Semel's out; Yang and Decker are taking the top spots. Can this duo revive the struggling company?
Except for the sudden timing, Yahoo!'s announcement June 18 that Terry Semel is leaving as chief executive was remarkable only for how few people were surprised. After all, the Internet pioneer had turned in one disappointingly slow quarter after another recently. And Yahoo couldn't seem to catch up to today's online hot hands, from search giant Google (GOOG) to social-networking services such as News Corp.'s (NWS) MySpace and upstart Facebook. At Yahoo's annual meeting on June 12 (see BusinessWeek.com, 6/13/07, "Yahoo's Semel Faces the Music"), shareholders very publicly laid the problems squarely at the feet of Semel, slamming his strategy, execution, and $72 million pay package last year.
But Yahoo's choices of co-founder Jerry Yang as new chief executive and veteran executive Susan Decker as president raise as many new questions as they answer. Chief among them: Is this just a temporary move, a safe choice to keep the Yahoo troops on board and investors at bay while Yahoo scrambles to come up with a new strategy? Or, after a year or more of rumors and talks of a Yahoo acquisition, does this just buy the company more time to field purchase offers?
Close observers aren't sure even Yahoo's board knows the answer. But the betting is that because Yang and Decker have been intimately involved with Semel, who will remain nonexecutive chairman, not much will change in the short term. "I think people that look at this as some kind of watershed event that is going to result in fundamental change at the company are going to be disappointed," says Scott Kessler, an analyst at Standard & Poor's (like BusinessWeek, S&P is owned by the McGraw-Hill Companies (MHP)). "These are two people that I don't see significant change from," says Kessler, who has a hold rating on Yahoo (YHOO) shares.
Kessler's pessimism is understandable. Highly respected within Yahoo, Yang nonetheless hasn't been an executive at Yahoo since its early startup phase. And Decker, despite whispers among Yahoos that her elevation to head of Yahoo's advertising group last December was a sign she's being groomed for the top job, apparently hasn't persuaded the board or investors she's ready yet.
Nonetheless, some observers believe that Yang's tenure as chief executive, while put forward as more than a temporary appointment, may be short-lived. One executive recruiter familiar with Yahoo's management believes the board will launch a search of outside candidates for chief executive, though it's believed that if Decker proves herself, she could still get the nod for the top job at some point.
Investors Are Waiting for Results
All that may explain why investors are only mildly pleased with the shake-up. The company's stock rose about 5% in after-hours trading—a tepid response given that shares are still down 17% from their 52-week high, even after a 3% gain before the announcement. Despite continuing speculation that Yahoo might be for sale, many shareholders are clearly not betting on it.
Nor should they, it appears. April rumors of takeover talks with Microsoft (MSFT) proved groundless. And one former executive with close ties to people at the company has taken recent calls from private equity firms assessing whether Yahoo would be a worthy purchase. However, this person doesn't think they will make bids because Yahoo's properties are so interconnected that it's tough to see how enough sizable units could be sold to unlock value. At a market value of $38 billion, it's an expensive acquisition for any company.
Despite the continuing skepticism by analysts and investors, Yang and Decker signaled during a conference call after the announcement that they will be trying to make some big changes. They mouthed praise of Semel's six-year tenure, including a reorganization last December that they said has speeded decision-making and streamlined operations. But it was hard not to hear an urgent need for change in their comments. Yang emphasized that his key role would be to retain talent in the wake of a steady stream of executive and engineering departures for more than a year. "We want to be a better Yahoo," he said. "It's imperative that we execute with speed, clarity, and discipline."
Likewise, Decker said Yahoo will in part dismantle the reorganization that Semel announced only six months ago. Yahoo had been looking for someone to head an audience group aimed at making sure more people flock to Yahoo's myriad properties, from its home page to sports, finance, music, and other sites. Instead, she will combine the advertiser group with the audience group and head it herself. The company is still looking for a technology chief to replace Farzad Nazem, who departed recently.
But precisely what moves the two will make remains uncertain. Some analysts believe the company needs to continue scaling back operations that aren't attracting advertisers. Yahoo also has tried to tap into the frenzy for social networking. But beyond some small successes, such as Yahoo Answers, a volunteer question-and-answer service, and the purchase of the fast-rising photo-sharing service Flickr, Yahoo has failed to come up with world-beating social services.
Most of all, analysts say Yahoo needs to prove that its new search advertising system, called Panama, will help close the gap with Google. Decker said second-quarter results would show better-than-expected progress with Panama. However, she said earnings guidance issued in April would likely come in only between the midpoint and the low point of those estimates because growth in display advertising continues to slow.
Time for a Change
For well over a year, talk that Semel's days at Yahoo might be numbered kept rising in volume. But in recent weeks, it appears that discussions of Semel's future intensified. Indeed, Semel said in the conference call that succession discussions had been "going on for quite some time.…. I saw myself as a coach more than a player going forward," he said.
At the June 12 annual meeting, neither Semel nor Yang, who was asked by a shareholder if he would step up to take a bigger role, gave a hint that such a big change was imminent. Some analysts and other observers believe that two shareholder votes at the meeting may have persuaded the board to take immediate action. More than 32% of shareholders withheld their approval of at least one director, and nearly 35% voted for a proposal to tie executive pay more closely to company performance.
The only thing some former Yahoos agree on is that the pair must do a better job than Semel. The change, says one former senior executive, was "way, way, way overdue." This person, as well as other former Yahoo executives and managers, say the company became more bureaucratic under Semel, slowing innovation at a time when Google and a raft of new Web companies were coming on strong.
It's not that Semel and other Yahoo executives didn't realize the urgency of catching Google in Web-search share and revenue. But time after time, Yahoo missed opportunities that others seized. News Corp. bought the social-networking site MySpace nearly two years ago for $580 million, while Yahoo didn't manage to snag now-ascendant Facebook despite offering as much as $1 billion last year. Last year, Google bought the fast-rising video-sharing site YouTube for $1.6 billion while Yahoo struggled to consolidate its 16 video offerings.
That trend continued this year in Yahoo's own backyard of online display advertising. Google made a $3.1 billion deal for ad-serving network DoubleClick, which is pending regulatory approval, and Microsoft shortly thereafter spent $6 billion on aQuantive. For its part, Yahoo bought the rest of Right Media, in which it purchased a 20% stake last year, but at a much higher valuation for a company whose presence trails those two.
Bringing Back an Insider
Semel also represented a different mind-set and culture from Yahoo's Silicon Valley roots. His Hollywood style and focus never meshed there, even after he was credited with turning the company around following the dot-com bust in 2000. "There's always been that chasm between technology and entertainment," says Jim Moloshok, a former Semel cohort at Warner and vice-president for media and entertainment at Yahoo until late 2005.
By most accounts, Semel also didn't develop a deep enough understanding of technology. "He was a fish out of water," says former Apple executive Jean-Louis Gassée, now a venture capitalist with Allegis Capital. "He just doesn't have the touch for technology, which is a necessary but not sufficient condition for success [on the Internet]. That's what propels Google."
For all the challenges, both Yang and Decker win kudos, especially inside Yahoo, which as much as anything needs a strong dose of managerial inspiration. "Jerry's got a uniquely honed intuition about the industry," says a former executive. "But does he have the skill set and the guts?" Decker, this person says, is smart and disciplined, but untrained in technology, marketing, or sales. "Together, they might be O.K. But they're exercising these muscles for the first time."