Icahn't

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Jul 23rd 2008 | SAN FRANCISCO
From Economist.com

Yahoo! solves one problem and is left with all the others
SUDDENLY, they all find pleasant things to say about each other. Until the weekend, Carl Icahn, an activist investor who had taken a stake in Yahoo!, a beleaguered internet company, was hurling public abuse at Jerry Yang, its boss and co-founder, and proposing to fire the entire board at a shareholder meeting on August 1st. Yahoo! was pitching the invective back—even using its own home-page—and mocking Mr Icahn’s ignorance in matters techie. He has no plan, said Yahoo!, besides selling out to Microsoft. That is what you should have done long ago, retorted Mr Icahn, who started negotiations with Microsoft himself. This “odd-couple collaboration” will “destroy stockholder value,” Yahoo! screamed.

Then, at the weekend, a tense truce. Yes, Yahoo!’s shareholders may be livid that Mr Yang did not take Microsoft’s offer of $33 a share while it stood (the share price is now about $21). But they also recognised that Mr Icahn did lack an alternative strategy, and that he had, by saying as much, frittered away any remaining bargaining clout with Microsoft. Bill Miller, a fund manager at Legg Mason, Yahoo!’s second-largest institutional investor, said that Yahoo!’s existing board had shown enough “care and diligence” for him to vote to retain it. Mr Icahn, unable to get the other large investors on his side, had to seek a rapprochement with Mr Yang.

A compromise was reached. Mr Yang remains the boss for now and all of the other directors keep their jobs, except for one who volunteered to go. In turn, Mr Icahn will join the board, as will two new directors to his liking, raising the board’s membership from nine to eleven. One of the new recruits is likely to be Jonathan Miller, who was once the boss of AOL, an internet portal often considered to be similar to Yahoo! and owned by Time Warner, a media giant. AOL, as it happens, is the only company that might be a viable alternative to Microsoft as a merger candidate, but whether Mr Miller’s presence would help the negotiations is questionable, since he was in effect ousted.

Where does that leave Yahoo!? In even more of a mess than when Microsoft first offered to buy it, on February 1st. A steady dribble of top managers and engineers who were leaving the company has turned into something of a gush. The economy is getting worse, and is likely to hit display (or “banner”) advertising in particular, the mainstay of Yahoo!’s business. On Tuesday July 22nd Yahoo! announced that its quarterly profits had again fallen. This follows Microsoft’s announcement last week that it saw hard times ahead in online advertising. Even Google disappointed Wall Street, although its economist claims that in a downturn search-related advertising—based on the keywords that consumers type into their search engine—will fare better than display ads.

Mr Yang increasingly sees his job as putting on a brave face no matter what the news. “This eliminates the distractions”, he said the day after the compromise with Mr Icahn was announced. Now Yahoo! can focus on its strategy, formed last year when Mr Yang became boss again.

Which begs the question whether that strategy is worth pursuing, even without distractions. Yahoo! fell from grace—with advertisers and consumers—because Google passed, then lapped, it in web technology. Mr Yang’s main response to Microsoft was to do a deal with Google to outsource much of Yahoo!’s search-advertising business to its rival—a potential fillip to Yahoo!’s bottom line but a strategic dead end. That deal, moreover, would leave Google with so much clout in the online advertising market that antitrust regulators have taken an intense interest.