Yahoo Tries to Heal Itself—Again

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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.

With Catherine Holahan in New York.

Hof is BusinessWeek's Silicon Valley bureau chief.