immediately announce a firm date within the next 12 months when Terry Semel will leave the company entirely (including the board) and begin a search process to find a new CEO. This CEO search should examine all qualified internal and external candidates. We will also be watching closely to ensure that Yahoo!'s Compensation Committee has not already approved a Nardelli-like exit package for Mr. Semel. As we mention below, Mr. Semel has already been extremely well-compensated for his time and effort at Yahoo! in the past 5+ years.

Pay-for-Performance for all Yahoo! Management.

At the same time as the new CEO is hired, the Yahoo! board should introduce a "pay-for-performance" plan for all Yahoo! management. Bonuses should be tied to preset goals for increases in revenues, cash flow, and EPS.

Restructure the Board Immediately with more Active Outside Directors who own Stock.

We believe some significant changes are needed in the structure of the board. The decline of the company's valuation in the past 2 years is not solely Terry Semel's fault. Some accountability also lies at the feet of the board. Therefore, we wish to see some changes in the make-up of the board. These changes should include replacing all current members of the Yahoo! Compensation Committee (Chaired by Arthur Kern and including Ron Burkle and Roy Bostock). In our opinion, the CEO's compensation has been excessive in the past 5+ years. Terry Semel is consitently ranked as the highest-paid CEO in the software industry and in the San Francisco Bay area. Stock options have been the primary way to reward the CEO. We note that Mr. Burkle is also a Director of KB Home, which is another board which has had a track record for approving outsized CEO compensation plans (for former CEO Bruce Karatz). Semel has received almost $250MM in compensation in the first four years since coming to Yahoo! and, as of the last proxy circular last year, holds stock granted to him or through options worth another $500MM. Even by Bob Nardelli standards, this is excessive. Last June, Yahoo!'s compensation committee set Mr. Semel's annual salary to $1 for the next 3 years. However, they included an annual grant of 1MM shares (which would amount to approximately $30MM at today's stock price) with further options that can be exercised above $31. A guaranteed $30MM a year is not the same as being paid $1. We wish to see each of the Compensation Committee members leave the board immediately. At the same time, we also support imposing 10 year term limits on all outside Yahoo! directors. At the moment, 2 of 8 outside directors have served on the board over 10 years (Messrs. Kern and Hippeau). Although they have obviously been with the company for a long time, we feel they lack the objectivity from past board decisions to make the best decisions now for Yahoo! We would additionally prefer a Non-executive Chair (or what Yahoo! calls a "Presiding Director") who is not currently a CEO. Robert Kotick leads Activision -- a demanding enough job. We prefer to see a "Presiding Director" not encumbered by active CEO duties. Finally, current directors receive their primary compensation from stock options and grants. We believe that there is a fundamental difference between the mindset of an individual who has bought stock from somone who is given stock. The latter is treated as "found money." All future outside directors need to meet requirements to purchase stock in the company themselves before coming on to the board (although allowances will have to be made for each person's net worth, as a Stanford professor's net worth will be different from a successfully retired executive - even though both might make strong directors).

Set up a Special Committee of the Board to Study "Strategic Alternatives" (Including Better Leveraging Its Strength in Non-Search Media) and Start Executing this New Vision.

To date, Yahoo! management has done a poor job of articulating to shareholders and Wall Street what is its long-term strategy and vision. We aren't the first to identify this. It was another critique surfaced in the internally-generated 'Peanut Butter Manifesto'. We believe that company has several significant strengths that it can better capitalize on and explain to shareholders and to the Street. For example, its lead in Non-Search Media (including Fantasy Sports, Launch, del.icio.us, Flickr, Web/media interactive shows), non-text ads, and its development in non-traditional search (e.g., Mobile Search). However, these strenghts are typically recounted in a laundry list fashion by the current CEO to the market, rather than explained as part of an over-arching strategy. We believe that Yahoo! can significantly increase shareholder value through a "go it alone" strategy and applaud it for some of the media innovation they have displayed with shows like "The Nine" and their recent "Talent Show." Yet, there needs to be some cohesion. We support, as Relational Investors proposed to Home Depot's board recently prior to it removing Bob Nardelli, that the board establish a Special Committee to study "strategic alternatives," consult with Yahoo! management and the new CEO, the company's strategy to better articulate and then execute it.

