Yahoo's new CEO facing tough challenge

While Yang promised to rejuvenate Yahoo, Wall Street worried that the Sunnyvale-based company's new boss might be too much like the old boss.

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June 20, 2007 10:59
4 minute read.
Yahoo's new CEO facing tough challenge

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Yahoo Inc. thinks it's back on the right track now that co-founder Jerry Yang has replaced Terry Semel as chief executive, but analysts and investors already are wondering whether the shake-up is just a prelude to more radical measures, including a possible sale or breakup of the troubled Internet icon. While Yang promised to rejuvenate Yahoo, Wall Street worried that the Sunnyvale-based company's new boss might be too much like the old boss. Yahoo shares fell 49 cents, or 1.7 percent, to finish Tuesday at $27.63, reversing the positive sentiments initially expressed after the management change was announced late Monday. "There was some knee-jerk excitement when people first heard the news, but now they are starting to question whether this was change just for change's sake," said Standard & Poor's equity analyst Scott Kessler. "Is this really going to lead to a fundamental change in the way Yahoo sees things and does things?" The reservations about Yang, 38, primarily stem from his managerial inexperience and ties to Semel. Although he once ran Yahoo in its very early days, Yang has never been the top executive since the company went public in 1996 and blossomed into a far-flung business with 11,700 employees and more than $6 billion in annual revenue. What's more, Yang emerged as one of Semel's closest allies during the past six years while serving in his role as "chief Yahoo." He was also a board member who presumably was consulted on some of the key management decisions that left the company a distant second to Google Inc. in the lucrative online advertising market. "He didn't function as chief Yahoo, so why would you think he will succeed as CEO?" said Global Equities Research analyst Trip Chowdhry. "They already missed the boat and, in the Internet space, there are no second chances." Chowdhry thinks Yahoo eventually will sell off major chunks of its operations, including e-mail, instant messaging, finance and its photo-sharing service Flickr. Although he provided few specifics about Yahoo's next move, Yang made it clear in a Monday interview that he believes the company can remain independent. Other analysts believe Yang will be able to tackle Yahoo's challenges with the help of Susan Decker, who was promoted to second-in-command as part of the new hierarchy. "We believe the recent changes at Yahoo are aimed in the right direction," RBC Capital Markets analyst Jordan Rohan wrote in a Tuesday note. Eric Jackson, a Naples, Fla. management consultant who sparred with Semel at Yahoo's annual meeting last week, said he believes Yang has learned from his predecessor's mistakes and will engineer a comeback. "It's misguided to think Jerry will do the same thing as Terry just because they were allies," Jackson said. "He has a much better feel for the Internet industry than Terry." Yang also has more of an emotional and financial stake in a company that he launched in 1995 along with another former Stanford University graduate student, David Filo, who is currently helping to steer Yahoo's technology department. Combined, Yang and Filo own a 10 percent stake in Yahoo currently worth about $3.8 billion. Yahoo's inability to keep pace with Google's torrid growth put the company in its current bind. Once the larger of the two companies, Yahoo has been outsmarted by Google at virtually every turn in recent years. Mountain View-based Google now makes more in three months than Yahoo does in an entire year - a contrast that has been reflected in the companies' respective stock prices. Google's shares have increased by six-fold since their initial public offering in August 2004 while Yahoo's stock price has dipped slightly during the same period. Yahoo introduced a retooled advertising system in February, but the improvements aren't expected to pay off until later this year. After Yahoo suffered an 11 percent decline in its first-quarter profit, Decker said Monday that the company's second-quarter results may fall at the low end of management projections. The downturn has fueled speculation that Yahoo might seek a buyer like Microsoft Corp. or consider combining some operations with another major Internet brand like eBay Inc. or News Corp.'s MySpace.com. In his note, Rohan also raised the possibility of Yahoo renewing its attempts to buy Facebook Inc., the second most popular online social networking site behind MySpace. Yahoo approached Palo Alto-based Facebook last summer only to be spurned by the startup's founder, Mark Zuckerberg, who has since indicated his preference to remain independent. Kessler thinks an outright sale of Yahoo is unlikely because any bidder probably would still have to pay about $40 billion - a steep price even for Microsoft, which also is trying to catch up to Google. Yahoo seems more likely to prune its operations to try to reduce costs and eliminate some of the bureaucracy that has been blamed for stifling innovation. Kessler believes a large Santa Monica office that Semel opened to house media operations is now a prime target for closure. Jackson also suspects the Santa Monica office may be shut down as part of Yang's efforts to turn around the company. "I think he really wants to step up and he won't be afraid to pull the trigger," Jackson said.

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