Coop's Corner

Is this the face of Yahoo's next boss?

OK, Jerry, so now what?

Don't you know that Jerry Yang would grab Microsoft's original $31 a share buyout bid if he could turn back the clock. Of course, that ain't about to happen, so mark November 5, 2008 as the start of the Great Countdown until the company's fate gets decided by Microsoft, or some still unknown third party. From this point on, its CEO has run out of options.

Google announced Wednesday that it was backing out of its proposed search ad partnership because it didn't have the stomach for a fight with Uncle Sam's antitrust lawyers. From a Google perspective, that's a perfectly understandable tactical retreat. In the near-term, the deal would have helped Yahoo more than Google anyway. (Yahoo expected the deal would have raised its revenue by $800 million in its first year, adding an additional $250 million to $450 million in incremental operating cash flow.)

It's hard to believe Microsoft won't go after Yahoo again. At a sharply discounted price to its original offer, why wouldn't it? Yahoo still possesses a coveted franchise, but this economy is a world removed from what it was in late winter when Microsoft was hot to do an acquisition. Back then, Yang could plausibly argue to his board and shareholders the logic of holding out for a higher price or negotiating a partnership with Google.

He gambled and lost.

Yang may still object to a Microsoft sale, but with the stock stuck near its all-time lows, Yahoo's shareholders won't care what he thinks. They've been badly hosed by being too patient.

Now it's make-or-break time for Jerry Yang.

Yahoo CEO Jerry Yang

(Credit: CNET Networks)

If his gambit succeeds, Yang will be feted as the second coming of Steve Jobs, reviving the glory of a one-time technology bellwether. If not, he'll join Terry Semel and Tim Koogle on the roster of failed Yahoo CEOs.

Earlier Thursday, Yahoo announced that Microsoft was no longer interested in pursuing a deal. Into the breach steps Google CEO Eric Schmidt with a search advertising arrangement that could be worth as much as $800 million to Yahoo.

•  During the first year after implementation, Yahoo expects the deal to generate an estimated $250 million to $450 million in incremental operating cash flow.

•  The agreement is nonexclusive. Yahoo can display paid search results from Google, other third parties, as well as its own Panama marketplace. (Here are more details on Yahoo's search ad-pact with Google.)

After all the "sturm und drang" revolving around a possible Microsoft deal, this much-rumored Google tie-up comes as a bit of an anticlimax. But at least Yahoo has chosen a direction, moving beyond the endless muddling of the last five months.

Steve Jobs: Been there, done that

(Credit: Dan Farber/CNET News.com)

Yang's immediate task is to find a way to sell the Google deal to regulators. The agreement won't officially kick in for another three and a half months because of antitrust sign-offs. Yahoo can probably persuade Washington to give the green light.

Some will dismiss the deal as an acknowledgment that Yahoo wasted millions of dollars developing its Panama search advertising platform (not to mention the $1.6 billion it paid in 2003 to buy Overture Services). There's some truth there but it may be too harsh a judgment. Besides, the Google arrangement may turn out to be a clever move if it fosters the two companies' respective strength in search and display advertising.

Whether Carl Icahn and the investor class agree--we'll know Friday morning when Wall Street opens up for business. Icahn could do nothing Thursday but count his losses as shares of Yahoo plummeted after the company announced the collapse of the Microsoft talks. If the Google deal fails to do much to revive the stock price, they'll naturally call for Yang's scalp.

Of course, that goes with the territory. Yang never wanted to see Yahoo get swallowed by Microsoft. He wanted the opportunity to direct the turnaround, and now he's got his wish. Is Yang equal to the challenge? Beats me. He's super-smart and knows the company backwards and forwards. But he is not a charismatic leader and he turned in an uneven performance on the conference call announcing the Google deal. He tripped over words and sounded unsure as he spoke, leaving No. 2 Sue Decker to handle the hard questions. I wouldn't read too much into appearances, but strong CEOs know how to put on a good show.

Stepping up his one-man PR offensive, activist investor Carl Icahn described as "completely disingenuous" Yahoo's contention that disagreements over price torpedoed acquisition talks with Microsoft.

Resistance is futile: My kung fu is stronger than your kung fu

Icahn, a veteran negotiator, broke an uncharacteristically long silence by talking to the media this week to rally anti-Yahoo opinion. Yesterday it was The Wall Street Journal, today it was CNBC.

"Sue Decker says today 'We're doing everything we can but the price isn't high enough.' It's not high enough because of (a proposed severance) package," Icahn said in an interview on the CNBC program, Fast Company. "And it's a bit worse than you're alluding to because one of the things that Microsoft, I would imagine, needs here is the workforce. And how do you then go in and tell them (Microsoft's) paying $45 billion but we're incentivizing this workforce that you want to leave? I mean, it's sort of--it's sort of incomprehensible what they're doing here."