Step up the Pace of the $3B Stock Repurchase Plan Announced in October 2006.

In October 2006, in conjunction with its disappointing Q3 earnings, Yahoo! announced that its board had authorized a $3B stock repurchase over the next 5 years. YHOO's stock bottomed out this same day at just under $23. The stock is up over 6% in the first week since we announced our "Plan B" for shareholder value creation. We believe that there is considerable upside in the company's valuation. Therefore, we strongly wish to see evidence that the board is commencing the share repurchase now, rather than when the stock increases in value substantially months down the road.

Begin a Modest Cash Dividend Immediately.

Dividends are typically utilized to create additional shareholder value in older companies that have slow- or no-growth, but are generating tremendous cash. The best use of this cash is to return it to shareholders, rather than redeploying it for internal uses. High-growth companies typically pay no dividend, in favor of spending all cash on internal growth purposes (e.g., R&D). However, examples of tech companies growing and paying a dividend include National Semi, TI, and HP. Yahoo! is certainly a fast-growing company in a dynamic market with strong competitors. It needs to use its $3B cash position wisely to effectively compete and succeed for all shareholders. In our opinion, Yahoo! has been judicious in how it has used its cash for general corporate purposes (e.g., new building expansion) and M&A (although we believe it has been too judicious in passing up on earlier opportunities to buy Google for $1B and YouTube). R&D investment is another important area and, in recent years, Yahoo! shareholders have not seen a strong return on this investment vis-a-vis Yahoo!'s competitors. Yahoo!'s technical leadership needs to be accountable for this (hence a later suggestion), although we are strong believers in the many talented engineers working for the company. In our opinion, Yahoo! should introduce an immediate annual dividend of 5 cents a share, which would only amount to $40MM a year (therfore, no inhibiting the company's ability to compete effectively). 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.

Reduce Overlapping Internal Divisions.

The Peanut Butter Manifesto was one of the first examples of an internal recognition that more efficiencies could be created within Yahoo! from streamlining the various groups. The del.icio.us group (coming from an external acquisition) is still a distinct group from the home-grown MyWeb. Flickr is still a distinct group from the original Yahoo! MyPhotos group. Although an argument could be made my management (which we have yet to hear) that these kinds of groups should always be separate from an external perspective because they increase page views and therefore ad revenue, no justification can be made from keeping them as separate internal groups. This must be corrected immediately to improve the profitability of the organization. It would also help to clarify who, within Yahoo!, has distinct ownership and accountability for key deliverables.

Remove Anti-Takeover Provisions which are not Shareholder-Friendly.

In the most recent Yahoo! 10-Q filing with the SEC, the final Risk Factor facing the company cited is: Anti-takeover provisions could make it more difficult for a third party to acquire us. The filing goes on to detail how the board of directors can thwart a takeover of the company by diluting shareholders, if necessary. We believe these anti-takeover provisions are not shareholder-friendly. Although we believe in the long-term future of Yahoo! as an independent entity -- one that can serve as a role model for the next kind of global media company -- we strongly oppose these anti-takeover provisions if they inhibit the valuation of the company, as we believe they do. We feel they do not serve shareholders' interests, but management's. They should be swept aside immediately.

Make Changes to the Technical Leadership.

"Plan B" is about accountability to Yahoo! shareholders. The last two years have not delivered the appropriate value to shareholders compared to Yahoo!'s competitors. Partly, this is due slowness to respond in the technical area of the business. While we continue to think that the company has some of the most talented engineers in the tech world, we believe that Farzad Nazem should be replaced as the head of the Technology Group. The December 5th most recent Yahoo! reorganization kept the Technology Group as it was, with Nazem still in place as its head. We believe the organization would be better suited with a new leader. We also wish to see both co-founders and Chief Yahoo!s -- Jerry Yang and David Filo -- more actively leading this critical group in the organization. [Others in the "Plan B" community: please expand upon the next three suggestions: Other suggested value-creating actions for the technical group to study include: opening up the YPN from beta, eliminating the minimum bid within Panama, and email profit development (i.e., customized CPC ads within Yahoo! mail)].

