Tuesday, November 18, 2008

TheStreet.com: Activist Investor: Goodbye, Yang, Hello, Change?

From TheStreet.com

by Eric Jackson

11/18/08 - 03:14 PM EST

Jerry Yang still bleeds purple, but he announced Monday night that he'll no longer do so in the CEO cubicle.

His agonizing 16-month tenure as CEO of Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) has been marked by intense shareholder upset over his rebuffing Microsoft's (MSFT Quote - Cramer on MSFT - Stock Picks) offer to buy his company at triple its current valuation, as well as a continuous outflow of top talent.

Yang is a good man and will always be associated with co-creating an Internet icon. Unfortunately, he will also now be inextricably linked to his turbulent tenure as CEO and the busted Microsoft deal. And now Yahoo! needs to find someone to take over the helm. It's a huge decision.

The Yang Months

Yang's two biggest weaknesses as a leader were people-picking and tough decision-making. He was instrumental in Terry Semel being selected as his predecessor, and Semel probably played a strong role in him getting the top job last year. Both picks, in retrospect, severely hamstrung the former high-flying company. Once in the CEO role, Yang promised 100 days to analyze the business and come to some important strategic decisions about the redirection of the business. That self-imposed deadline came and went with no action.

While Yang should be consulted regarding the selection of the next CEO of Yahoo!, he clearly should take a back-seat role to the rest of the search committee. While many viable candidates are out there, I doubt any will want to jump to the sinking S.S. Sunnyvale. It would have been much different a year ago, but most of the best candidates will not want to take a two-month stop-gap stint awaiting Microsoft to return to claim Yahoo!'s assets.

There's lots of blame to go around for the current sad state of affairs at Yahoo!, but the press has focused too much on Yang as CEO and not enough on the board. Ultimately, Yahoo!'s failures in negotiating the deal with Microsoft rest with the board.

Chairman Roy Bostock was tied at the hip to Yang for most of the Microsoft discussions. He also received less than 50% shareholder support for his re-election last August, if you also count the votes that Carl Icahn's proxy slate received before he called off his proxy contest. Now, Bostock will lead the search for Yahoo!'s next leader. This is how dysfunctional boards beget dysfunctional boards.

Looking Beyond Yang

Tech bloggers Kara Swisher and Henry Blodget have already floated the names of some potential successors. Here's my take of the much-talked-about top candidates to take over the chief Yahoo! role:

  1. Steve Ballmer, CEO of Microsoft. The best outcome for Yahoo! shareholders of course would be if the new search committee never selected a CEO. This company should use this change in leadership to go back and open discussions with Microsoft about selling the company. This made sense when Microsoft made its initial offer last January at $31 a share, and it makes sense (triply so) now that Yahoo! trades around $11.
  2. Peter Chernin, COO of News Corp. An ideal candidate who probably wants to spread his wings without CEO Rupert Murdoch looking over his shoulder any longer. Although News Corp's (NWS Quote - Cramer on NWS - Stock Picks) stock price has dropped precipitously over the last three months, it's still a safer bet than Yahoo!. Chernin probably would have considered moving last year, but not now.
  3. Jonathan Miller, former AOL CEO. Great relevant experience and well-liked by his staff and peers despite being unceremoniously dumped out of his former role heading up AOL. Miller recently set up a new venture fund called Velocity Interactive Group with Ross Levinsohn (ex-head of Fox Interactive Group). Icahn tried to draft him many times over the summer to take the top spot at Yahoo!, but Miller declined because he didn't want to turn his back on his new venture and his investors. He is also not likely to take the job, if asked.
  4. Ross Levinsohn. See the Miller description above. Levinsohn would be a solid choice but is unlikely to leave his current gig.
  5. Tim Armstrong, senior vice president at Google. The revenue head at Google (GOOG Quote - Cramer on GOOG - Stock Picks) has relevant experience and is probably ready to take a CEO role. Even though Google has struggled in this recession along with everyone else, it still has much more upside than Yahoo!. It would be tough for Armstrong to turn his back on that safety.
Fresh Perspective

I favor an outsider taking the reins at Yahoo! -- preferably someone who has enough experience and reputational capital that he or she can insist on reshaping the board, as well as the rest of the company. Yahoo!'s board is still very much the board Terry Semel hand-picked, and it's in desperate need of a refresh.

An insider CEO, or someone coming from the current board, would most certainly keep the company on its current trajectory, which is the slow boat to China. For that reason, Yahoo! President Sue Decker or board member Maggie Wilderotter would be poor choices. Former eBay (EBAY Quote - Cramer on EBAY - Stock Picks) CEO Meg Whitman defines "big company Internet CEO," but her last few years, marked by questionable acquisitions, and eBay's subsequent performance have diminished her luster as a candidate.

This board will be under intense scrutiny from the media but also its largest shareholders. I hope that people like Gordy Crawford of Capital Research and Mark Casey of Capital World will be heavily involved in the deliberation discussions to keep the current board members in check.

The Yahoo! board probably wants to make the "safe" choice of a big company/Internet experience/former CEO/outsider. Peter Chernin fits the bill. Miller, Levinsohn, Armstrong and Whitman would all be good choices. However, I expect none of them to be interested.

So, ladies and gentlemen, the last man standing to take the Yahoo! CEO job will be a woman: Sue Decker. She has too much baggage to be an acceptable selection for a majority of Yahoo! shareholders, but such concerns haven't stopped this board before.

At the time of publication, Jackson's fund held a short position in NWS, and Jackson held a small long position in YHOO in his personal account

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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