The proposed Yahoo severance plan, which comes out to roughly $1.60 a share, was seized upon by critics who said it presented an obstacle to any potential deal with Microsoft. In a letter he sent today to Yahoo Chairman Roy Bostock, Icahn demanded that the board rescind the severance plan, which he described as "the largest impediment to a Microsoft deal." Icahn said that decision would free up approximately $2.4 billion and possibly even more that could be added to the bid.

In the meantime, Icahn used his CNBC appearance to deride Yahoo's management as lacking accountability. On Monday, he again urged the dismissal of Yang, who Icahn said stood in the way of a fruitful negotiation with Microsoft. In mid-May, he filed a proxy slate to unseat Yahoo's board.

"I tell you I've rarely seen (a management team) where the company has gone to such lengths to entrench themselves and it's a sad commentary."

At the same time, Icahn remained unenthusiastic about any of the alternative deals being bruited about between Yahoo and Microsoft in lieu of an outright acquisition.

"Sometimes, you have to have patience," Icahn said. "But I believe if it's not this month--it'll be six months from now. But it's crazy for the company now to do this alternative deal and give the store away because obviously, an alternative deal is a poison pill. Because once you've done an alternative deal and given search to Microsoft, you don't need Microsoft to buy you anymore. So, that would be a poison pill."

Icahn also said a partial sale would leave Yang and the current board in charge, which he said "would be terrible for shareholders."

Jerry Yang and Sue Decker, Yahoo's top two executives, took the stage earlier this week at the D Conference organized by the Wall Street Journal. Naturally, they were guarded in what they had to say about a possible sale--in full or part--to Microsoft. But the tone and content of their comments was illuminating in unexpected ways. Earlier on Friday, I had a chance to chat about their appearance with Dan Farber, who was part of our team of reporters covering the conference.

Click here for full coverage of the D: All Things Digital conference.

If Jerry Yang does lose his job as the result of a deal between Yahoo and Microsoft, the Stanford connection may prove its worth.

(Credit: Dan Farber/CNET News.com)

"Jerry is very talented and if he wants to work at Google we'd be very excited to have him, but I don't think that's going to happen," the BBC quoted Google co-founder (and fellow Stanford alum) Sergey Brin. He was responding to a question whether Google would ever consider employing Yang if Yahoo's chief executive lost his job.

Brin is huddling this week with the other two-thirds of Google's top leaders in Hertfordshire, England, for the company's European "Zeitgeist" meeting. Eric Schmidt later told reporters that he would meet with Brin and Larry Page to digest news of Microsoft's renewed interest in Yahoo and decide on Google's next move. (Maybe we'll hear something soon on a follow to Yahoo's apparently successful pilot of Google's search advertising technology.)

It's not entirely idle speculation. OK, there's a little of that going on. But if Yang wanted to make his next home at the Googleplex post-Yahoo, why wouldn't they want to make room? Of course, there's no way Yang would be able to join the ruling triumvirate (Three's a troika, but four's a mess). Still, I can envision one of those 30,000 foot big picture jobs where they get paid a lot for thinking deep thoughts. Give the guy the honorific title of "Chief Google" along with a swell tee shirt and turn him loose.

Strange but for some reason, no mention was made of Yahoo's other co-founder (and fellow Stanford alum) David Filo. Must have been an oversight.

Jerry Yang was able to rope-a-dope Steve Ballmer. But he's never had to square off against a royal pain in the ass like Carl Icahn.

This afternoon, Icahn, a billionaire with a God complex--or is that repetitive?--wrote a new chapter in this deliciously goofy Microhoo saga when he launched plans for a proxy contest to challenge Yahoo's famously feckless board of directors with his own handpicked nominees.

Talk about jumping out of the frying pan into the fire.

The problem for Yang is that he's over-matched. We're talking about a geek going up against one of the most brilliant, cold-hearted bastards this side of T. Boone Pickens (and I meant that as a compliment.) Icahn basically wrote the book on greenmail when he was squeezing sundry CEO testicles as a corporate raider in the 1980s. An abbreviated list of corporations he's had his way with include Trans World Airlines, B.F. Goodrich, Phillips Petroleum, US Steel, Texaco, Goodrich-Uniroyal, RJR Nabisco, General Motors--and more recently--Time-Warner.

Yo Jerry, I can take down Gordon Gekko with one hand tied behind my back

(Credit: The Icahn Report)

In a recent profile, Fortune labeled Icahn "The Hottest Investor in America." Aside from the typically Madison Avenue hyperbole, the description is apt. Icahn, who has a brilliant knack for uncovering undervalued companies, has an important ally in this looming proxy fight: the timing's all in his favor.

