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Investors Sour on Yahoo Shakeup, Pushing Stock Lower


Investors in Yahoo abandoned their initial excitement over a management switch at the Internet media company, sending its shares lower on expectations that little real change was in the works.

Jerry Yang

Yahoo shares dropped 1.5% on Tuesday, partly retracing gains of more than 6% in extended trading on Monday after the company said co-founder Jerry Yang would take over the chief executive role from Terry Semel.

Some shareholders had bet that Yang's taking the helm signaled more drastic changes, such as extensive partnerships with technology and media players, or even a potential merger.

But that speculation cooled after Yang himself pledged a commitment to keeping Yahoo a "vibrant independent company."

"We believe this announcement implies that the near-term probability of a sale of the company is low," wrote Goldman Sachs analyst Anthony Noto in a note on Tuesday.

If Yahoo had truly been close to doing a deal, it probably would not have replaced Semel and would have weathered growing criticism of performance that has fallen behind that of Web search rival Google, Noto said.

Analysts also pointed to Yahoo's warning that its display advertising sales are slowing as the latest sign that the company is still wrestling with its financial performance.

But with intensifying competition from Google, Yahoo needs to make a move soon to shore up its business model, they said.

Semel Out, Investors in?

Possible Partnerships

"We believe Yahoo will consider partnerships with Comcast, AT&T, (Time Warner's) AOL, News Corp.'s MySpace, and Microsoft," RBC Capital Markets analyst Jordan Rohan wrote in a note to clients.

Speculation surrounding Yahoo's future has included the idea that it might give Rupert Murdoch's News Corp. a stake in the company in return for the popular MySpace social network.

"We believe an acquisition of Facebook would also be interesting, although a more likely acquirer of Facebook may be Microsoft," Rohan added. Facebook.com is a main rival to MySpace.

Semel is taking the role of nonexecutive chairman at Yahoo, while Susan Decker, the company's former chief financial officer, was named president to oversee the company's key advertising and media business operations.

In a conference call Monday, an emotional Yang hailed Semel as "a role model and mentor" and then sought to defuse recent speculation that Yahoo might be sold to Microsoft or another suitor hoping to exploit the recent turmoil at the company.

Yahoo's Possible Partnerships

In an interview later, Yang reiterated his belief that Yahoo will remain independent. 'We are well aware of the challenges facing Yahoo,' he said. 'We need to execute better and to get better talent. I feel Yahoo needed someone to be here for the long haul.'

Greg Sterling of Sterling Market Intelligence said the next few months may determine Yahoo's fate.

"Precarious Time"

'Yahoo still has a lot of great opportunities, but it's also a very precarious time for them,' Sterling said. 'They can't afford to be tentative.'

Yang, 38, still owns a 4% stake in the company currently worth about $1.5 billion. Fellow co-founder David Filo, who is helping to run Yahoo's technology group after the sudden retirement of the department's leader earlier this month, owns a 6 percent stake worth about $2.3 billion.

This will mark the first time that Yang -- previously known as 'chief Yahoo' -- has been in charge of the company in more than a decade.

Since Semel's arrival in May 2001, Yahoo's stock has nearly tripled as the company benefited from the influx of advertising flowing to the Internet from newspapers, magazines and other more-established media. But Yahoo's inability to capitalize on the shift as adroitly as Google tarnished Semel's legacy.

Mountain View-based Google now makes more money in a single quarter than Yahoo does in an entire year. The contrast represents a harsh comedown for Yahoo, which was the larger of the two companies when Google went public in August 2004.

Difference in Stock

Since then, Google has steadily expanded upon the Internet's largest advertising network to create nearly $140 billion in shareholder wealth as its stock price increased by more than sixfold. Yahoo's stock, meanwhile, is worth a little bit less than when Google went public.

Google's meteoric rise is an especially hard pill for Semel to swallow because he once flirted with the idea of buying Google. In mid-2002, Semel reportedly terminated negotiations when Google set its sales price at $5 billion.

Google's success since then has decimated the employee morale at Yahoo, leading to a recent wave of executive departures that raised concerns about whether the company would be able to retain the talent it needs to regain its stride.

'It's a tough place to be when you see another company eating your lunch like that,' said Mike McGuire, an analyst at Gartner Inc.

Just last week, Semel assured shareholders attending Yahoo's annual meeting that he had the fortitude to lead a comeback. He has been counting on recent improvements to Yahoo's online advertising system and a series of key partnerships to boost profits after the company suffered an 11 percent drop in its first-quarter earnings while Google's profit soared 69 percent.

In Monday's conference call, Decker said the advertising upgrade, known as Panama, is delivering results that so far have exceeded management's expectations.