The Problem With Yahoo!

In News, Online on May 17, 2008 at 9:49 am

(Pic from fantichi)

Phew. Okay. So much crap has been happening since Microsoft finally pulled out of the Yahoo! bid, and the week after has been a time for vultures to circle around Yahoo!’s ailing body. Founder Jerry Yang has been given until July 3rd’s shareholder meeting to convince shareholders why he thinks Yahoo! is better off without Microsoft’s big bucks–and from the looks of things, Yang isn’t going to be on solid ground for long.

Jerry Yang’s return to the board after Terry Semel got the boot hasn’t paid off. Most were expecting a Steve Jobs-like effect on the company, but that feel-good sentiment has long faded into memory–compared to its main competitor, Google, Yahoo! has floundered in its bid to innovate and improve itself.

Yang’s plan in hoping that Y!Open will save the company hasn’t convinced too many analysts, not least because of Yahoo!’s history of failure to integrate its acquisitions into making Yahoo! a stronger core product. Flickr and are two major examples of this failure, with the web services still as disparate and unconnected as they were on the day they were acquired. Architecturally, Yahoo!’s a mess–the groups are here, the mail client is there, newsfeeds are everywhere.

With Google, their services are integrated more seamlessly. If you ask me, there’s too much of a mess to clean within the next 7 weeks before Yang meets up with the board, and my feeling is that he could get ousted.

Vultures have smelled the desperation. Carl Icahn has now entered into the fray, threatening to launch “an attempt at a Yahoo boardroom coup after criticising the company’s decision to reject a $47.5bn Microsoft takeover bid and unveiling his own rival slate of directors,” according to the Guardian. His move has since been rebuffed by Roy Bostock, chairman of Yahoo!, in a strong statement that warned off people like Icahn. This, an excerpt of the letter plucked from The Register:

This was communicated to Microsoft in-person at a meeting in Seattle on May 3rd. With Microsoft’s offer at $33 and Yahoo!’s counter-proposal at $37, Microsoft elected, within hours, to walk away from the negotiating table and informed us that they were “moving on,” having never engaged further on price or any of the key non-price deal terms.

In short, Yahoo!’s board was at every point in this process prepared to enter into a transaction with Microsoft that would maximize stockholder value–and included certainty of value and closing. What Yahoo!’s independent board refused to do was to allow control of this company to be acquired for less than its full value.

Icahn plans to remove several members of Yahoo!’s board and replace them with his own–people who would understandably be more open to another Microsoft bid. This move prompted John C. Dvorak to post a Marketwatch column in which he criticizes Icahn’s cronies, and that Icahn’s move to buy-oust-and-sell Yahoo! will destroy the company.

Bottom line: Dollars for shareholders in the short run, ruin for the long term future of Yahoo!. Dvorak’s gotten some heavy flak for this column, but I’m on his side of the argument.

From his Marketwatch column:

Shareholders of Yahoo Inc. are now being confronted by Carl Icahn and the slate of directors he has to replace the current board. The thinking is that the company’s directors screwed up an opportunity to sell to Microsoft Corp.

I’ve looked over the current directors of Yahoo and Icahn’s proposed replacements. Here’s what I think of them, keeping in mind that to be on this board it might be useful if you knew something (anything) about computers and the Internet. In some cases, I seriously doubt that the person named even knows how to turn on a computer.


Here’s the deal: If these guys get on the board, they will first try to package a deal for Microsoft and walk away with more money. If they cannot do that, they will be unable to manage Yahoo since they are all professional place-sitters on everything but Internet companies.
So they will immediately parcel out and sell off the company piece by piece until Yahoo is dead. Looking at the bios of these guys tells you this is something they can do.

And they’ll do it fast.

There’s been a lot of counter-argument to his column, notably centered around the point that the board is there to protect the shareholder’s interest first and foremost–which means that the board doesn’t necessarily have to involve technologically savvy boardmembers. That’s schmuck.

Though you could level the argument that Jerry Yang is arrogant and wants to preserve his ego and legacy within Yahoo!, one could see why Yang’s so reluctant to sell: Microsoft has a bad habit of taking care and integrating its acquisitions, and right now, MS is running around like a headless chicken.

They haven’t got their core competency right (Vista is a confirmed disaster), and they’re chasing the competition headlong with a weak strategy that will always see them second best–because they’re not innovators like Google is. Microsoft Mesh is the latest typical example of this lack of innovative spirit; they don’t break any new ground.

Reacting to the competition is never a good way to move the company forward, because you’re always chasing; you don’t lead. And the only area in which MS is leading in–their Windows OS–is suffering a huge dip in consumer confidence. In acquiring Yahoo!, little will change because MS hasn’t the innovative culture that will drive Yahoo! forward to compete with Google.

In the end, both Yahoo! and MS will suffer badly, and Yang would lose his legacy. The problem–and this is the conundrum shareholders are facing–is whether to believe that Jerry Yang has the brains to pull Yahoo! ahead. That’s uncertain. But one thing’s for sure: if Yahoo! ends up in the hands of MS, it would be disastrous.

So, back to protecting the shareholder’s interest: the only benefit shareholders will get is within the short term if the Icahn-to-Microsoft move takes place as predicted. It’s not looking great for shareholders either way. In scenario one, Yahoo! gets acquired and shareholders can cash in at the expense of the company’s values. That’s guaranteed. Scenario two: Yahoo! maintains independence, but shareholders risk the ship sinking further down.

There is however, the hope that Yahoo! could rise again. Is that a gamble worth taking?


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