After infuriating investors by walking away from the sure payday that Ballmer put on the table, Yahoo doesn't have any options (And no, neither Google nor Time Warner is going to play white knight with a surprise buyout bid.) Yang may be true to his word about having a long-term rescue plan, but that's not helping Wall Street's bad mood. Whatever the truth, Yang was portrayed during the Microsoft negotiations as a passive-aggressive ditherer who queered a good thing. A bit harsh, perhaps, but a lot of paper profits when Microsoft withdrew its offer.

In a perfect world, Yahoo's fate would be placed in the hands of technologists, win, lose, or draw. Let the best ideas flourish and to the victors go the spoils and all of that. In the real world, though, finance capitalism trumps all. If he doesn't already realize it, Yang will soon: Now he's up against the Big Dog.

Barring a come to Jesus moment by both sides, "Microhoo" is dead and buried. So who won and who lost? Months from now, we'll have a clear idea. In the meantime, here are my back-of-the-envelope picks.

Biggest winners: Steve Ballmer and Microsoft
A lot has been made of Microsoft's seeming inability to engineer its way out of a paper bag. Trouble with the conventional wisdom is that it's usually out of date. Prior to Ray Ozzie coming onboard and Microsoft's move to embrace cloud computing in a big way, Yahoo may have been worth nearly any price.

Jerry Yang is a girly-man--and that goes double for Eric Schmidt.

Not now. Besides, why buy trouble? By walking away from a protracted proxy contest, Ballmer saved billions buying a company which would have existed in name only. Too many malcontented Yahoo employees would have walked out the door. What's more, the cost of integrating the companies would have been a cluster bomb. Now Microsoft can dip into that big war chest and selectively buy any number of Web 2.0-ish companies to complement its bigger strategic ambitions.

Biggest losers: Jerry Yang and Yahoo
When Wall Street opens on Monday morning, I wouldn't want to be holding shares of Yahoo. After the company effectively put the kibosh on what would have been a 70 percent premium, investors are going to have a fit. In his letter, Ballmer said Microsoft was going to raise its offer to $33 a share, or another $5 billion, but the deal fell apart because Yahoo wanted even more.

I've got a plan. Really. I do.

I'm anxious to hear Yahoo's side of the story, but the spotlight's on Yang to convince outsiders that he held out for all the right reasons and not because of personal animus toward either Ballmer or Microsoft. Perhaps he thinks he can inveigle Rupert Murdoch and News Corp. or that the Google connection will work out to Yahoo's bigger benefit. Tough to say what's going through his head these days. Yang has remained incommunicado during the course of the entire novella. Perhaps he believes this clears the decks for the "rewiring" of Yahoo previewed by the company's CTO last month at the Web 2.0 conference. Maybe it does in the long term, but Yang doesn't have two years to muck around. He's got to produce a turnaround now.

Eric Schmidt and Google: Moderate losers
It's as simple as a zero-sum game. Whatever hurts Microsoft benefits Google. And vice-versa. The conventional thinking is that the Microhoo combo would have presented Google with a potent threat. I don't buy that line.

Sergey, Larry, and I quite enjoy Steve's Monkeyboy routine

On paper, a Microsoft-Yahoo merger looked formidable. In practice, however, it was rife with potential for a major culture clash. Management would have been bogged down for months trying to figure out how to get all the high-strung boys and girls on both teams to play nice. Google would have continued to feed its juggernaut, snickering all the while at "Micro-molasses." Now Ballmer's going to be in a frenzy to get Microsoft back in the game. Google would have fared better if Microsoft had to focus on making a Yahoo merger work.

Rupert et al: Moderate winners
Round and round they go. Maybe Murdoch or the folks at Time Warner (AOL) still hanker after Yahoo. If so, they may yet get another chance to twirl. During the last couple of months every scenario was on the table. Here's another: if Yahoo's stock fails to recover, Yang doesn't have any wiggle room. Without immediate improvement in the stock price, management may be amenable to a combination between Yahoo and one of its erstwhile suitors.

Jerry Yang: He's not ready to go down without a fight.

(Credit: Anne Broache/CNET News.com)

So if Yahoo thinks so much of Google's search technology, why did it waste all those millions on its 'Panama' ad system?

All I can say is that Jerry Yang must really pack a pair.

After spending millions to build a Google-like algorithm, the company plans to test Google's AdSense for Search service.

Say what?

"This is only a limited test, and does not necessarily mean that Yahoo will join the AdSense program," the company said.

Sure.

