Tuesday, June 19, 2007

WSJ: Amid Missteps, Yahoo's Semel Resigns as CEO

From Today's Page One of the Wall Street Journal:

Company Faces HeatFrom Google, Investors;A Co-Founder Steps Up

By KEVIN J. DELANEY and JOANN S. LUBLINJune 19, 2007; Page A1

The abrupt resignation of Yahoo Inc. Chief Executive Terry Semel, amid mounting investor criticism that the company needs new leadership, reflects the continuing fallout for technology companies now lagging red-hot Google Inc. in crucial areas.

Mr. Semel, 64 years old, is widely credited with helping to focus a foundering Yahoo following his 2001 arrival and helping it ride the recovery in online advertising. The Sunnyvale, Calif., company is one of the largest sellers of such ads, and has played a key role in leading some name-brand companies to increase their marketing on the Web.

In recent years, though, Yahoo has been eclipsed by the success of Google's search-advertising-fueled growth, faced criticism for a lack of management focus and fumbled some opportunities to capitalize on the latest high-growth Internet areas such as video and social networking.

A recent struggle to upgrade its online ad systems to more closely match Google's approach suffered delays, and Yahoo lost executives and failed to fill crucial slots. Mr. Semel had also drawn fire for 2006 compensation that has been estimated by some at $71 million, which critics said wasn't warranted amid the company's declining revenue-growth rates and share price. In all, he has garnered more than $450 million from pay and stock-option exercises since 2001.

With Mr. Semel becoming nonexecutive chairman, Yahoo co-founder Jerry Yang, 38, was tapped to be CEO. Susan Decker, the company's 44-year-old former chief financial officer and head of a key operating unit, became Yahoo's president. Mr. Semel said he resigned the CEO post voluntarily so Yahoo would have "management that's thinking more long-term and that's going to help drive the company into the future."

Now, Mr. Yang and Ms. Decker face the task of steering Yahoo to capitalize on a massive base of more than 500 million users each month and to narrow the gap with Google. The company's strong relationships with advertisers and loyal consumers who use its popular services, such as email and news, will be an asset. But there are signs of further challenges ahead as well.

Ms. Decker said during a conference call with analysts yesterday that Yahoo's results for the second quarter would come in at the low to mid levels of its projections, as slowness in its core graphical-display advertising -- such as banner ads -- outweighs benefits from an ad-systems upgrade it dubbed "Panama."

The executive shake-up could intensify speculation that Yahoo is a candidate for acquisition or other combination. Yahoo in the past year has had conversations of varying intensity with Microsoft Corp., Time Warner Inc. and eBay Inc. about combining at least some of their activities, without reaching any deal, people familiar with the matter say.

"Jerry Yang didn't sound like he wants to sell, though that doesn't necessarily mean the company won't be sold," said Morris Mark of Mark Asset Management, a New York money-management firm that owns Yahoo shares. "Jerry Yang said all the right things for someone who wants to run the business."

Media companies Time Warner and News Corp. recently have separately been considering possible deals to merge their Internet activities with Yahoo, some of those familiar with the situation say, though none of the discussions appear to be advanced. Mr. Yang told analysts during the conference call that his company's board believes Yahoo should remain independent at this point.

"This is a time for new executive leadership, with different skills and strengths," Mr. Semel wrote in a letter to the board released by Yahoo. "We are again addressing challenges created by dramatic changes in the needs of audiences and advertisers," he said, and acknowledged that "none of us is at all satisfied with the company's recent financial performance." But, he said, "Yahoo continues to have tremendous fundamental strengths."

Mr. Yang wrote on Yahoo's Web site that his joint vision with Ms. Decker is "a Yahoo that executes with speed, clarity and discipline." (Read the post.) In an interview, he said, "We see ourselves as having to change to keep pace with the environment, but we also have to differentiate and get ahead of it," suggesting Yahoo would be more aggressive in trying to pioneer services that would set it apart from rivals. Some critics have accused Yahoo of doing little more than following the lead of Google and taking few bold risks of its own.

Exact details of how Mr. Semel came to step down remain in dispute. Mr. Semel formally notified Yahoo directors during an emergency board meeting conducted by telephone Sunday, said one person familiar with the matter. Some board members were surprised by the timing, said this person, adding that the board has discussed plans for Mr. Semel's succession at each meeting over the past year. This person said Mr. Yang's position wasn't designed to be only an interim role, and that "he's going to be in that job longer than people think."

Another person familiar with events said directors conferred off and on informally several times last week before concluding Friday that Mr. Semel should give up the CEO post because Yahoo was "not catching up with Google." However, this individual added that directors currently intend to conduct a search for a new chief executive. Ms. Decker "has the inside track as the internal candidate, but there will be external candidates as well."