Next Steps:

"Plan B" will continue to be modified by members of the "Plan B" Community through this wiki in the coming days.

Once finalized, we intend to communicate it to Yahoo!'s management and board for action. In the meantime, we will continue to build up our community and shareholdings.
It is the group's aim to amass a stake of 10% in the company, so that our concerns will be voiced as the largest group of shareholders in the company. Relational Investors was able to recently effect change at Home Depot with only a 1.6% stake in the company.

We will also be in touch with Yahoo!'s largest shareholders, as our plan is intent on increasing value for all shareholders. At present, the 10 largest Yahoo! shareholders include: Legg Mason, Axa, Capital Research, Janus, Barclays Global, Fidelity, T. Rowe Price, State Street, Vanguard, and Goldman Sachs.

Thank you for being part of this "Plan B" group, intent on using the power of the web and our collective wisdom through this wiki, to help one of the greatest companies in the world.

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Saturday, January 13, 2007

The Unofficial Yahoo! "Plan B" Wiki

It has been less than a week since I sat down in front of a webcam in my guest room to record a video asking other Yahoo! shareholders to join me in articulating a "Plan B" which would help the company unlock more value faster than it is currently.

I put forward a draft "Plan B" at the time, which I asked be treated as a "straw man." Since then, you've responded in droves, not only with suggested edits and/or support for "Plan B," but pledging shares at an unprecedented pace.

Today, our unofficial Yahoo! "Plan B" group owns about 70,000 shares of Yahoo!'s stock -- worth approximately $2MM. That's still a long way from our goal of owning 10% of the company -- we need to go from 70K to 133MM, so we have some work -- but it's an amazing start. What's also interesting is that Yahoo!'s stock is up 6.16% since our advocacy began (compared to 3.66% for Google and 2.81% for the NASDAQ over the same time period).

We seem to have caught the interest of the media too. In the past week, we've received inquiries from TheStreet.com (a special thanks is due to Vishesh Kumar for his detailed profile before anyone else broke the story), the NY Times' DealBook, Dow Jones, and Red Herring. We've also received coverage and support from Henry Blodget and Mathew Ingram. One aspect of our "Plan B" is always asked about: the wiki. Are you going to really have a wiki? When? How will that work?

At the start of the week, we put the plan on the blog. We got and I'm sure will continue to receive great comments/suggestions. As it was difficult to keep track of them, I created a Vizu poll (actually 2 polls) where our community could vote on the different suggestions. (See the current voting here.)

Yesterday, Riva Richmond of Dow Jones asked again about the wiki: would we eventually put the plan up in a wiki? Coincidentally, this morning, I was contacted by Angela Beesley, a co-founder and VP of Community at Wikia.com. With a little help from her, I'm pleased to announce the unofficial Yahoo! "Plan B" Wiki at http://yahoo.wikia.com .

Please check it out and contribute. The plan is obviously very rough in its current form. The plan is for all of us to take part in creating it in the coming weeks (as we continue to build up our shareholder base towards our 10% goal) and then take our "Plan B" to Yahoo!'s management and board.

We are not a protest group, nor are we interested in a quick-flip of Yahoo! shares. We are long-term investors in the company. We are here because we believe Yahoo! is a great investment opportunity with unlocked potential. Rather than sell our shares, we would rather work together on proposing how to unlock that potential -- for the benefit of all shareholders. There are some wonderful and enormously talented employees and directors at Yahoo! We support them and the company. We are working to make your company even better. Many current and former Yahoo! employees have already anonymously pledged their share support. We won't let you down and look to continue to benefit from your unique perspectives.

Thanks. This is a very exciting initiative that's never been tried before in business. I can't wait to see how it ends! It can only benefit Yahoo!'s shareholders.

