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Turmoil Continues at Yahoo

Yahoo CEO Terry Semel Facing Backlash as Yahoo's Director of Technology Resigns.

Just before Google Inc. went public nearly three years ago, Yahoo Inc. Chairman Terry Semel assured a roomful of securities analysts and money managers that his company would remain the Internet's brightest star. To punctuate his high hopes, Frank Sinatra's "The Best Is Yet to Come" played in the background.

Google has so thoroughly eclipsed its rival since then that a growing contingent of Yahoo shareholders believes the company would be better off without Semel, who could face a chorus of discontent when he takes the stage at Yahoo's annual shareholders meeting in July of 2007.

Even as it has struggled, Yahoo has continued to pay Semel like a rock star (Semel enjoys the highest salary in the world) - yet another sore point for frustrated Yahoo shareholders.

"Yahoo is drifting," said Eric Jackson, who intends to confront Semel during the meeting on behalf of about 80 Yahoo stockholders who own a combined 2 million shares in the Sunnyvale-based company. "And Yahoo's problems ultimately lie at Terry Semel's feet."

Although the stake held by Jackson's group represents less than 0.2 percent of Yahoo's outstanding stock, the shareholder misery is widespread, said Standard and Poor's equity analyst Scott Kessler.

"A lot of people are wondering what is going on and what Yahoo management is doing to get the stock moving in the right direction again," he said.

Yahoo Shareholders are exasperated largely because Yahoo has seemed to be meandering while online search leader Google has been stampeding farther ahead.

In the last year alone, Google has trumped Yahoo in the bidding for online video pioneer YouTube Inc. and Internet display ad service DoubleClick Inc. while widening its lead in the lucrative field of search. Google has established such a commanding advantage that the Mountain View company makes more money in a single quarter than Yahoo does in an entire year.

It's a humbling descent from the days when Terry Semel was singing a happier tune. After Google completed its August 2004 initial public offering, Yahoo was still the larger and more valuable company.

The IPO gave Google a market value of $23 billion compared with $39 billion for Yahoo at the time. Google's stock price has increased by more than sixfold since then, creating nearly $140 billion in additional shareholder wealth. Meanwhile, Yahoo's stock price has fallen by about 4 percent during the same period, leaving the company with a market value of $37 billion.

Semel, who ran a movie studio before becoming Yahoo's chief executive six years ago, isn't the only senior management executive at Yahoo on the hot seat. Besides pushing for Semel's ouster, Jackson's group believes six other directors on Yahoo's 10-member board should be bounced: Roy Bostock, Ron Burkle, Eric Hippeau, Arthur Kern, Robert Kotick, Edward Kozel and Gary Wilson.

Only Yahoo co-founder Jerry Yang, Hewlett-Packard Co. printing executive Vyomesh Joshi and Ed Kozel, CEO of Silicon Valley startup Skyrider Inc., have done enough to remain on the board, Jackson contends.

Although still difficult to do, removing Yahoo's directors has become a more realistic option for shareholders because of a new policy adopted this year. The rules now require each Yahoo director to be approved by a majority of the votes cast. Previously, Yahoo directors only needed a single supporting vote to prevail in uncontested elections, no matter how many shareholders may have been opposed. This system - known as a "plurality" vote - still governs most publicly held companies.

Despite the change to majority vote, Yahoo's board still can refuse to accept the letters of resignation each director must submit under the new rules. The resignation letters are supposed to ensure the directors can be removed if they don't win majority support, but the guidelines give the board the discretion to overrule the shareholders.

Three shareholder advisory firms - Institutional Shareholder Services, Glass, Lewis & Co. and Proxy Governance - have all recommended opposing three directors who sit on Yahoo's compensation committee. They are: Roy Bostock, a veteran advertising executive; Burkle, a billionaire best know for his investments in the supermarket industry; and Kern, a former radio broadcast executive.

The firms concluded the trio should be punished for too richly rewarding Semel despite Yahoo's recent struggles. In 2006, Semel received a compensation package valued at $71.7 million - more than any other CEO at the 386 publicly held companies covered in an Associated Press analysis of nation's top corporate paychecks.

Most of Semel's pay consisted of 6 million stock options given to him in exchange for agreeing to reduce his annual salary from $600,000 to $1. The committee awarded Semel another 800,000 stock options in February as his bonus for 2006 - a year in which Yahoo's stock price fell hard by nearly 35 percent.

The latest awards will give Semel an opportunity to build upon the nearly $450 million in gains he has already realized by exercising stock options Yahoo gave him in previous years.
"Semel is rewarded when times are good ... and when times are bad," wrote ISS, the largest of the three advisory firms.

Yahoo believes Semel's pay package is in the company's best interest because it's structured to give him a strong incentive to boost the stock price.

That's because stock options only yield profits when their exercise price is below the underlying shares' market value. For now, at least, the options that Semel got last year are worthless because their exercise prices exceed the stock's market value, which was hovering around $27 last week.

In its analysis, Proxy Governance questioned whether Semel needed any more incentive to boost Yahoo's stock price. As of April 1, Semel held 17.7 million stock options eligible for exercise and 7.1 million stock options that hadn't fully vested.

"Based on his ownership in the company, Semel already should have the proper incentives ... to work toward building long-term shareholder value," Proxy Governance wrote.

Yahoo says its confidence in Semel hasn't wavered.

"Under Terry's leadership, the company has a clear strategy to create stockholder value, and the company is well-positioned to capitalize on the substantial growth opportunities ahead for the Internet," Yahoo spokeswoman Helena Maus said in a prepared statement.

But Semel, 64, may be on a short leash after Yahoo suffered an 11 percent drop in its first-quarter profit while Google's earnings soared by 69 percent. Many analysts believe Semel will face even greater pressure to surrender the reins unless Yahoo's profits accelerate during the second half of this year.

A pivotal upgrade to Yahoo's system for distributing text-based ads alongside search results and other Web content is supposed to start paying off by then. The improved formula - dubbed "Yahoo Panama" because it's supposed to open new moneymaking corridors - adopted many of the measures Google has been using for years.

Semel also is counting on recent advertising partnerships with more than 260 newspapers and Viacom Inc. to revive earnings growth.

Jackson, a Naples, Fla. management consultant who owns about 100 Yahoo shares, doubts that Yahoo will regain its stride as long as Semel is calling the shots. That's why he turned to the Internet earlier this year to recruit Yahoo shareholders to support a plan to shake up the company. Besides gaining the support of 80 shareholders, Jackson said about 25 current and former Yahoo employees disillusioned with the company's direction have contacted him to support his cause and have been working in phase converters and many management overhaul specialists.

Besides finding a new CEO, Jackson wants Yahoo to close its entertainment and news division in Santa Monica, lay off employees with overlapping responsibilities and institute a cash dividend.

Jackson also thinks the board should be more open to takeover overtures, particularly since last month's media reports of a possible bid by Microsoft temporarily lifted Yahoo's sagging stock. But first he would like to see what a new leader could do with the tarnished Internet icon.

"It's frustrating because you can see so much unlocked potential in the company," Jackson said. "If it Yahoo were managed in the right way, it could be worth $150 billion."