Victorious Yahoo CEO now will have to walk the talk

SAN FRANCISCO — Yahoo Chief Executive Jerry Yang has gotten what he wanted: a chance to prove his company is worth more than the $47.5 billion Microsoft offered to buy the Internet pioneer.

It will be a daunting challenge, as Yang will be pointedly reminded today when investors are expected to show how little they think of Yahoo without a takeover bid on the table. Faced with resistance from Yang and the rest of Yahoo's board, Microsoft withdrew its offer over the weekend.

Many analysts believe Yahoo's stock price, which had climbed nearly 50 percent since Microsoft's initial offer, will surrender most, if not all, of that gain, leaving the Sunnyvale, Calif., company's market value around $30 billion.

Shareholders are bound to question whether the rejection of Microsoft's sweetened $33-per-share offer was driven more by emotion and ego than sound business sense.

"Clearly there's frustration," said Darren Chervitz, co-manager of the Jacob Internet Fund, which owns Yahoo stock. "I am not even sure if Yahoo cares about its shareholders because they didn't show much regard for shareholders' best interests in this process."

Bloomberg News reported Sunday night that Citigroup had cut its investment rating on Yahoo to "sell" from "buy," with analysts writing "For Yahoo, we believe its outlook is uncertain."

Despite such negative sentiment, Yahoo shares are unlikely to immediately fall back to their $19.18 pre-bid price, partly because some investors may still be holding out hope the software maker will renew its takeover attempt if Yahoo continues to struggle.

Yahoo shares finished last week at $28.67, slightly below the $29.40 Microsoft was offering before CEO Steve Ballmer agreed to raise the offer to $33 share in a last-ditch effort to get a deal done.

Accompanied by fellow Yahoo co-founder David Filo, Yang flew to Seattle on Saturday to inform Ballmer the company wouldn't sell for less than $37 a share — a price that Yahoo's stock hasn't reached since January 2006.

Analysts and investors were left to wonder why the two sides couldn't compromise at $35 per share.

"They really didn't seem that far apart," Chervitz said. "There is probably blame to go around on both sides, but I think most of it is in Yang's hands."

Today's anticipated investor backlash will put Yang on the hot seat as he tries to execute on a turnaround plan he began drawing up nearly a year ago after he replaced Terry Semel as CEO amid shareholder angst about Yahoo's financial malaise.

"This squarely puts the pressure on Jerry Yang to deliver results and shareholder value," Standard & Poor's equity analyst Scott Kessler said. "You are going to see a lot of shareholders just throwing in the towel because they are going to realize it's going to take awhile for the stock to get back to where it was Friday."

Ballmer also will be under the gun to prove he can come up with another way to challenge Google's dominance of the Internet's lucrative search and advertising markets.

The unsolicited bid was widely seen as Ballmer's admission that Microsoft needed Yahoo's help to upgrade its unprofitable Internet division.

Analysts now expect Ballmer to use the money earmarked for the Yahoo acquisition to explore other possible deals with large Internet companies like Time Warner's AOL and News Corp.'s MySpace, and with promising startups like Facebook and LinkedIn.

Microsoft already owns 1.6 percent of Facebook, the second-largest social network behind MySpace.

Ballmer is unlikely to be under as much duress as Yang, because most analysts believe Microsoft's stock price will rise Monday.

The shares had dropped 10 percent to $29.24 since Ballmer made the bid, reflecting concerns the proposed marriage would turn into a complicated mess that would enable Google to grow even stronger.

Yang has promised that Yahoo's development of a more sophisticated and far-flung Internet advertising platform will produce net revenue growth of at least 25 percent in 2009 and 2010.

That would be a dramatic improvement, considering Yahoo's revenue rose 12 percent last year and is expected to grow at about the same pace this year.

But analysts are skeptical about whether Yahoo will be able to hit those targets, raising the chances for a shareholder rebellion if the company stumbles during the next few months — a distinct possibility if advertisers curtail spending in a shaky economy, as many analysts fear.

As it is, Yang and the rest of Yahoo's board almost certainly will face more lawsuits from incensed shareholders. Even some employees may be irritated because virtually all of them own stock options.

What's more, Microsoft had planned to offer $1.5 billion in retention packages to the thousands of Yahoo employees it wanted to stay on after a takeover.

To help boost its short-term profits and its stock price, Yahoo is widely expected to form a long-term advertising partnership with Google.

Although the final details are still being ironed out, Yahoo wants to hire Google to place some of the text-based ads that appear alongside the search results on its Web site. It's a task Google already handles for scores of Web sites, including AOL and Ask.com.

Both Yahoo and Google have said they were encouraged with the results of a two-week trial run completed last month.

But turning to Google would be a humbling step for Yahoo after spending more than $2 billion to acquire and build its own technology.

An alliance between Google and Yahoo also would face antitrust hurdles because the two companies combined control more than 80 percent of the U.S. search-advertising market.

Although Google's superior technology would help boost Yahoo's profits in the short term, some analysts worry it could be a mistake for Yahoo to surrender any control over such a lucrative piece of the online ad market.

Yahoo also has been exploring a possible merger with AOL's Internet operations but may now have to contend with a competing offer from Microsoft.

Yahoo also might attempt to placate shareholders by buying back stock.

Kessler believes Yang should use some of his estimated $1.9 billion fortune to personally buy more Yahoo stock even though he already owns 54.1 million shares, or 3.9 percent of the company.

"Jerry Yang really needs to put his money where his mouth is," Kessler said. "If he really thinks Yahoo is worth $37 [per share], then he needs to step up and buy some shares when they are in the low $20."