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Friday, January 12, 2007

The WSJ's Coverage of "Plan B"

From this afternoon's WSJ/Dow Jones article:

Investor Launches Online Campaign To Sway Yahoo

January 12, 2007 4:26 p.m.
By Riva Richmond

NEW YORK (Dow Jones)--Eric Jackson is trying to foment a Yahoo Inc. (YHOO) shareholder insurrection using the democratizing tools of the social Web.

Armed with a blog, an online-voting service and plans for a wiki, Jackson, an individual investor in Yahoo with less than 1,000 shares, is trying to create a voting block of fellow shareholders with enough collective weight to force leadership and strategy changes at the Internet giant.

On his Breakout Performance blog Sunday, Jackson, who is the chief executive of a Naples, Fla., consulting firm, called on investors and Yahoo users to buy shares - even as few as 10 - and pledge them to the effort. As of Friday morning, investors had pledged about 60,000 shares worth about $1.8 million.

Jackson also asked them to help refine his proposed "Plan B" for the company with which the group will lobby the board, which among other things demands the firing of Chief Executive Terry Semel and the immediate appointment of Chief Financial Officer Susan Decker to the top post.

The effort is inspired by rising investor activism that recently helped lead to the ouster of Home Depot Inc.'s (HD) Bob Nardelli and by growing online political activism that has empowered candidates like Howard Dean.

"Activist Investing has principally been the domain of hedge funds - well, no longer," Jackson wrote Sunday. "Let's take back control of one of the greatest Internet companies in the world and see the stock price finally start moving up."

Yahoo's stock price, now at $29.45 a share, is down 19% in the last 12 months. Meanwhile, shares of rival Google Inc. (GOOG) are up 159% for the period.

The Sunnyvale, Calif., company said in an emailed statement that it is "always interested in the views of our shareholders, as well as employees and others with a stake in Yahoo." It argued that its current strategy and recently announced reorganization, which gave Decker responsibility for a key operational unit, will help it "focus more intensively on our customers' needs and better leverage our core strengths" to the company and shareholders' benefit.

And in defense of its top executive, Yahoo said that: "Under Terry Semel's leadership over the past five years, Yahoo! has achieved tremendous growth, consistent profitability and impressive returns for shareholders, our stock price rising four fold."

Shareholders like Jackson, frustrated by the stock's more recent poor performance, have argued that Yahoo's reorganization is not enough and that more radical changes are needed.

Jackson is gathering proposed improvements to his Plan B through comments on his blog, though he said he hopes to launch a wiki to allow more direct collaboration on the document. He is also using online-voting site Vizu to gauge group support for various proposed "Plan B" actions.

Among 45 voters so far, 36% are in favor of firing Semel, 49% want stepped up share buybacks, 60% favor a pay-for-performance plan for managers, and 62% want a reduction in overlapping Yahoo products.

Jackson has set an ambitious target to gather a group with a collective 10% ownership stake, a goal he argues is more possible today than ever before because of blogging, which has put global publishing and instant interaction with like-minded people into the hands of anyone with an Internet connection.

With $1.8 million in stock pledged so far, he is still a long way from a $3.9 billion target, based on Yahoo's $39 billion market capitalization.

"It's clear we're going to need the help of the institutions" to reach that goal, Jackson said in an interview. And reaching out to them is "definitely something in the cards." But for now, he's focused on attracting individual investors and crafting a strong Plan B people can get behind.

The largest investor involved in the effort so far holds 18,000 shares, while most hold 800 to 2,000, Jackson said. About 60% have pledged anonymously, but Jackson says a fair number of current and former Yahoo employees are in the mix. On the comments section of the blog, an anonymous investor claiming to own tens of thousands of shares said he or she would monitor the campaign closely and join depending on its progress and the substance of Plan B.

"This has a 'grassroots' feel to it. I suppose this is what happened when the blogging community rallied around Ned Lamont in Connecticut," Jackson wrote on the blog, referring to the Senate candidate who beat Sen. Joe Lieberman in the Democratic primary last year. "We're really trying to harness the power of social groups in the business world for the benefit of Yahoo! shareholders."