Yahoo can spin this as a experiment on 3 percent of its traffic and thus stand on terra firma when it rejects this as an admission that Panama is broken. After all, this is only a "test." Word games notwithstanding, Panama remains behind Google's AdSense in terms of RPM (revenue per thousand impressions) or revenue per search query, in this case. One advertising exec I spoke with put it this way:

"Panama might be perfect on the technology side and might 'know' exactly which ads it should serve onto each page, but if there aren't any active advertisers for it to serve then the end result will still be a low yield. The ad coverage will reflect negatively on the quality of the platform. Google has much better ad coverage than Yahoo does for historical reasons, and that's not something that can be solved quickly."

Ultimately, he added, this boils down to a question of how many clicks get fed into the algorithm to make it intelligent about targeting. Due to its bigger market share, Google's got insight into far more clicks than anyone else. That means it will continue to get more intelligent about the ads that work well.

Maybe Yang's being crazy as a fox here, though investors might wonder whether a collection of village idiots is now running the show. After two months of trying to elude Microsoft's bear hug buyout offer, is this the right time to tacitly acknowledge that Yahoo's most ambitious IT project is a bust? I'm sure that's going to thrill the company's investors.

Full disclosure: I never believed Yang was the right replacement for Terry Semel. Woody Allen famously quipped that 90 percent of success in life can be accomplished by just showing up. Not in this case. To be fair, Yang inherited a company listing at 30 degrees. But months passed without strong action. If not Microsoft, it was only a matter of time before some other bidder would have come knocking.

Yang's problem is that he wound up with a suitor he can't stand.

Let's assume for the moment that Yahoo ultimately does agree to a Microsoft buyout. How long do you think it will take for Steve Ballmer to pull the plug on the Google test? This is only an extra obstacle Yahoo's putting in Microsoft's way. So far, Microsoft says it's still interested in doing a deal (though for the life of me I still can't understand why.)

Just to keep the yucks flowing, Microsoft issued a terse response under Brad Smith's byline:

"Any definitive agreement between Yahoo and Google would consolidate over 90% of the search advertising market in Google's hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo! We will assess closely all of our options."

Brad's a good dude, but that line came straight out of the pot-calling-the-kettle-black folder. By now, we're all acutely familiar with Microsoft's devotion to maintaining open and competitive markets.

Then again, neither side in this monotonous novella has a monopoly on hypocrisy.

Jerry Yang: If Ballmer wants me, first, he must bring me a Shrubbery!

(Credit: Anne Broache/CNET News.com)

Give Steve Ballmer credit for trying to bail Jerry Yang out of an impossible position. But he'd do better teaming up with Marc Benioff and Salesforce.com.

If you're a Microsoft shareholder, the good news is that Saturday's love letter to Yahoo's board finally starts the clock ticking. Yahoo's got three weeks to come up with a final yes or no answer--and no, Microsoft says, this is its best and final offer. Hopefully, Yahoo's incredibly deluded board will continue to fancy its prospects and tell Microsoft's negotiators to take a hike. At that point, Microsoft can do much, much better for itself by taking a run at Salesforce.com.

Microsoft is working on CRM Live in a bid to go after Salesforce.com, but its still unclear how its services push will do. In the meantime, Benioff's cleaning up and having a one great time mocking Microsoft's inability to turn "software-plus-services" into a winner. (Check out the recent interview News.com's Dan Farber and I did with Benioff.)

But this is all the usual window-dressing. Microsoft's ready to pay $44 billion and change--and that's still one helluva lot of change--to buy Yahoo. So if Ballmer came up with a serious offer, Benioff and the Salesforce.com board would take it in a heartbeat. The combination would bring together two companies whose similar enterprise DNA would mesh a lot better than would a kludge like "Microhoo." There's been a ton of discussion about the difficulty making a Microsoft-Yahoo pairing work. Do you really believe Yahoo's Greta Garbo act is going to make any post-merger transition smoother?

The Salesforce.com scenario's a lot cleaner. Benioff's company is developing a next-generation platform, similar in some ways to what Microsoft did with Windows except in the cloud. The similarity is in bringing thousands or millions of developers into the tent to build applications that require a subscription or license to the platform. It prints money, and in the case of Salesforce.com takes a lot of the 20th century drudgery out of the development process. Salesforce.com is based on Java and Oracle, but customers don't care whether its .NET or Java as long as it works.

In addition, Microsoft would still have money left over to invest in beefing up its search business. Microsoft's Google obsession shouldn't obscure the fact that there's huge potential revenue within grasp if management can turn its software services into a success.

If Jerry Yang & Co. want to screw this one up, Microsoft should avoid future headaches and simply wish them well.