Can A Potential Yahoo, Microsoft Marriage Be Saved?

Corporate credibility has been the big loser in Yahoo's ongoing saga to find itself.

Yahoo's board of directors meets August 15 to appoint two new members who will join activist investor Carl Icahn in providing a so-called minority checks and balance. Two of the leading candidates are former Viacom CEO Frank Biondi and former Grey Global Group CEO Ed Meyer.

Yahoo CEO Jerry Yang and his management team could be feeling vindicated by their reelection in a shareholder vote that has turned scandalous--but they shouldn't. It took a demand from major institutional investor Capital Research Global to conduct a recount, which revealed that Yang and company were reelected by fewer votes than originally reported in the certified results. In fact, Yang and Yahoo board chairman Roy Bostock each lost 19% of support as a result of what the company called a "truncation" error.

Yahoo is not at fault for the tabulating error by proxy accountant Broadridge Financial Services that now shows Yang with a 33% disapproval rating by shareholders. While the outcome of the vote remains the same, the bizarre development just raises more questions in an already unsettled situation involving Yahoo.



If Yahoo's shareholders are not all that happy, they neglected to convincingly demonstrate their dissatisfaction at Yahoo's annual meeting August 1. It was not the mutinous mandate for change suggested by months of hyped press coverage. Almost nothing turned out as expected. How could perception and reality be so different?

Yahoo's management appears to be retreating for a while to catch its breath, with its stock down 30% from when Microsoft first made its $47.5 billion offer to acquire the company for $33 a share in April. The future of Yahoo, whose formidability as an Internet leader has been lost in all the minutiae, rides on executing Yang's strategic vision.

The ball is now in Microsoft's court to resume a Yahoo search deal or merger. Time Warner is completing plans to spin off the dial-up access and other ancillary businesses of AOL in order to more easily sell the Internet giant to Yahoo or Microsoft. In other words, after a lot of huffing and puffing this year, corporate credibility has a black eye all around the table.

For instance, it was widely reported for weeks leading up to Yahoo's annual meeting that Jonathan Miller was likely to join the Yahoo board with the endorsement of both Yang and Icahn. Time Warner CEO Jeff Bewkes waited until the eve of the shareholders' meeting to telephone Miller to tell him that his board of directors was unwilling to release him from a non-compete clause that prevents the former AOL CEO from working for competitors until March 2009. Miller's inability to join the Yahoo board was the biggest unexpected development of Yahoo's annual meeting--angering everyone, including Yang and Miller.

While the timing seems suspiciously related to Time Warner's plans to flip AOL to either Yahoo or Microsoft, informed sources say it was purely a matter of corporate governance. So why not say so up front when reports first circulated about Miller's appointment?

Yang insists that he has had a strategic growth vision for the company he created all along, but did not share it until Microsoft's offer to buy Yahoo. Had he not lost so many of his lieutenants in the process, Yang's efforts to put his company back on track would be more believable. The miscount of shareholder votes in support of Yang and his existing board added a new layer of mistrust to the ongoing saga.

While Icahn had good intentions in holding Yang's feet to the fire, all it took was gaining three seats on Yahoo's board to make him withdraw his proxy fight. Even Capital Research has not threatened legal action. Just how concerned are these guys?

And then there is Microsoft CEO Steve Ballmer. He wants--and needs--Yahoo so badly that he botched his pursuit of the Internet giant at nearly every turn. Six long months later, Microsoft is still wondering how to become more competitive with Google in search advertising.

None of the principals will comment on the situation, although sources say that Yahoo, Time Warner and Microsoft continue their informal discussions. Time Warner's latest quarterly financial reported Wednesday revealed how much pressure the company is under to make a deal, with AOL's earnings dropping precipitously. Conventional wisdom was that Miller's involvement would have been an asset to an AOL-Yahoo tie-up, although he also has been mentioned as a candidate to lead Microsoft's online businesses.

Since it would likely take at least another six months to work out a deal of some kind, Miller would then be free to participate. Miller, who has declined comment, appears to be the only clear winner so far, having been vindicated in his transformation of AOL from a subscriber to an ad-based company. Currently, Miller is launching start-ups as a partner of the venture capital Velocity Interactive Group, but his expertise and insights would make him valuable to future Yahoo or Microsoft search ventures.

The "bad date" metaphor voiced by a frustrated Yahoo shareholder last week seems more appropriate than ever. "You got the girlfriend who experienced the breakup and is now trying to convince the world that she was the initiator and not the victim. And that situation never works out for anyone," the shareholder said. Either by brilliant design or extraordinary default, Yang and Yahoo can still date.

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