For Jerry Yang, July 3 will loom large in his diary. That is the date that Yahoo!, the online giant he co-founded 14 years ago, has set for its annual shareholder meeting and he will face dismayed investors, angry at the weekend’s rejection of a last-minute $47,5-billion offer from Microsoft.
The next eight weeks are crucial. If Yang arrives at the meeting without a deal with another player, a concrete plan for reviving the firm’s fortunes or at least a promise to hand some of the firm’s cash back to shareholders, Wall Street will ‘flay him aliveâ€, said one industry insider this past week.
Yang might even face a direct challenge to his leadership of the business. Under Yahoo!’s bylaws, nominations to the board of directors must be received by May 15 and at least one group of activist investors is looking to mount a fight.
Wall Street analysts were poring over the future of Yahoo! and coming up with a limited range of options for the company. These break down into: buying or forming a partnership with another major online player to increase audience reach and advertising revenues; sweating it out and focusing hard on the tough three-year goals Yang set the business during the three-month bid battle; and getting back into talks with Microsoft.
Top of many investors’ lists was the latter option. Yang has made it plain since the fateful meeting with Microsoft boss Steve Ballmer in Seattle last Saturday, at which he rejected the firm’s increased $33-a-share bid, that he had ‘mixed feelings†about the ending of talks and he was not opposed to a deal with anyone at the right price. Having plunged 15% on Monday, shares in Yahoo! were up more than 4% on Tuesday on hopes the two sides would get back together.
But Jean-Philippe Courtois, president of Microsoft International, seemed to shoot down the possibility of the software group returning when he said the collapse of talks was ‘the end of the storyâ€.
Some of the bankers involved in the deal, however, have suggested that the talks collapsed purely because of the personalities involved and not the financial realities of the situation.
In the lucrative online search advertising market Google is the dominant player and there is no other company that either Microsoft or Yahoo! can work with that will provide them with enough scale to compete. And Google is getting more powerful as time goes on.
In March last year Google had 53,7% of all internet searches in the United States and Yahoo! secured 21,8%. In the same month this year Google had gained share — to 58,7% — while Yahoo! had gone backwards — to 18,1% — according to Nielsen Online. Microsoft gained share over the same period, but is in third place, with 12% compared with 10,1%.
Yahoo!’s position in the market was weakened by the fact that it spent much of the past two years focusing on technology, building its Panama platform, which enables advertisers to bid on search terms, while Google was steadily building its share of internet users.
But having pumped more than $150-million into its technology, Yahoo! now wants to get out of search altogether. Yahoo! carried out small-scale trials of Google’s technology on its Yahoo!.com page last month and in his letter Ballmer raised concerns about Yang’s apparent desire to widen that trial into ‘the outsourcing to Google of key paid internet search terms†on Yahoo!.
Analysts reckon that because Google gets more money for its search terms than its rivals, such a deal, if it got past the regulators, would add up to $1-billion to Yahoo!’s revenues. But it would be a mammoth U-turn and leave Yahoo!’s advertising business focused on the online display advertising market and its core Yahoo! online property.
That might go some way to explain why Yahoo! is still looking for alternatives.
Having snapped up online photograph sharing site Flickr and bookmarking service Del.icio.us in the past few years, Yahoo! moved to increase the size of its online audience. But it is also understood to have held talks with Time Warner about buying AOL, which would give it a larger slice of the pie. Microsoft is also believed to be interested in AOL and its search advertising is already supplied by Google. AOL also owns Bebo, which used to be one of Yahoo’s advertising partners.
Yahoo! has held talks with News Corp about a deal to get hold of its social networking site, MySpace, but again Microsoft has held similar discussions and Google is the site’s search advertising provider.
In the past two years Yahoo! has tried to buy Facebook, which has emerged as a major competitor to MySpace, but was rebuffed. The site has yet to sign up a search advertising partner, but Microsoft is desperate to do a deal with the company, having snapped up a small stake in it last year.
If no deal can be pulled from the hat, Yang will have to focus hard on his promise to double operating cash flow in the next three years from $1,9-billion to $3,7-billion in the face of a softening global economy. It is unlikely that the first tangible results of this plan will be there for investors to see in July, so he might need to sweeten them with a return of some of the $2,3-billion Yahoo! has in the bank. That is likely to be the cost of the space Yang needs to turn around Yahoo’s fortunes.–