-By Riva Richmond, Dow Jones Newswires; 201-938-5670; riva.richmond@dowjones.com

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More Press on "Plan B"

Here's some great press from yesterday. As of this morning, our committed investors in Yahoo! have a collective ownership stake worth approximately $1.8MM -- and YHOO is up 5.27% since we began our activism at the start of the week.

From the NY Times' DealBook:

Tilting at Yahoo With a Web Site and Wiki
January 11, 2007, 3:13 pm

Eric Jackson is not happy that Yahoo has lost more than a third of its market value over the past year. But since he holds fewer than 1,000 shares of the Internet giant, he lacks the muscle of big-time activist shareholders such as Carl Icahn, Nelson Peltz or Ralph Whitworth, who have wrested concessions from the likes of ImClone Systems, Wendy’s International and Home Depot in recent months. Still, Mr. Jackson hopes to use the Internet to consolidate the anger of other small shareholders, attempting to become what TheStreet.com’s Vishesh Kumar describes as an “virtual activist investor.”

For Yahoo shareholders, a grim year

In a set of ideas for Yahoo that he collects under the title “Plan B,” he has demanded the immediate replacement of Yahoo Chief Terry Semel with Susan Decker, the chief financial officer and Mr. Semel’s heir apparent. He also wants the company to restructure again — but this time more radically, by consolidating overlapping divisions.

By creating a wiki, which allows users to create and edit material on the site, Mr. Jackson is opening up his own ideas to criticism and revision. Others have already said that others besides Ms. Decker should be considered as candidates for Mr. Semel’s job.

But as TheStreet.com’s Mr. Kumar points out, a group of shareholders is only as powerful as the investment they represent. Mr. Jackson says he wants his group to eventually represent 10 percent of Yahoo’s stock. That seems “outlandish,” by Mr. Kumar’s reckoning, but Mr. Jackson thinks he can swell his ranks by inducing Yahoo users to each buy, say, 50 shares and join the group.

That would mean 25 million users — “as daunting a task as they come,” Mr. Kumar write, “but the group could still become a force to be reckoned with even if it controlled far less than a 10 percent stake.”

As of Thursday, Mr. Jackson claimed on his blog to have garnered the support of Yahoo shareholders who collectively hold stock worth $1.7 million. Based on Yahoo’s market capitalization of about $39.8 billion, that is an equity stake of about 0.004 percent.


From Henry Blodget's Internet Outsider:

Grass-Roots Yahoo Shareholder Wants to Boot Terry

A small Yahoo shareholder, Eric Jackson, is trying to organize a grassroots web campaign to complete the baby-step shakeup Yahoo announced last month. The idea of organizing shareholders via the web is an excellent one (albeit quite challenging), and Jackson has already made some progress. The Street's Vishesh Kumar has a good piece about the effort.

Chief among Jackson's Yahoo proposals is to immediately promote Sue Decker to CEO. I agree wholeheartedly with this, because I think otherwise the company will be in suspended animation until the new CFO and Group Head are in place and Terry's successor is clear (a process that could take at least a year). This isn't an anti-Terry position; it's just a pro-Yahoo one. Until the shakeup has been completed and the company's management structure is clear, every valuable employee will have only one eye on the business. The other will be on the "send" button, ready to send out their resumes.


From Mathew Ingram's Blog:

A Web 2.0 revolt against Yahoo management

Posted by Mathew Ingram @ 4:09 pm on Thursday 11 January 2007

As Mark Twain once said, everyone complains about the weather but no one ever does anything about it. Well, lots of people complain about Yahoo too — about how it is big and bloated and unfocused and is losing ground to Google, not to mention the fact that its peanut butter is spread too thin — but is anyone doing anything about it? Eric Jackson is trying to.

Eric, a Yahoo shareholder and management consultant who writes a blog called Breakout Performance, is like Peter Finch’s character from the movie Network. He’s mad as hell and he’s not going to take it any more. So Mr. Jackson wrote a post called Yahoo Plan B, complete with a video clip of himself describing said plan, and sent it out to various places, including YouTube.

