Yahoo faces up to life after Jerry

After a turnaround plan that never got off the ground, falling profits and a disastrous reaction to his rejection of Microsoft's advances, Yahoo chief executive and founder Jerry Yang has fallen on his sword after 18 months at the helm.

The move came as no surprise to the market. Question marks have been raised over his leadership for some time, and his obituary had been fully written up months ago. He steps down at a company battered by the elements and floundering for direction.

The group is now desperately searching for a strong leader to tackle its myriad issues head on, who can set about chipping away at rival Google's dominant position in the market and prepare for a renewed takeover assault by Microsoft. Basically, they need to find the yin to Jerry's yang.

Youssef Squali, analyst at Jefferies, said: "Jerry's resignation as chief executive reflects failed promises he made while fighting off Microsoft's offers, and the board's displeasure with his go-it-alone strategy. This vacuum creates an opportunity to bring in a new chief who will make bold strategic moves or, more likely, open the door to Microsoft."

The official news came out late on Monday from Yahoo's headquarters in Sunnyvale, California. Mr Yang would step down as soon as a new chief executive was found. He will remain as "chief Yahoo", a special executive role, and board member to focus on product strategy and the company vision.

The statement from the board of directors said Mr Yang had led the company through a "strategic repositioning and transformation of its platform" but the time was right for a new boss to take it the next level.

Mr Yang founded Yahoo with David Filo in 1994, and it now provides services in more than 20 countries and 15 languages. He said the board had appointed him in 2007 to overhaul the company, after the resignation of former chief executive Terry Semel, following a regime that "just wasn't working," according to analysts.

"I did so because it was important to re-envision the business for a different era to drive more effective growth," Mr Yang said. Analysts were less sure. Larry Witt, analyst at Morningstar, said: "We never thought it was going to be a long-term solution, it almost seemed like a stop-gap measure." Mr Yang was known as a "technology guy, not a management guy," and "maybe it's too early to tell but it looks like his restructuring plan hasn't worked".

The chief executive was almost immediately overtaken by events – what chairman Roy Bostock called a year and a half of "extraordinary challenges and distractions". Firstly, the impact of the credit crunch, with the pressure on profits as advertising revenues sunk, and the inevitable fall in the share price, which has more than halved since last year. The company has also had problems holding on to staff.

"Turnover has been an issue. Yahoo is now quite mature, and many are looking for more exciting opportunities. It's a Silicon Valley thing," said Mr Witt.

But it was the handling of merger talks with Microsoft that proved a huge blow to Mr Yang's credibility. The technology giant approached Yahoo with a $47.5bn (£32.7bn) bid six months ago. Mr Yang rejected the approach as undervaluing the company, a move that incensed shareholders and billionaire activist Carl Icahn to seek to oust the board in a bid to push through the deal. Mr Yang was later forced to concede he could countenance an offer. Yet relations with Microsoft's chief executive Steve Ballmer had deteriorated to such an extent that the bidder said it was no longer interested in an offer for the company at its offer price and with existing management.

There were other factors heaping pressure on the beleaguered chief executive, and one analyst said that Google pulling out of an internet advertising partnership was the last straw. The search engine group was hoping the deal would boost annual revenue by $800m in a move that was also an olive branch to shareholders.

Other critics said the company's strategy has always been to unfocused, even from before Mr Yang's tenure as chief executive. One UK technology banker summed up the difference between Yahoo and its bigger rival. "Google has been very disciplined in terms of acquisitions. It gets 100 calls a day from M&A bankers with ideas for deals but is very methodical over what it does. Yahoo has done too much M&A; it's hard to see what their objective is."

Since 2001, the group has launched bids for 31 companies, according to data provider Mergermarket, with recent deals include Flickr, the online photo site. Yet the company is still in a relatively stable position. It has respected content assets including the news and finance channels, and is one of the world's most visited sites. Benjamin Schachter, analyst at UBS, said: "Yahoo is a key strategic asset in the online space and given the scarcity of key players of size, we see value here not reflected in the stock's current valuation."

Analysts say the problem is its inability to monetise its model better and the numbers visiting the site are not growing. Added to that, in terms of queries, Google has 62 per cent of the market, while Yahoo has 20 per cent.

The group also revealed weak third quarter numbers at the end of October. It announced that profits had fallen 64 per cent to $54.3m and it would have to slash 10 per cent of the workforce.

Mr Yang was given the job of re-energising the staff, but analysts believe a change of management was essential to achieve it. Justin Post, analyst at Merrill Lynch, said: "We believe that Yahoo needs a new chief executive to energise as confidence was lost when the Microsoft deal collapsed. We think an external candidate would be best suited to change this trend and bring in new talent."

Possible candidates include Tim Armstrong from Google; former AOL head Jonathan Miller and Brian McAndrews, a senior vice-president at Microsoft's online division. Speculation has also surrounded Peter Chernin, chief operating officer of News Corporation, Meg Whitman, formerly of eBay and former Yahoo executive Dan Rosensweig. Internally, Sue Decker, the president, is the most likely candidate, although many feel she is too close to Mr Yang to appease shareholders.

Gene Munster, analyst at Piper Jaffray, added that the replacement would give a clear indication over whether the company saw itself as able to remain independent or target another takeover. "A well-known industry veteran with a solid track record would likely signify the intention to continue competing under its own control. A choice from within the company would likely signify the intention to partner or be acquired," he said.

All of the sector analysts are backing Microsoft to return to the negotiating table.

Mr Post added that a new chief executive "is more likely to be able to restart the dialogue, though the end result is probably a lower value search deal rather than an acquisition".

There are three options for the group, according to Jefferies analyst Youssef Squali. The first is to go it alone under a new chief executive, but one that would have to make bold changes and "requires that investors and the board be patient as any turnaround is likely to take one to two years". The other two are mergers. Either with AOL "which is possible but not to our liking", or Microsoft, which is "the most likely".

While the company is secure, many are uncertain over its future direction. Mr Witt said: "I wouldn't be too worried about their future, it's not like they are losing money. It could be independent for many years, but to remain as relevant as they are today they need strong new leadership to come in and give it a boost."

From Taipei to Yahoo!

Many men feel loath to celebrate their 40th birthday, but Jerry Yang was probably less in the mood for a party than most on the big day two weeks ago. His reign at Yahoo, the company he helped to create and grow into one of the world's most recognisable internet brands, was teetering, and yesterday it was finally over.

Mr Yang was born in Taipei in Taiwan in 1968, but moved to San Jose in California when he was 10. He travelled with his mother and brother – his father had died when he was two years old – claiming to know little English.

With little trouble negotiating the language, let alone high school, Mr Yang studied electrical engineering at Stamford University. It was while studying his PhD at the university that he teamed up with David Filo to create an internet navigational guide in April 1994. It was originally called Jerry's Guide to the World Wide Web, before they renamed it Yahoo!. Encouraged by the positive buzz around the site, the two suspended their doctorates and officially launched Yahoo! a year later.

Since the company's founding,Mr Yang has been a member of theexecutive management team holding the role – along with Mr Filo – of Chief Yahoo!, but took over as chief executive after Terry Semel resigned in June last year. He announced his resignation as chief executive,although not from the company, on Monday night. He will be hoping for a happier 41st.

Nick Clark