Mr. Semel said in an interview that he wasn't pushed out in any way by the board, and that his departure resulted from continuing discussions with directors. "No surprise on our end," Mr. Semel said. "We thought it was the right time to do it." He said indications that the Panama project was yielding positive results played a role in the timing.

Mr. Yang, who co-founded the company in 1995, has had varying levels of involvement with it since then, say people familiar with the matter. In an interview, he said he isn't serving in merely an interim role as CEO.

It isn't clear whether a strong protest vote at last week's annual meeting may have played a role in the management shakeup, though Mr. Semel denies that. Proxy-advisory firms had recommended that investors withhold votes from members of Yahoo's compensation committee. Though Yahoo didn't give the specific vote breakdown, it said the full slate of 10 directors was reelected with at least 66% of the overall vote each.

That relatively high proportion of withheld votes suggests "shareholders want a new direction," said Eric Jackson, a management consultant in Naples, Fla., who owns 96 Yahoo shares. He led a grass-roots drive to oppose the reelection of seven of Yahoo's 10 directors. Yesterday's change in leadership "no doubt will lead to a shuffling at the board" as well, Mr. Jackson predicted.

Since becoming Yahoo CEO, Mr. Semel has reaped huge stock-options packages, even though the use of stock options has lost favor in Silicon Valley. According to a study by compensation firm Equilar Inc., Mr. Semel has realized a total of nearly $452 million in salary, bonus and stock-option exercises since 2001, including $231 million in fiscal 2004, $174 million in fiscal 2005 and $19 million in fiscal 2006.

In addition, Mr. Semel was awarded an additional $71 million in stock options in the 2006 fiscal year, according to Equilar's calculations. Some of that grant has already vested, and Mr. Semel will be able to exercise those options over the next three years, but he may not be able to exercise the unvested options, Equilar says.

The executive changes harken back to the last big shakeup at Yahoo in early 2001. At that time, as the company was reeling from the dot-com meltdown and numerous missteps such as a bungled opportunity to buy Internet auctioneer eBay, then-CEO Tim Koogle left the company and Yahoo said it would search for a new chief executive from outside the company.

The person it ended up selecting in April 2001 was Mr. Semel, the former co-CEO of Warner Bros. He was considered a surprise choice because while he was known as a top handler of Hollywood talent, he wasn't seen as the main operational guru running Warner Bros.

Shortly after his arrival, Mr. Semel identified a few major opportunities, such as overhauling its online-ad-sales efforts. Yahoo laid off staff and allocated more people to core businesses. It shut down activities viewed as nonessential. The payoff was enormous, as online advertising recovered with a vengeance, broadband usage proliferated and Yahoo led the charge. Yahoo's shares rose more than 270% from Mr. Semel's arrival through the end of 2004, but have fallen since then. Revenue rose nearly ninefold from 2001 to its $6.4 billion level last year.

But with Google's rise, it became clear that Yahoo was lagging behind in the fast-growing search and search-advertising markets. Yahoo last year suffered from slumping shares, slowing revenue growth, staff defections and a delay in the crucial Panama project aimed at boosting online ad sales. Executives began fretting that the Internet company's top management wasn't prepared to take the strong medicine they felt was needed. That dissent sprung into public view in November 2006 when The Wall Street Journal published the so-called Peanut Butter
Manifesto by a senior Yahoo executive, calling for big changes.

The company unveiled a reorganization in December and announced the departure of Chief Operating Officer Dan Rosensweig and other executives. Recently, Yahoo has faced competition in its graphical-display advertising business from sites such as social-networking services that have lots of places for ads they can sell at prices far below Yahoo's traditional rates.

"It seems like it's about the second stage of a five-stage rejuvenation for Yahoo," said Jordan Rohan, an analyst at RBC Capital Markets Corp. in New York. He said further stages would have to include overhauling its graphical-display-ad business amid the increased competition.

Yesterday's moves mark a new chapter for Mr. Yang. Until today, his official title was "Chief Yahoo." Mr. Yang recently became interim executive sponsor of Yahoo's technical staff with the departure of the company's longtime chief technology officer, Farzad Nazem. In response to a shareholder question at Yahoo's June 12 shareholder meeting about whether Mr. Yang might serve as permanent CTO, Mr. Semel said, "If Jerry would think hard about being our CTO, I'd be very flattered and very honored."

At the meeting, Mr. Jackson, the shareholder activist, asked Mr. Semel whether he still had "the fire in the belly for this job." Mr. Semel answered, "Absolutely -- I think Yahoo has more opportunity going forward than perhaps any other time in its history."

Ms. Decker's appointment as Yahoo president marks the former financial analyst's continued rise. The role will test her abilities in managing operations, where some believe she needs more experience before she might ascend to the company's top post.

--Gregory Zuckerman, Martin Peers and Matthew Karnitschnig contributed to this article.

Write to Kevin J. Delaney at kevin.delaney@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

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