business

Yahoo Tries to Heal Itself—Again

The beleaguered Internet portal is reorganizing management ranks in what may be a last chance to prove it should remain independent

In the latest attempt to persuade restive investors it can fix itself, Yahoo! (YHOO) is reorganizing its management ranks. The widely expected revamp, unveiled June 26, centralizes product and sales operations under President Sue Decker.

The reorganization comes a day after co-founder and Yahoo CEO Jerry Yang and Chairman Roy Bostock sent shareholders a public letter explaining why the company rejected a deal that would have combined its Web search operations with those of Microsoft (MSFT).

The public statements follow a flurry of management departures in the wake of failed takeover discussions with Microsoft. They also signal Yahoo is ratcheting up efforts to rally support for its independence ahead of an Aug. 1 annual shareholder meeting. Yang, Decker, Chief Financial Officer Blake Jorgensen, and Yahoo directors will take their appeal straight to large investors in a road show due to begin next week.

Little Fundamental Change

In the third major reorganization in the past 19 months, Yahoo consolidated operations under three new groups. Longtime executive Ash Patel, former head of the group focused on the company's underlying technology, will head a new Audience Products Div. responsible for developing new products and services.

Hilary Schneider, former head of its Global Partner Solutions group, responsible for sales and ties with advertisers, will lead all activities for the U.S. A third Insights Strategy group, which will work on a "common strategy for the use of data and analysis" across Yahoo, will get a leader in a few weeks, reporting to Decker. And Yahoo is also revamping its technology operations under Chief Technology Officer Ari Balogh, who reports to Yang.

For the short term, the reorganization presents little fundamental change in Yahoo's top leadership, which has been roiled by high-level defections (BusinessWeek.com, 6/20/08) recently. In the past year, Yahoo has seen the departure of more than 100 managers, including top executives such as Jeff Weiner, former executive vice-president for Yahoo's Network Div., who left last week to work with two venture capital firms, Accel Partners and Greylock Partners.

More Technical Acumen Needed

Although recent departures may have helped force the reorganization, Decker told BusinessWeek it has been planned for months, a claim confirmed by at least one former Yahoo manager. Decker said some executives who would have been shunted to new jobs with less responsibility decided to leave instead. "You're seeing the promotion of a lot of leaders who are very strong in products and technology, which is a different set of skills than the business-and-product mix we had before," she said.

That's a trend favored by many observers inside and outside the company. "Yahoo needs more technology chops because I think the future of media is in technology," says Shar VanBoskirk, an analyst with Forrester Research (FORR). "Yahoo tells a great story [but] they don't have the technical acumen to pull all that stuff together." Yet even Decker cautions against expecting the impact to be felt quickly. "The kinds of changes we're making are fairly deep and structural, and typically would have an impact in a six- to 12-month time frame," she says.

That may be too long for angry shareholders. Discontent with the stewardship of Yahoo by Yang and Decker has been rising since May 3, when Microsoft walked away from its offer to buy Yahoo outright, saying it bid $33 a share. Unrest grew even louder after June 12, when Yahoo rejected a search deal with Microsoft, which Yahoo later explained would have given the software giant a veto on a sale of Yahoo. Instead, Yahoo inked a more limited arrangement that lets Google (GOOG) handle the placement of ads on some Yahoo pages.

Investors Not Impressed

Recent reports in the blogs TechCrunch and Boomtown indicate Microsoft may be considering a new offer to buy Yahoo's search operations and perhaps make a significant minority investment in the company. Sources close to the matter indicate to BusinessWeek those talks are not formal and that there is not yet a new deal on the table.

Initially, shareholders appeared unimpressed with the management revamp. Yahoo's stock fell almost 3%, to 21.37, the day of the announcement, though that was a small fraction less than what the overall market fell. "We're struggling to see if it's going to make any difference," says Jeffrey Lindsay, a senior analyst with Sanford C. Bernstein (AB). "All you're doing is replacing one ineffective organization with another ineffective organization." Lindsay says he's especially dismayed by the greater centralization, especially in technology development.

In any case, it's an open question how much the reorganization will matter since Yahoo's ultimate fate remains up in the air. In a proxy statement filed June 26, activist financier Carl Icahn, who has proposed an alternate board slate, repeated his intention to replace Yang as CEO and push for a Microsoft buyout at $33 a share or more. If Icahn and a majority of other shareholders vote against the current board, Yang and Decker could find themselves out of their current jobs as well, rendering their management revamp moot.

Challenges from Within

Persuading shareholders not to vote Icahn's way and to back the current board will be Yahoo's key job in coming weeks. Yahoo directors, along with Yang, Jorgensen, and Decker, intend to embark on a tour next week to talk to restless investors. Some of those investors continue to favor a full Microsoft buyout of Yahoo.

Decker reiterated that even after Microsoft quit talks May 3, Yahoo had offered to sell itself at somewhere in the range of $31 to $33 a share, or as much as $47.5 billion—and that Microsoft has said it's no longer interested. People close to the situation say discussions of an outright purchase are not happening now, though insiders indicate there may be less formal conversations about a new search deal.

Yahoo faces challenges from within as well. Some of the people who left did so because they were growing weary of the off-and-on Microsoft negotiations. They decided to make their move after Microsoft walked away from its proposed buyout, as they faced many more months of uncertainty about Yahoo's prospects and direction. With the reorganization, they say, more talent could walk out the door. "The patience is growing thin" within Yahoo's walls, says one former Yahoo executive. The sentiment is shared outside the walls, too.

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