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Yahoo?  You Have Some 'Splainin' to Do!

Yahoo faces the music in a big way Tuesday, hosting the company's annual shareholders' meeting in Santa Clara, Calif. at 10 am, Pacific time. And the question for the company is -- whether that music will be a dirge or something akin to Pomp and Circumstance.

Exterior view of Yahoo Inc. headquarters in Sunnyvale, California.
Paul Sakuma
Exterior view of Yahoo Inc. headquarters in Sunnyvale, California.

Terry Semel will probably spend a good chunk of his time tonight wondering just how bad it's going to get, and how angry shareholders have become over the company's apparent glacial response to some of the biggest trends in the internet business. But those business issues will take a back seat to Semel's ongoing, and extraordinary, pay package that once again turned him into Silicon Valley's highest paid CEO last year. Semel raked in another $71 million and that's on top of the nearly $550 million he's already pocketed over the past five years.

Those first couple of years, it would seem anything the company wanted to pay Semel was worth it. His turnaround of the company was swift, successful, and visionary. But over the past 24 months, Yahoo has stalled even as Google continues to go gangbusters, leaving many in the industry to wonder where this company has jumped off the tracks.

The past year has been brutal for Yahoo: continuing to lose ground against Google; losing the YouTube bidding war; losing the DoubleClick bidding war; stomaching the ongoing delays of the new monetization software called "Panama," which was designed to squeeze more cash out of every click; dealing with management turmoil at the highest order, including the reorganization last December that cost former COO Dan Rosensweig his job; and propelling CFO Sue Decker into the de facto Number Two spot behind Semel. Farzad Nazem, the company's CTO, announced his retirement last week (though some scratched their heads when he survived that reorg last December since all those Panama delays occurred on his watch.)

Yahoo shares have done nothing these past few years. A little up; a little down, yet nowhere near that $45 a share the company enjoyed in January, 2006.

Yahoo's got problems, to be sure. The board seems squarely behind Terry Semel, at least publicly. At 64, Semel may be on his way out the door and maybe the board wants him to graciously retire when he's ready. He's already indicated that he doesn't plan to quit; that doing so would be against the very executive he strives to be. One that certainly doesn't abandon ship. But this ship needs to be righted and Semel hasn't demonstrated that he has the strategic vision to get that job done.

A group of shareholders has put their collective interests together, representing about 2 million shares, and they plan to make their voices heard at the meeting. Loudly. Eric Jackson, the leader of that dissident group, says bluntly: "We would like to see Terry removed. You get a few kicks at the can, but you don't get to go over 10 (kicks) for the last three years and get to keep your job. We would like to see significant turnover at the board level. We're urging all investors to vote against 7 out of the 10 directors on the slate at tomorrow's meeting and if any one director gets less than 50%, they'll have to immediately resign from the board."

It's not clear just how much support and momentum Jackson and his group enjoy, but it is clear that many shareholders are impatient and upset. Institutional Shareholder Services and Proxy Governance have both recommended that shareholders vote against Semel and the three members of the board who also make up Yahoo's compensation committee. The fact that Sue Decker made nearly $30 million last year; that Dan Rosensweig made almost that much; that Farzad Nazem took in over $12 million, all thanks to the exercising of stock options even as Yahoo shares continue to flounder, may have something to do with those recommendations.

Citigroup's Mark Mahaney is one of the Street's best internet analysts. He tells me that "Clearly, Yahoo's management team is on the hot seat, and probably it should well be." He adds, "Should there be some management changes? Yes, probably."

"It is not so much about strategic errors," says Mahaney. "Although the management team may have missed one or two trends like social networking, it is really for execution errors. This company has been slow to execute on what it knew were important areas, but it was too slow to go after those."

He who hesitates is lost, the old saying goes, but in the internet world, with Google lurking, he who hesitates runs the risk of being destroyed. But Mahaney does find a silver-lining to all this: "We continue to believe the best money-maker in the internet sector is Google. But if you look at Yahoo, the risk/reward here is still positive. The stock trades not too far off radio stocks, newspaper stocks, traditional media stocks. yet, it does have higher growth than any of those sectors. So it is a matter of execution."

Hmmmm. "Execution" is an interesting word. Some investors wonder whether Terry Semel's job is on the chopping block with Roger Kay at Endpoint Technologies concerned that Semel has lost his motivation.

"They've already paid him $450 million, and he's feeling pretty satisfied. He might just be ready to push back from the table," says Kay. "How do you motivate a guy who's a half-billionaire, at least from this round, and from others he's got more, to do anything new and interesting? It may be just be too much hard work for somebody who's got that much money in his back pocket."

Those are tough words, but these are tough times. I've had the opportunity to talk with Semel a number of times. He's an engaged, personable, incredibly bright, intuitive executive who truly does "get it." I liked him. He was honest with me. He tolerated me. I enjoyed speaking to him. But Yahoo needs a new vision. Or at least a much more effective way of communicating Semel's existing message.

Right now, Yahoo is indeed doing so much right, but that message isn't getting conveyed to investors and the media. This is a company that should be in the sweet-spot of its revenue growth; but instead the media paints a picture of a hapless, rudderless company that can't seem to get out of its own way.

That's partly because of the lack of clear, decisive, creative, innovative, messaging coming from the company. I contacted the company last week ahead of Tuesday's shareholder meeting and spelled out precisely the kind of story we wanted to pursue. The compelling revenue streams; an update on Panama; the successful partnerships Semel has been able to forge with his old Hollywood buddies; the way Yahoo seems to have developed a better business model than Google since there seems to be so many ways Yahoo can generate revenue when Google is still essentially a one-trick pony in search advertising.

The response? None. Zilch. Nada. I mean, are you kidding me? So weird.

Which makes Tuesday's meeting all the more interesting. Semel and the entire board will be on the hot seat. The time for a clearly conveyed strategic vision is now. The groundswell of impatience is only gaining momentum, made all the worse by the San Jose Mercury News' compensation survey which came out Sunday, and the top of which was dominated by former and current Yahoo executives. Even though investors aren't sharing the same wealth.

Ouch.

Nothing substantive will likely come from Yahoo's shareholder meeting. And nothing substantive will happen until institutions have had enough. But the individual shareholders with small and moderate holdings in the company will line up to make sure the board hears their dissatisfaction. Great theater for some of us. Truly painful for all the others who've tied up hard-earned cash in a company wandering aimlessly through the internet.

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