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There are no easy remedies for what ails the troubled Internet giant as its board begins looking for a successor to co-founder Jerry Yang
After a tumultuous 17-month reign as chief executive, Yahoo! (YHOO) co-founder Jerry Yang gave up on Nov. 17. Having failed to reverse Yahoo's stalled growth and plunging profits, he will return to his longtime strategy-setting role as board member and Chief Yahoo. But now, as the board launches a formal search for a successor, more questions than ever swirl around Yahoo, especially: Can anyone save the struggling Internet icon?
The company, which is still profitable and expected to pull in $5.4 billion in revenues this year, is in no danger of going out of business. Yet Yahoo faces a dilemma: It must find a strong, ambitious leader who is also willing to preside over what is almost certain to be a major downsizing through divesting operations or laying off more employees, or even the outright sale of Yahoo. "Whoever comes in might need to break it to fix it," says Christa Quarles, managing director of Internet services at investment bank Thomas Weisel Partners (TWPG).
That's because despite its continuing strong presence on the Web, Yahoo is reeling from a triple whammy that defies a quick fix. It has steadily lost ground to search giant Google (GOOG) and burgeoning social networks such as Facebook and News Corp.'s (NWS) MySpace. Revenues rose only 3% in the third quarter, while profits slumped 64%. The worsening economy is widely expected to hit Yahoo's mainstay online display ads especially hard. Not least, Yahoo's stock price of about 11—even after rising almost 9% on Nov. 18 on the Yang news—is just a third of the 33 a share that Microsoft (MSFT) offered less than five months ago when it ended its unsolicited bid to buy the company.
All this will force the new CEO to make quick, decisive moves, especially with activist investor Carl C. Icahn and two allies firmly ensconced on Yahoo's board, following a settlement last summer that headed off his threatened proxy fight. Already, a source close to the CEO search says, the board's selection committee—Yahoo Chairman Roy Bostock, longtime directors Gary Wilson and Arthur Kern, and Icahn buddy Frank Biondi—has spent several weeks whittling a 50-person list to five. Along with executive recruiter Heidrick & Struggles (HSII), it is expected to start calling the names this week in hopes of settling on a pick in just a few weeks.
The board is looking for a strong operational manager who has been a CEO at a midsize company, not a strategist, according to sources. That's an indication the board still aims to keep Yahoo independent, whatever other deals the new chief may strike. Indeed, Microsoft CEO Steve Ballmer on Nov. 19 repeated that an acquisition offer is off the table, sending Yahoo shares into a tailspin. The stock plummeted 21%, to an almost six-year low of $9.14. But Ballmer said he's still interested in talking again about a Web search advertising partnership. The candidates considered at the outset, sources say, include Yahoo President Susan Decker as well as outsiders such as Jonathan Miller, former chief of Time Warner (TWX) Internet unit America Online, and News Corp. Chief Operating Officer Peter Chernin. Other observers have floated former Microsoft executive Kevin Johnson, who recently joined Juniper Networks (JNPR) as CEO, former Yahoo COO Dan Rosensweig, and Google executives Tim Armstrong and Jonathan Rosenberg.
Yet none of the likely candidates looks ideal. Analysts think Decker is unlikely because investors view her as a key member of the management team that has failed to revitalize Yahoo. Johnson, whose advertising and media role at Microsoft makes him very attractive, is unlikely to leave a job he just took. Miller's tenure at AOL was mixed, and he's not seen as the operations expert Yahoo needs. Chernin would be a catch, but he's negotiating an extension to his lucrative contract at News Corp. And neither he nor the Google executives would be the CEO-level leader Yahoo aims to get.
Facing a Divided Board
Another challenge to drafting a top-notch CEO: They may clash with factions of a divided board. Icahn and his allies may favor quick deals to boost the stock price, while Yang and his fellow longtime directors may continue to resist radical changes. What Yahoo needs, say management recruiters and analysts, is someone with the profile of Hewlett-Packard (HPQ) CEO Mark V. Hurd. A low-key operating wizard from the relative tech backwater of NCR (NCR), Hurd has managed to turn around HP in the three short years since he joined. In fact, one source close to the search says Yahoo isn't ruling out an executive outside the Internet realm. "You need someone who doesn't have the ego of a rock star," says Dona Roche-Tarry, a partner at executive search firm CTPartners. "But the new person would need the strength of character to stand up to Yang and the board."
Problem is, that probably means scaling back Yahoo's ambitions—an unappetizing prospect for a high-powered executive hoping to make a lasting mark.