Yahoo's Joyful, Difficult Journey

The beloved Internet icon's buoyant beginning gave way to missed acquisitions, an inferior understanding of the Web's evolution, and Google's shadow

From left, Yahoo! co-founder David Filo, former CEO Terry Semel, and Jerry Yang. Spencer Platt/Getty Images

by Robert Hof

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For a company whose very name is a joyous exclamation, it's almost unbelievable that Yahoo! may end up going out with a whimper. Yahoo's possible purchase by Microsoft, which launched an unsolicited $44.6 billion bid on Feb. 1, would end one of the technology world's iconic fairy tales. If the deal happens, the company that put a friendly face on the wild and woolly Internet would be reduced to nothing more than a brand within the bowels of an old-guard technology titan.

That would be a huge comedown—and an object lesson in how easily a tech company can lose its way in the industry's treacherous rapids. What shocks many people about Yahoo's decline is that this is no shell of a company. Yahoo (YHOO) has seemingly unmatched assets: a global base of 500 million monthly visitors, leadership in key online content categories such as finance, sports, and e-mail, and even a new search ad system that's managed to win some kudos from advertisers in a market dominated by Google.

But after years of watching promising projects get mangled in a convoluted corporate bureaucracy, both shareholders and many employees have been giving up on the once-loved company. Matters came to a head on Jan. 29, when Yahoo issued another disappointing quarterly report and an even more troubling outlook, announcing 1,000 job cuts (BusinessWeek.com, 1/29/08). When Yahoo executives essentially said a turnaround was another year away, investors reached a boiling point, knocking the stock to its lowest level in four years. "Management has no credibility," fumed Oppenheimer & Co. analyst Sandeep Aggarwal.

At the same time, even some longtime Yahoo executives and employees—those not among the hundreds who departed for greener pastures in the past two years—were getting close to throwing in the towel. "I just don't see things changing," says one angry executive who has worked at Yahoo almost six years and is looking elsewhere now. "I don't see people making really tough decisions. There's been a lot of talking but not a lot of walking."

Comeback Options

When a company spirals this low, it's often impossible to stage a comeback. And in Yahoo's case, the company has few options left. Microsoft's (MSFT) offer, a whopping 62% higher than Yahoo's market value before the announcement, seems crafted to ward off potential rival bids. Yahoo could swallow a poison pill of sorts, seeking an alliance with Google (GOOG) in which its rival would run its search and ad businesses, a strategy some analysts had suggested even before the Microsoft bid. Alternatively, Yahoo could look for a private equity firm to take it private, though the credit crunch has made raising such a huge sum more difficult.

With shareholders unlikely to show much patience for stalling, Yahoo's best bet may be to force Microsoft to pay more by courting a cable TV company like Comcast (CMCSA) or a media company like News Corp. (NWS). Either way, most analysts think Yahoo's fate is sealed and that the deal will go through. And at this early stage, it's entirely unclear which parts of Yahoo would survive inside a company often dubbed the Borg, after the race of human-robot hybrids from Star Trek.

Mergers, of course, are part and parcel of every industry, most of all the fast-moving technology business. But this tale is particularly poignant because it's about Yahoo, the little company started by two Stanford guys who shelved their pursuit of engineering degrees in 1994 to create the first widely used Internet directory in a campus trailer.