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The Story Of Yahoo's Decline

Yahoo's precarious position today can be attributed to the decisions Jerry Yang made and the two deals he failed to consummate.

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


But before the ink dried, there was public outcry from advertisers and regulators who felt the deal between Yahoo and Google infringed on fair competition worldwide. According to comScore, the two companies combine to represent 80 percent of the Web search engine market.

In July, the European Union launched an investigation into the deal, citing antitrust concerns and fueled by the Newspaper Association of America, a subset of the World Association of Newspapers.

On this side of the Atlantic, the World Federation of Advertisers lodged their own complaint with the Department of Justice in September, claiming the deal would have a "detrimental effect on competition, result in price increases and reduce the options available to advertisers worldwide."

At first both Google and Yahoo went on the offensive, saying the deal wouldn't hinder competition and braced for a fight against regulators. Omid Kordestani, senior vice president, Global Sales and Business Development, took to Google's blog to address the issue. "We expect to work closely with them to answer their questions about the transaction.

Ultimately we believe that the efficiencies of this agreement will help preserve competition."

Google compared the proposed deal to the agreement reached with AOL, which garnered no complaints. But the Department of Justice didn't buy it; the investigation dragged on. All the while both companies pledged to work with regulators in order to get the deal pushed through.

But by late October cracks were beginning to show. On Halloween, rumors surfaced that Google was considering walking away from the deal because it was dragging them down. An anonymous source told Reuters, "is [Google] more serious about walking away? Yes. Have they decided? I'm not sure."

Not wanting to give up that enormous stream of revenue, Yang and Yahoo scrambled to find a way to push the deal past regulators while still retaining the Google seal of approval. A few days later, on Nov. 4, Yahoo announced a rejiggered the deal in hopes of getting a federal seal of approval.

But everything that seemed promising for Yang and Yahoo had been gutted. The initial pact partnered the two companies for up to 10 years; the revised deal had a full term of two. The amount of money Yahoo would've generated with Google's help was being estimated at nearly $800 million; the revised deal put a hard cap at 25 percent.

That dropped the net worth of the deal from $250 to $400 million dollars annually to an approximate $80 to $100 million.

Even though the deal had essentially been gutted, Yang was still anxious to get it approved -- after all, by this time the economic downturn was in full swing and $80 to $100 million in this climate is better than nothing. But it was never meant to be. The day after the revised terms of the deal were announced, Google walked away from the deal on Nov. 5.

Writing on the Google Public Policy blog, David Drummond, senior vice president, corporate development and chief legal officer, put the speculation to bed:

"[A]fter four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement."

And perhaps more damaging to Yang and Yahoo, Drummond continued, writing, "[W]e're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on."

The Aftermath Of Two Failed Deals

Shortly after the proposed Google/Yahoo ad deal corroded at the hands of antitrust regulators, Jerry Yang appeared at the Web 2.0 Summit in San Francisco.

He took the stage with the loss of about $100 million in revenue fresh in his mind. What does the CEO of a company say after a deal like that falls apart? Yang went back in time about six months and asked a familiar partner if they'd be willing to dance again: Microsoft.

Speaking at the conference, Yang said, "To this day the best thing for Microsoft to do is buy Yahoo. I don't think that is a bad idea at all, at the right price whatever that price is. We're willing to sell the company."

Not exactly the inspiring, confident words that the board, stockholders and employees want to hear from their CEO -- especially in the midst of an economic recession. But even though rumors of rekindling the Microsoft-Yahoo merger have occasionally popped up on the Web, Steve Ballmer put those rumors to bed the next day.

Speaking at a business lunch in Sydney, Australia, Ballmer told the group that Microsoft had "moved on." We made an offer, we made another offer ... we moved on," Ballmer said, according to Reuters. "We tried at one point to do a partnership around search ... and that didn't work either, and we moved on and they moved on. We are not interested in going back and relooking at an acquisition. I don't know why they would be either, frankly."

About ten days later, Jerry Yang officially ended his tenure as the CEO of Yahoo through a blog. After the announcement, stock prices rallied.

Until Steve Ballmer, today, quashed speculation that Microsoft would make an attempt to purchase the company now that Yang has stepped down.

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