Yahoo yhoo CEO Jerry Yang is understandably relaxed, as a man who just dodged a bullet. But he isn't ready to breathe too easy.
"Look, I think we cannot go back to business as usual," Yang said during a 40-minute phone interview last week. "The last six months have been a test for Yahoo, but we are stronger for it and ready to move forward."
Since January, Yang and the rest of Yahoo's nine-member board have been hammered by investors and Wall Street analysts for snubbing takeover offers from Microsoft, including one for $47.5 billion. Yang now is girding for an annual shareholders meeting in San Jose on Friday. It had loomed as D-Day, before an 11th-hour settlement with activist investor Carl Icahn, who owns 5% of Yahoo's shares and had vowed to displace the board with his handpicked group.
Yang took over as CEO last year to engineer a turnaround at the Internet pioneer he co-founded. He replaced Terry Semel, who was ousted after six years. Icahn and other critics say Yang and the Yahoo board backed themselves into a corner because of the way they handled — some, including Icahn, say bungled — Microsoft's takeover bid despite an economic slowdown and Yahoo's struggles to compete with Google.
Yang and Yahoo Chairman Roy Bostock dispute the characterization. In separate interviews, they say the software giant repeatedly got cold feet whenever they seriously discussed a deal. Yang went so far as to advise Microsoft on how best to combine the companies, but Microsoft backtracked, Bostock says.
"It's unlike any hostile takeover I've ever seen. Unbelievable," says Bostock, who had been in the chairman's job just 15 minutes when Microsoft CEO Steve Ballmer faxed the company's first takeover offer on Jan. 31. "I wake up some mornings wondering if this is Alice in Wonderland."
Microsoft had no comment for this story.
The latest twist occurred last week, when Yahoo reached a truce with Icahn, who owns Yahoo shares worth about $1.5 billion. Icahn, whom Yahoo at one time dismissed as a technological neophyte, will join an expanded, 11-member Yahoo board with two of his surrogates. Yang and Bostock remain leaders of the Yahoo board, which will make the changes by Aug. 15.
Meanwhile, Microsoft and Yahoo have ceased communications for more than two weeks — signaling that perhaps the unsettled times are finally over. Ballmer, speaking to analysts last week, said the company was "done," for now, with pursuing Yahoo.
Or maybe not. Yahoo remains in play as a takeover target, tech analysts say.
Jonathan Yarmis, an analyst at AMR Research, says Yang "now has his fiercest critic and two of his friends on the inside, agitating for a sale. The fat lady hasn't sung yet."
Says a philosophical Yang, "I just don't know what's going to happen with Microsoft. They may come back tomorrow or a year from now."
A troubled recent history
Yahoo remains an Internet powerhouse and one of the most popular websites in the world, with nearly 600 million unique visitors each month, according to ComScore.
It has weathered corporate storms, including the dot-com meltdown in 2000 and the financial calamity after 9/11. It is No. 1 in market share for e-mail and instant messaging and No. 2 in search and search ads. It has a market value of $27.7 billion.
Yang, who co-founded Yahoo with David Filo at Stanford University in 1994, has been trying to steer a turnaround since he became the company's CEO 13 months ago. He insists Yahoo can dramatically improve its revenue the next two years by extending the reach of its ad network, through new technologies such as its new Zimbra e-mail service and a slew of business partnerships with the likes of Walmart.com.
Under a non-exclusive search-advertising partnership, to start in the fall, Yahoo can run ads supplied by Google alongside its own search results and on some of its websites in the USA and Canada. Yahoo will decide where the Google ads will run and alongside which search terms. Yang says the partnership could infuse as much as $800 million in annual revenue. The deal covers four years; Yahoo holds options to renew for up to 10 years.
"We did the Google deal after it was clear Microsoft was not interested in a deal," Yang says.
Reorganizing into 3 divisions
Last month, Yahoo also said it would reorganize into three new divisions to help centralize its Internet products, build its worldwide audience and better capitalize on the growth of online advertising.
"We've made huge changes that are just taking hold, and we are a stronger, more aggressive company strategically positioned to take advantage," says Yang, who says he doesn't regret taking over as CEO.
