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Yahoo's Beginning of the End

Yahoo logoYahoo has been between a rock and a hard place - not making the right management decisions, losing market share, seeing high-level people stream out faster than the latest hit YouTube video, and pressure stepping up from investors. Now it's all coming together in a way that probably spells the end of an independent Yahoo: Carl Icahn is teaming up with Steve Ballmer at Microsoft. In an open letter to investors, Icahn made things abundantly clear:

Our company is now moving toward a precipice. It is currently losing market share in its "Search" function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google's income from operations grew 59% per year over the last two years while Yahoo!'s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE. If elected, I have little doubt that the new board, subject to its fiduciary duties, will do what the current board will not do, i.e.,

-- Immediately start negotiation with Microsoft to sell the whole company or, in the alternative, sell "Search" with large guarantees.

-- Move expeditiously to replace Jerry Yang with a new CEO with operating experience.

The gloves are now completely off. For Yang and the board to keep their jobs, they would have to find a way to immediately "fix" the company or pull together a deal that would at least come close to the money they turned down from Microsoft. But when you're under pressure, you get fire sale prices, not premiums, and turning around a company in a short timeframe is effectively impossible, even for those who are operationally excellent. If either scenario were likely, it probably already would have happened.

At this point, the Yahoo yahoos probably only have until the annual meeting, which they postponed for the second time this year until an unspecified day late this month. Icahn already has a dissident slate of directors in line. Unless investors become inexplicably forgiving, this may be the board's, and Yang's, last round-up.

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