In a nutshell, Eric is trying to get a wave of shareholder support for change, in the same way that activist hedge funds and other prominent investors often do, except he’s starting with blogs and YouTube and wikis instead of a board seat and a couple of hundred million. He says:
Yahoo! is drifting; and its board and management have been too slow to act to this fundamental problem. As shareholders, we don’t have to sit by and watch this.

Activist Investing has principally been the domain of hedge funds — well, no longer. With the help of the web, blogs, and wikis, I’m asking all current and future retail investors in Yahoo! to join me in pushing for a change.

So far, Eric has gotten some favourable press at TheStreet, as well as from former trader David Neubert, and the Internet Outsider blog, written by former analyst and Bubble 1.0 cheerleader Henry Blodget.

Eric says he has received many emails of support, and now has shareholders with more than $1.7-million in Yahoo stock who are backing his campaign. Not exactly a hedge fund, but not a bad start. Good luck with the crusade, Eric.

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Thursday, January 11, 2007

How Can I Get More Engaged with "Plan B"?

The response to our Yahoo! "Plan B" since Monday has been phenomenal. As of this morning, we have a group with a collective stake in Yahoo! worth $1.7MM. Plus, I've received notes from several observers with holdings in Yahoo! in the tens of thousands, who are watching what we're doing with keen interest and may join up later, depending on our progress.

Several people, who have already thrown their support behind our efforts with shareholding commitments, have emailed me to ask how they can be more involved. This has a "grassroots" feel to it. I suppose this is what happened when the blogging community rallied around Ned Lamont in Connecticut. We're really trying to harness the power of social groups in the business world for the benefit of Yahoo! shareholders.

Here are some possible ways to get more engaged:

1. Spread the word to fellow YHOO shareholders

2. Spread the word to the media

3. Spread the word to institutional investors in YHOO

4. Contribute to a new Flickr group, making mash-up photos of the next ideal YHOO CEO or other ideal management team members or directors at www.flickr.com/groups/yahooplanb -- we can inject a little levity into a shareholder battle

5. Along the same lines as above, create a video montage about what we're doing and post on YouTube at http://www.youtube.com/breakoutperformance . If you were inspired by Stephen Colbert's "Green Screen Challenge" last Fall, here's your chance to do the same on a Yahoo! theme. Can't wait to see what you come up with. Hopefully, the creative entries we get for this and on Flickr will help attract the attention of the mainstream media, so these two are not just kitschy.

6. Comment on the blog about the Plan B

7. Vote for the aspects of Plan B you agree with

If there are other ideas you have, please let us know.

Thanks again.

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Positive Press for "Plan B"

We've already received some great press coverage for our Yahoo! "Plan B."

David Neubert was the first to jump on this and has been very supportive. (Thanks, David.) In the recent polls we've put up, we've tried to address several of his points.

Yahoo (YHOO): Individual Activist May Shake Up Yahoo

This entry was posted on 9 Jan 2007, 6:49 PM and is filed under My Portfolio Trades,Finance,YHOO.

Sorry Warren Buffet, I still love you but Eric Jackson is my new investor hero. This guy is leading a campaign of individual investors from his blog to push for a restructuring of Yahoo (YHOO ) for the benefit of shareholders. In his blog and embedded video posted on YouTube Mr. Jackson describes a ten point plan to increase returns for shareholders and remind Yahoo Management who they work for. He then asks shareholders to either buy shares or use their current holdings and commit to vote them with his proposals.

This is shareholder activism at its most democratic level.

Congratulations Mr. Jackson, you are my new investing hero. Now if only you had $37 billion to commit to philanthropy.

The seven point plan is very reasonable:Mr. Jackson even proposes creating the plan in a wiki . That may be a bit far-fetched as an idea but I support his radical idealism. You never know what kind of shareholder democracy, added value and profits to shareholders may ensue.

