June 18 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Terry Semel stepped down after losing the lead in Internet advertising sales to Google Inc.

The company named co-founder Jerry Yang CEO and said Semel will be chairman. Susan Decker, an executive vice president, will become president, Yahoo said in a statement today. The stock gained 4 percent in extended trading.

Semel, 64, who joined Yahoo as CEO in 2001, failed to keep up with the growth of Google, which now has more than twice the sales of Yahoo. Initially hailed for overhauling the sales force and buying companies such as Overture Services Inc. to move into Internet search ads, Semel faced calls for his dismissal amid a slide in the stock last year.

``Terry Semel lost the confidence of the board, he lost the confidence of the shareholders and to some extent he lost the confidence of the employees,'' said Charlene Li, an analyst at Forrester Research Inc. in Foster City, California.

Under Semel's watch, Sunnyvale, California-based Yahoo's shares rose from a low of $4.06 in 2001 after the Internet bubble burst to $28.12 today. The shares had their first stumble in four years in 2006, declining 35 percent after the company delayed a new ad program and reported results that disappointed investors.

Shares of Yahoo, owner of the second most popular Internet search engine after Google, rose $1.12 to $29.24 in extended trading after the announcement. They have gained 10 percent this year in Nasdaq Stock Market trading.

Difficult Year

``The past year has been a difficult one for Yahoo,'' Semel said on a conference call. ``The truth is that I've long been talking to the board about ensuring a smooth succession.''

Yahoo's revenue per search has gained more than 10 percent this quarter, helped by the new ad program, called Project Panama, Decker said on the call. Decker previously said gains of that size wouldn't happen until the second half of the year.

Total sales this quarter will be at the middle to the low end of its forecast, Decker said. Yahoo in April said net sales may be $1.2 billion to $1.3 billion. While Panama is lifting results, sales of display ads are slowing, she said.

``We must intensify our focus on differentiating our products,'' Yang, 38, said.

Pay Outcry

At Yahoo's shareholders' meeting last week, investors holding more than a third of the company's stock voted to tie executive pay more closely to performance.

Semel, who received $39.8 million last year, mostly in stock options, has earned 926 percent more than the median paid to CEOs in his peer group even as the stock underperformed, according to investor advisory group Proxy Governance Inc.

Semel's pay was the subject of a joke from California Governor Arnold Schwarzenegger at a dinner last week in San Jose, California, attended by Semel and Google CEO Eric Schmidt. Schwarzenegger said he gave up a career in movies making millions of dollars to be governor of California, a job for which he's not taking a salary, ``unlike Terry,'' he said.

Before Yahoo, Semel spent more than two decades at Warner Bros., where he was known for backing big-budget movies such as ``Batman.'' When he first joined Yahoo, analysts questioned whether he had enough contacts in the advertising industry and expected Yahoo to be sold.

Too Late

Yahoo's sales rose 71 percent in 2003, doubled in 2004, and gained 47 percent in 2005 as advertisers shifted more of their budgets to the Web. U.S. companies spent 4.6 percent of their ad budgets online in 2005, up from 2.5 percent in 2002, according to EMarketer Inc., a researcher in New York.

Semel bought Inktomi Corp. and Overture in 2003 to build a search service and add software for selling links next to search results. The company previously used Google's search engine.

The additions came too late. Google's sales surpassed Yahoo's after the fourth quarter of 2004 as searching the Web become more popular among consumers and companies bought more of the four-line text links that appear next to search results.

Google's sales reached $3.66 billion in the first quarter, with net income of $1 billion. Yahoo's revenue totaled $1.67 billion, with profit at $142.4 million. Google handled 48 percent of U.S. search queries in the quarter, compared with Yahoo's 28 percent, according to researcher ComScore Inc.

Semel's departure comes after a management shakeup in December. Chief Operating Officer Dan Rosensweig left and then- finance chief Decker was promoted to oversee all ad sales.

``In the space they operate you always need fresh ideas,'' said Pat Becker Jr., who helps manage $2.5 billion at Becker Capital Management in Portland, Oregon. He doesn't own Yahoo shares. ``Google has put a lot of pressure on Yahoo.''

Filo & Yang

Yang founded Yahoo with David Filo as a PhD student at Stanford University in 1995. While Filo handled technology, Yang became the business manager, taking part in earnings calls and speaking at conferences. In 2005, he helped sign a deal for Yahoo to buy a 40 percent stake in China's Alibaba.com for $1 billion.

Today, sites such as MySpace, Facebook and YouTube offer alternative outlets for advertisers. MySpace and Facebook let users create profiles and link up with friends, while YouTube lets people post home made videos.

The announcement also marks a broadening of Decker's role at Yahoo to oversee both products and advertising. This year, Decker, 44, led Yahoo's agreement to share advertising sales with newspapers.

Semel still keeps close ties to Hollywood, shuttling between Los Angeles and Sunnyvale. Among his friends is Tom Cruise, who appeared on stage with him last year at a convention in Las Vegas. Semel's handprints are imprinted in the concrete outside Grauman's Chinese Theatre in Hollywood.

To contact the reporter on this story: Jonathan Thaw in San Francisco at jthaw@bloomberg.net

Last Updated: June 18, 2007 19:33 EDT