The Story Of Yahoo's Decline

You know you're having a bad month when you're forced to blog your resignation as CEO of a major internet player only to see the company's stock price jump at the news. I'm talking, of course, about Jerry Yang who on Tuesday announced he would be resigning his role of CEO of Yahoo once a successor has been tapped. Yang, who led the company for 18 disastrous months, is a co-founder of the search engine company and will remain in his role as "Chief Yahoo."

While the last month or so has been particularly disastrous for Yang's tenure as CEO, there were signs that signaled he had lost the rudder of the good ship Yahoo. His run was marred by half-finished projects and incomplete deals that ultimately brought the water level so high that not even every able-bodied hand could bail Yahoo out.

Microsoft Merger

In February Microsoft shocked the IT world by making their initial, unsolicited bid for Jerry Yang's company to the tune of $44 billion, or $31 per share. At the time, the bid from Ballmer and Microsoft marked a 62 percent premium over the cost of the Yahoo's shares in February.

Yang was operating as the CEO of the company and, coincidentally, the day before Microsoft's bid for the Yahoo had arrived, former CEO Terry Semel resigned his position from the board.

What played out of the course of the next several months was instrumental in pounding the first nail into Yang's coffin as CEO of the company.

It was clear from the outset that Steve Ballmer, CEO of Microsoft, was looking to strengthen his company's position on the Web and in the search field against Google. In order to make that happen, the Redmond crew was willing to pay a premium price to acquire Yahoo and bolster the competition against Google.

Yang read the writing on the wall. Perhaps he sensed that he'd be able to extort a higher price from Microsoft, and thereby leave an indelible legacy on his time as CEO of the company. So he waited.

A game of chicken erupted between the two tech companies with Ballmer setting a deadline that passed without comment from Yahoo. The next day Ballmer came out and said that "the world is rooting" for Microsoft and that there were three options to explore: a friendly takeover, a hostile takeover or simply walking away.

Microsoft was still interested. In fact, the company raised its bid by roughly $5 billion over its initial offering to $47 billion or about $33 per share " a premium of 70 percent.

At the time, it seemed that Yang was playing his cards just right. Until, that is, it came out that Yahoo was seeking at least $53 billion or $37 per share to sell the company.

Even with the intervention of Carl Icahn, Ballmer and Microsoft walked away, which set off a series of events that signaled the decline of Yahoo, a struggle to find a consistent cash flow and bad management decisions.

The Google Ad Deal

Rumors about Microsoft and Yahoo persisted throughout the summer, with rumors of Microsoft purchasing Yahoo's search popping up from time to time. Ultimately, however, nothing came to fruition. Realizing that the company could have used the infusion of cash that would've come from Microsoft, Yahoo began looking at potential partnerships with other companies.

As the proposed Microsoft takeover dragged out into the middle of the year, rumors began emerging as early as February that Yahoo was in discussions with AOL to merge, even though the former ISP had partnered with Google in 2005. Rough sketches of the deal had AOL kicking in $2 billion for its share in Yahoo.

Not to be outdone, News Corp., Rupert Murdoch's company that owns MySpace, started to be mentioned as a potential partner for Yahoo. Some analysts saw obvious "synergies" between both News Corp. and AOL and Yahoo, which might've made for an interesting and compelling new online entity, while providing the cash Yahoo seemed to desperate to find.

But both of those deals failed to materialize. Instead, Yahoo and Yang turned to their No. 1 competitor in order to bolster flagging ad revenues and kick-start the dollar stream flowing back into the Good Ship Yahoo. In June, Yahoo and Google announced that the companies had inked an ad revenue sharing deal.

Initial reports estimated that Yahoo would reap about $800 million in annual revenue, with between $250 and $400 million in operational revenue in the first 12 months.

The terms of the initial deal formed a non-exclusive, 10-year pact between the two companies in the United States and Canada. The first term of the deal would last four years and Yahoo would retain the option to commit to two additional three-year deals.

Again, it looked like Yang had played his cards right and engineered a deal that would provide a substantial, renewable source of income for Yahoo for at least four years, but would likely last a full decade.

Next: The Blowback