1. Appoint Susan Decker CEO immediately; implement pay-for-performance for all YHOO execs going forward.
2. Restructure the board immediately with more active outside directors who own stock; 10 year term limits for directors should also be introduced.
3. Set up a special committee of the board to study and then articulate the company's vision/strategy and start executing it.
4. Step up the pace of the $3B stock repurchase plan announced in October 2006.
5. Begin a cash dividend immediately.
6. Reduce overlapping internal divisions (e.g., del.icio.us/MyWeb, Flickr/MyPhotos.)
7. Remove anti-takeover provisions which are not shareholder-friendly.

My comments on his plan:
1. Why Susan Decker as CEO? I would want to know what he means by pay for performance. He should probably explain that. I hope it has earnings and cash flow targets instead of just share price.
2. Amen
3. More Board involvement is better.
4. Amen.
5. Dividends instill discipline on management. But a small dividend. This company still needs to invest cash in growth.
6. Why has this taken so long?
7. Always a good idea.

I plan to support the proposal with my shares. I agree with most points and I'm happy to support the little guy.

Disclosures and Confessions: I own Yahoo and plan to pledge my shares to the campaign. However, if the shares rise above $35 I'm likely to start selling. I'm short Jan 2008 35 strike calls against half my position of YHOO and am also short Jan 2008 30 strike puts. I like Yahoo!. I use their email and use MyYahoo as my homepage. I make extensive use of Yahoo Finance . I also like their newsreader in yahooMailBeta. I also own Mr. Buffet's company Berkshire Hathaway. (BRK.A )

Disclaimer: Nothing in this blog is meant to be specific financial advice or a recommendation to buy or sell. I do not give investment advice. Do your own research. Do not rely on anything in this weblog to make investment decisions. I do not log all my trades here. I only describe or mention those that I think might be interesting. Consult an investment professional familiar with your specific financial situation before buying or selling any security.

Then, yesterday, we received some nice coverage from James Altucher in TheStreet.com's Daily Blog Watch. And, then a big article from Vishesh Kumar of TheStreet.com in the afternoon. Here it is below.

Thanks to everyone for their support and great comments thus far.

Yahoo! Holder Building a Dissident Nation
By Vishesh Kumar
TheStreet.com Senior Writer
1/10/2007 2:26 PM EST

One Yahoo! (YHOO - news - Cramer's Take - Rating) shareholder is mad and doesn't want to take it anymore.

Frustrated with the Internet giant's loss of more than one-third of its value in 2006, Eric Jackson wants to use the tactics of activist hedge funds -- like the recent high-profile ousting of Home Depot (HD - news - Cramer's Take - Rating) CEO Robert Nardelli by Relational Investors -- to spark a change at Yahoo!

But while Relational shelled out $1 billion for a 1.2% stake in Home Depot, Jackson doesn't exactly have the same financial muscle: He owns fewer than a thousand shares.

So Jackson is setting about recruiting like-minded individual investors in Yahoo! in what he hopes will amount to a virtual activist investor with so much buying power that the company will be forced to listen. He plans to use blogs, video blogs and wikis as his main arsenal.

Jackson already authors Breakout Performance, a well-known blog that offers keen analysis of developments at Yahoo! as well as a way for him to communicate with other investors. On Sunday, he added a short video clip outlining his position for the changes he would like to see at Yahoo! -- what he calls the company's "Plan B" -- to his site.

Far from dissident ravings, however, the plan stresses points that many investors have already been mulling in the wake of Yahoo!'s dismal performance. It ranges from replacing CEO Terry Semel with up-and-coming executive Susan Decker (who is widely seen as Semel's eventual successor) to scaling back its convoluted and often overlapping divisions (as was argued by a Yahoo! senior vice president in the widely circulated "Peanut Butter Manifesto.")

Jackson is presenting his Plan B in the form of a wiki -- a platform that lets many users collaborate -- much like the Wikipedia online encyclopedia. The plan is already benefiting from user input. One user said that the scope of replacement CEO candidates should be expanded beyond Decker, while another suggested that Yahoo! spin off its holdings in Yahoo! Japan, for example. (Yahoo! didn't immediately respond to a request for comment.)

