At the time of the deal in October 2005, with longtime media executive Terry Semel at the helm, Yahoo was closing out a year in which net income doubled and sales jumped 47 percent. Even though the company had given up the lead in digital advertising to search engine Google, the two were still neck and neck in terms of ad dollars. Of the $11.4 billion in revenue between them in 2005, Yahoo had 46 percent. Plus, it was the more profitable of the two.
Now, after a disastrous (almost) decade for the Sunnyvale, California-based company, Yahoo's revenue is less than 10 percent of Google's. In the lucrative search market, Google took such command that Yahoo was eventually forced to partner with Microsoft's Bing search engine just to stay relevant.
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Yahoo co-founder Jerry Yang, during his tenure running the company in 2008, rejected a $44.6 billion takeover offer from Microsoft, passing on what would have been a huge premium for investors. Meanwhile, Facebook's emergence—and Yahoo's failed attempt to purchase the social network—has eaten into Yahoo's share of the display advertising market, while other services like Twitter, Pinterest and Pandora have explored more innovative ways to capture ad dollars.
"They lost any technology edge they ever had," said Ethan Kurzweil, a partner at Bessemer Venture Partners in Menlo Park, California. "They stopped attracting cutting-edge people."
Yahoo's worldwide share of the digital advertising market has plunged to 2.5 percent, while Google's (including YouTube) has soared to 34 percent, according to eMarketer. Facebook has captured 7.8 percent. Since 2005, Google's sales have climbed ninefold, and Yahoo's have actually shrunk. Even after a two-year stock rally—fueled by Alibaba's valuation increase—Yahoo's shares have hardly budged since late 2005. Google's stock price has about tripled.
To try and right the ship, Yahoo turned to its top rival. Marissa Mayer, the 20th employee at Google, was hired as Yahoo chief executive two years ago, becoming the fourth official CEO since Semel's departure in 2007. It's an unenviable task, because aside from the Alibaba investment, investors ascribe virtually no value to the company. Meanwhile, just north in Palo Alto and San Francisco, Internet and mobile start-ups with sky-high valuations are battling it out for top engineering talent.