• by Diane Mermigas , November 19, 2008

The yin to the yang going on at Yahoo has serious implications for media and Internet companies that believe a merger or alliance can solve, rather than compound, their problems. There is something to be said for resorting to leadership and innovation instead.

That is the crossroads at which Yahoo has arrived: It lost the original $47 billion, $33-a-share takeover offer from Microsoft in May that Yahoo CEO Jerry Yang and his board flatly nixed. Instead, Yahoo has been paralyzed by bad press, debilitating morale and dogged uncertainty. Yang, his management and board should have been strengthening Yahoo's dominant display advertising position, building search and ad-serving, gaining more of a social networking and e-commerce foothold. If there is any doubt about the lucrative difference that CEO leadership can make, look at Apple's Steve Jobs, Cisco's John Chambers and Walt Disney's Bob Iger.

Yahoo needs a visionary, proactive CEO who can re-channel its energy and resources, make innovation the gold standard and constructively respond to challenges with an epic sense of digital possibilities. Yahoo's new CEO and senior management team must be empowered to chart a new entrepreneurial blueprint (its Peanut Butter Manifesto would be a good place to start) for revitalizing and advancing, alone or in a strategic partnership. And there's the rub.

Time Warner knows only too well the pitfalls of a strategic partnership (remember its painful Comcast alliance) and merger (AOL remains an albatross eight years after the record $184 billion media marriage). The lessons from these strained endeavors must not be lost on Yahoo. Yang's long-overdue resignation also must be pause for Yahoo to pragmatically reassess the pros and cons of any deal with Microsoft, AOL or both. Although regulatory, corporate culture, economic and timing issues are vast, a new CEO's biggest job could be reduced to presiding over the complete sale or dismantling of Yahoo.

Yang's resignation as CEO (he's still co-founding Chief Yahoo and a board member) is not as important as what happens next. All of the same issues and problems that are vexing Yahoo remain. There is an overriding need for a clear, next-level game plan and vision that must emanate from the new chief executive. Some reasonable candidates span from Hollywood to Silicon Valley: News Corp. COO Peter Chernin (under contract until May), former AOL CEO Jonathan Miller (who is under a non-compete from Time Warner until March), Miller's Velocity Interactive co-managing partner Ross Levinsohn (former CEO of Fox Interactive Media), Google (GOOG) ad exec Tim Armstrong, new Juniper Networks CEO Kevin Johnson (formerly of Microsoft) and former Nextel CEO and new Yahoo board member John Chapple. Two talented, but less likely, insiders are former Yahoo COO Dan Rosensweig and Yahoo president Susan Decker.

At once, Yahoo should pitch the baggage of the past 18 months. Yang's board vote is no more potent than that of activist shareholder Carl Icahn. The only vestige of the botched Microsoft deal that matters is that Yahoo stock is now about one-third of what Microsoft offered to pay for it, believing in its strategic value. Rather than gloating about Yang's departure, Microsoft CEO Steve Ballmer should be taking a hard look at whether he can adroitly manage an ad-based Internet business that if done right, would fortify his own company's vulnerable base. At the very least, Yahoo will emerge from this process more receptive to valuable alliances with News Corp. Google, AOL or Microsoft.

That said, Yahoo should look within to determine what's next. Historically, the company shares with Apple the ability to identify and build consumer-friendly products and services, and to cater to an evolving mobile interactive culture. There is much unrealized value domestically and globally in its branded products in news, sports, search, communications and e-commerce.

Industry analysts generally consider Yang's resignation a power shift that sheds new light on old prospects. JP Morgan analyst Imran Khan still believes that Yahoo could gain at least $725 million in annual operating cash flow from a search partnership with Microsoft, allowing Yahoo to be "more nimble and focused as a content and display advertising entity."

Bernstein Research analyst Jeffrey Lindsay says, "Yang's departure is a strong indication that the board is keen on re-opening discussions with Microsoft." It is unlikely that Microsoft would offer more than $15 a share, or $21.6 billion, in a renewed bid for Yahoo--about half of its original offer, yet a 50% premium to its recent trading price. Of course, Google remains the most potent deal catalyst, having recently bailed on a proposed search alliance with Yahoo and continuing to gain market share on both Yahoo and Microsoft even in a recession.

This could be the last opportunity Yahoo has to determine its own destiny and fortune--to be exceptional rather than just reactionary. Or as "Good to Great" author Jim Collins would say: "A crisis is a terrible thing to waste."