But this far-flung group of individual investors will have to put their money where their collective mouth is are for the plan to really take off. Pooling their Yahoo! holdings -- and the associated voting power -- will give teeth to their vision. In fact, Jackson's goal is to cobble together a breathtaking 10% of Yahoo! stock -- a stake larger than that held by any institutional investor.

Such a target seems outlandish at first, but it's not impossible, Jackson argues. Yahoo! has 250 million registered users, and if 10% of those purchased 50 shares each and joined his group of vigilantes, it would more than exceed the goal. Bringing together 25 million users is still as daunting a task as they come -- but the group could still become a force to be reckoned with even if it controlled far less than a 10% stake.

Jackson, who says he has so far received enthusiastic feedback and commitments of about $1 million in Yahoo! stock, is further emboldened by the frustration he sensed among fellow Yahoo! shareholders since he first became critical of the company's management last fall.

"When I started posting about Terry Semel last fall, I was surprised at how strongly these [posts] seemed to register with people -- former employees, industry watchers, and just general Yahoo! users. The frustration was palpable," Jackson wrote in an email. "The sense was: this company has so many great assets ...why can't they get it together?"

The frustration is especially acute among current and former Yahoo! employees, many of whom still have stock options tied up in the company and had a front row seat for missteps. One former employee wrote that he or she found it "terribly hard to sit by and watch the current regime at Yahoo! destroy everything I and so many others worked so hard to build," according to Jackson. That employee added that "I still keep in touch with many ex-Yahoos, many of whom are still shareholders, and am willing to coordinate with them as well."

At first glance, Jackson seems an unlikely head of an attempt to pioneer a brazen new way for individual investors to make a dent on the strategy of a major Fortune 500 corporation. Anything but an obscure conspiracy theorist, Jackson heads up a consulting firm that counts major corporations such as General Electric (GE - news - Cramer's Take - Rating), JPMorgan Chase (JPM - news - Cramer's Take - Rating), Kraft Foods (KFT - news - Cramer's Take - Rating) and American Express (AXP - news - Cramer's Take - Rating) among its clients.

But what motivates Jackson is a sense of frustration with the status quo combined with a sense of what thoughtful corporate governance can accomplish. Most individual investors tend to throw away their votes, Jackson says, while this group has the potential to make a real difference.

"I'm tired of reading passive bloggers, commentators, and market watchers saying that 2007 should be a good year for Yahoo! because expectations are so low and Google (GOOG - news - Cramer's Take - Rating) can't keep growing at the pace it has over the last three years," he says. "Most people say that it is just easier to take your money out of Yahoo! and place a passive bet on Google. But I think there is more upside out of unlocking the value in Yahoo! than in Google."

Jackson's plan is ambitious, to say the very least. Generating a business plan for a major corporation in the same way that open-source movement produces software is audacious enough. Even if that were somehow accomplished, coordinating among a group of investors that large would be, if anything, even more of a challenge.

Still, the Internet provides an ideal platform for this venture. In recent elections, the very real sums of campaign contributions that came about as a result of small donors giving bits and pieces are testament to the hidden financial might that the medium can scrape together. Flash mobs -- groups of people who can rapidly coordinate for a purpose, either in one location or on a distributed basis -- also offer evidence of the Internet's ability to harness spread-out sentiment for collective action.

But Jackson's experiment will be worth watching even it falls short of its lofty goals. If the movement picks up some more momentum, Yahoo! management is sure to take note. He is also right in pointing out the potential of large, well-coordinated groups of individual investors -- and this group will play an increasingly important role in the future.

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Wednesday, January 10, 2007

Polling the Yahoo! "Plan B"

We've had many new comments and suggested additions to "Plan B." I think a polling system will help us track the collective support for different ideas. I constructed the following 2 polls in Vizu. You can vote for all options if you like. However, Vizu limits me to 10 options per poll. Thanks for the great comments. If you have more suggested actions, send them in and we'll include in future polls.

Update: Jan. 12th -- As of this morning, our committed investors in Yahoo! have a collective ownership stake worth approximately $1.8MM -- and YHOO is up 5.27% since we began our activism at the start of the week.

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