Yahoo exodus adds to Yang's burdens
CEO Jerry Yang takes another hit with the latest raft of top-rank departures. Can he stem the tide?
SAN FRANCISCO (Fortune) -- If Jerry Yang didn't already have enough problems already, some of Yahoo's top managers are streaming toward the exit.
Yang celebrated his one-year anniversary as the Internet pioneer's CEO on Wednesday, but it hasn't been a happy week in Sunnyvale. On Thursday, search execs Qi Lu and Vish Makhijani joined communications honcho Brad Garlinghouse in quitting Yahoo, according to press reports. Garlinghouse is best known as author of a 2006 memo that said Yahoo was spreading itself too thin and advocated a major shake-up at the company.
The departures come as Yahoo, which had already seen the exodus of four top managers this week, moves forward on an internal reorganization being overseen by President Sue Decker, The Wall Street Journal reports. "We have a deep and talented management team across all areas of the company," Yahoo said in a statement. "We continue to recruit outstanding talent."
Yang is trying to restore an even keel at the company after Yang beat back a $45 billion takeover proposal from Microsoft. But if Yahoo's top executive has succeeded for now in preserving Yahoo's treasured independence, it's increasingly clear that few people are looking to congratulate him on a job well done. Indeed, this year's setbacks have some employees wondering if Yang is in over his head.
"I don't think he's the right guy for the role," said one long-time, mid-level Yahoo employee. "I had a lot of hope for Jerry in the beginning. But this whole saga with Microsoft has left me disillusioned and a lot of people here angry."
These days, Yang is hardly seen as the savior that everyone had hoped for a year ago. Under Yang's watch, Yahoo (YHOO, Fortune 500) stock has lost 17% of its value. In rejecting Microsoft's offer to acquire the company at $33 a share - a 72% premium to pre-approach prices - Yang made himself the target of shareholder lawsuits and activist investors like Carl Icahn, who is threatening to oust Yang and his board of directors.
Yang, 39, likely never envisioned his one-year mark would turn out like this. Twelve months ago, Yang, the laid-back engineer who rarely wears ties with his suits, gets $11 haircuts and sends e-mails typed all in lower-case to his staff, was widely viewed as the right choice to replace Terry Semel, the CEO from Hollywood who spent six years molding Yahoo into a media company. Yang had the Silicon Valley cred Semel never had and, it was hoped, could rejuvenate the company.
The company declined to make Yang available for an interview, but Decker told Fortune that the CEO "is absolutely the right choice at the right time."
"He's terrifically patient about the company," Decker said. "He's the visionary of Yahoo."
Decker says she is most impressed with the way Yang, whose stake in Yahoo is worth $1.2 billion, has handled himself during the Microsoft bid and the resulting fallout. "He has an unwavering vision of where he wants to take Yahoo and an unwavering passion and commitment and energy to get there," she said.
No one doubts Yang's passion. But some question whether Yang's zeal clouded his judgment and obligation to act in the best interests of shareholders. The overwhelming Wall Street consensus favored a sale to Microsoft (MSFT, Fortune 500). Said one former Yahoo executive who recently left the company, "Jerry should have taken the deal. That's the rational thing to do. He's a rational guy, but he didn't behave that way."
Yang and Yahoo's board ultimately decided that the company was better off staying independent. Last Thursday, the company announced it ended talks with Microsoft. As an alternative to selling the company, Yang immediately announced a deal to outsource some of its paid search results to Google (GOOG, Fortune 500) and place Google's text ads on Yahoo's Web properties. "This puts Yahoo on a faster track" of capturing more online ad dollars, Yang said on a conference call last week.
Decker said that outsourcing to Google doesn't mean that Yahoo is abandoning its own search technology. Instead of devoting most of its resources to "compete with Google in the thing they do best," the company will focus on a market that combines both paid search and graphical-display advertising. "We see this as a bridge to our core strategy" of pushing search and display advertising, she said.
Wall Street isn't buying that. "While YHOO remains a principle [sic] in search and text-based ads, it weakens its position as a text-ad provider for affiliates and potentially drives more advertisers to go directly to GOOG," wrote UBS analyst Ben Schachter in a client note. He said the move also calls into question Yahoo's focus on integrating search and display advertising.
Critics say Yahoo ended up in Google's arms because Yang has been slow to re-engineer the company to compete with Google in advertising He initially failed to shake up the management team that he inherited from former CEO Semel despite proclaiming there were "no sacred cows."
Then, in late January, after six months on the job, Yang told shareholders in a quarterly conference call that 2008 would be another turnaround year. Yahoo would invest heavily in developing a new platform to combine its Panama search system with display advertising. The Street's doubts about Yahoo's ability to execute on that strategy drove its stock to its lowest level in more than three years and gave Microsoft the opening to pounce with its Jan. 31 $44.6 billion takeover bid.
Some employees said they've been frustrated by Yang's inability to make Yahoo relevant again. One former Yahoo executive said he left the company this spring because the search/display strategy didn't sound like a winning combo to him.
"There was a lot of buzz and excitement that Jerry was going to do something and reveal new changes. But after awhile nothing happened. Nothing was different," the executive said. "I lost belief in the leadership."
To be sure, not all Yahoo employees question Yang's performance as CEO and he retains support among the rank and file, grumbling aside.
Despite Yang's efforts to retain top talent, executives have been steadily leaving. On Monday, Accel Partners and Greylock Partners announced that Jeff Weiner, who runs Yahoo's network operations, would become an "Executive in Residence" at both Silicon Valley venture capital firms. Meanwhile, media reports confirmed that Yahoo data chief Usama Fayyad is heading for the door. Caterina Fake and Stewart Butterfield, the co-founders of Flickr, the popular online photo-sharing service that Yahoo acquired in 2005, have also resigned.
"We expect Yahoo's employee turnover to accelerate as its share price falls and their stock options are way underwater," wrote Soleil Securities analyst Laura Martin in a note to clients last Friday.
Trying to staunch such a brain drain and rejuvenate a 14,000-employee company in just 12 months would be an extremely difficult task for anyone, especially since Yahoo's operational performance has been steadily deteriorating for the past two years. Thomas Weisel Partners analyst Christa Sober Quarles argues that Yang inherited organizational issues that run deep at Yahoo. "Jerry needs to cut about half the VPs there," she said. "But that's like asking him to cut off his own arm."
A Yang replacement won't necessarily deliver results quickly enough to fix Yahoo, either. "Yahoo could take someone like [Google's top product management executive] Jonathan Rosenberg or [Google's global sales head] Omid Kordestani," Quarles said, "but putting someone else at the helm of the company isn't going to be a panacea to make it suddenly all better. Yahoo is a two-to-three-plus-years fix."
But investors have little patience left with Yang and his turnaround plans now that Microsoft is out of the picture (at least for now). Investors will get their say at the Aug. 1 annual shareholder meeting in San Jose. If Icahn succeeds in replacing the Yahoo board, he will likely make firing Yang as CEO the first order of business. Icahn did not return a phone call requesting a comment.
Even if Yang manages to survive the summer unscathed, gets shareholder support and the Google deal survives antitrust scrutiny, he's still not out of the woods.
Said Needham & Co. analyst Mark May, "Jerry's going to have to live up to those expectations that going solo is better in 2009. If he thought he was under pressure this year, it'll be far worse next year. [2009] is when the stuff can really hit the fan." 
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