He has his backers. Current and former executives vouch for Yang's plan and the fact that Yahoo has not changed its financial projections despite a squishy economy and Microsoft's overtures. Two weeks ago, Yang got a major vote of confidence from a major shareholder.
Bill Miller, chief investment officer of Legg Mason Capital Management, one of Yahoo's biggest investors with 4.4% of Yahoo shares, said he would support Yahoo's board though he would still back a deal with Microsoft at a decent price. In the past, Miller publicly second-guessed Yahoo's rejection of Microsoft's bid and said shareholders would have settled for a price only $1 more than Microsoft's final offer of $33 a share.
Still, Yahoo's wounds run long and deep, a reflection of an indecisive, complacent management team under siege from Microsoft and Icahn, say tech analysts and investors.
Until its recent turnaround plan, the company was beset by a misguided media strategy under Semel that diverted attention from search advertising, a bureaucracy larded with midlevel managers, disappointing quarterly results and an exodus of talented workers, says IDC analyst Karsten Weide. "Yahoo has made significant strides of late, but they dug themselves in a deep hole," Weide says.
Yahoo shares have slipped from the low-$30s in November. On Monday, Yahoo shares dipped 5%, to $20.12. (Interestingly, Yahoo's price is higher and Microsoft's lower since Jan. 31, the day before the companies announced Microsoft's first takeover offer. Most Internet-related stocks are down this year.)
USA TODAY contacted six current and former Yahoo executives for this story. None would speak publicly because they are not authorized to speak on behalf of Yahoo. These executives say Yang has been heaped with unfair criticism for inheriting a mess and trying to fix it.
Venture capitalists and some analysts agree with their assessment.
"I don't think Jerry is on a power trip," says Geoff Yang, a founding partner of Redpoint Ventures who is no relation to Jerry Yang and occasionally talks to him. "He wanted the CEO job because he was asked by many to do it, and he feels an enormous amount of loyalty to the company and its employees."
Yang and the Yahoo board may have sidestepped a shareholder showdown with Icahn, but their problems are far from over, tech analysts say. With two allies on the newly constituted Yahoo board, the opinionated Icahn has a forceful bloc of influence. And Icahn has let it be known he still wants Microsoft to acquire part or all of Yahoo.
"Microsoft and Yahoo is a match made in heaven," Icahn has repeatedly said. "You could compete with Google when you put the companies (Microsoft and Yahoo) together."
Yang says Yahoo remains open to reviving negotiations with Microsoft despite the two-week silence.
"You know somewhere along the way, Yang is saying to Icahn, 'Look, if you can get your buddy Steve (Ballmer) back to the table at $33 a share, we're all happy,' " Yarmis says.
"Selling the company is fine, but at the same time, we are trying to negotiate what is the best deal for shareholders," Yang says.
Unpredictable as the Yahoo-Microsoft-Icahn dance has been, analysts have wildly divergent views on what will eventually become of Yang, Bostock and others. With Yahoo's stock languishing in the low-20s, the board squandered a 50% premium on its stock when it rejected Microsoft's initial offer, Yarmis says. "Yang can't hang on. He has so clearly mismanaged the Yahoo side, he has lost investor confidence."
Jeffrey Lindsay, an analyst at Sanford C. Bernstein, correctly predicted Icahn would not curry enough favor with Yahoo investors to oust Yahoo's board. But he foresees Yang and portions of the board being replaced.
One theory making the rounds among analysts is that former AOL CEO Jonathan Miller could join Yahoo's board as an Icahn ally and might succeed Yang. Miller, a partner at venture firm Velocity Interactive Group, had no comment.
"It is a nightmare scenario for shareholders," Lindsay says. "This thing will probably end in complete confusion."
It is unlikely to be resolved any time soon, says a corporate-governance expert.
"What makes this one of the most unusual (corporate) ménages à trois is that Microsoft has not decided which position it wants to take," says Joseph Grundfest, a Stanford University professor. "It's not clear where they want to be in the process."
Contributing: Greg Farrell in New York