CEO Search: Can Anyone Save Yahoo?

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

By Robert D. Hof

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.

Pleasing Icahn

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.