Yahoo's Next 5 Headaches

The online giant may have escaped Microsoft, but it has loads of other problems.

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Yahoo CEO Jerry Yang probably feels he dodged a missile by rebuffing Microsoft's takeover attempt and retaining control of his company. But the incoming rounds are only likely to intensify. With the collapse of Microsoft's $48 billion bid for Yahoo, here's what the struggling online giant will have to contend with next:

A shareholder revolt. The Microsoft purchase would have valued Yahoo's shares at $33 each, a hefty premium over the $19 or so they were trading at before the offer. Since Microsoft withdrew, Yahoo stock has fallen from more than $28 to less than $25, and analysts think the shares could drift all the way back down to $20 or less. For somebody who owns, say, 1,000 Yahoo shares, the difference between the Microsoft price and the post-Microsoft price is a loss of about $9,000.

One factor complicating the deal was that many big Yahoo shareholders were also Microsoft shareholders. And since Microsoft's stock price would have fallen under an acquisition, those institutions could have lost more on the Microsoft end than they gained on the Yahoo end, which made them tepid supporters of a deal.

But many other Yahoo shareholders are outraged—and pledging aggressive action. Eric Jackson, who runs a small hedge fund called Ironfire Capital and has long been an activist Yahoo shareholder, has launched a campaign for shareholders to withhold votes for all of Yahoo's board members at the next annual meeting, which must be held by July. And he's running for a board seat himself. Jackson has led a group that calls for eliminating overlapping divisions inside Yahoo, replacing Yang as CEO, and clarifying the company's strategy. The Microsoft rebuff and the sinking stock price could open the door for many of their demands.

A spate of other complicated proposals. Yahoo has broadly hinted at a possible partnership with Google, in which Google ads would appear when users type in a search on Yahoo, just as when users do a Google search. Such a deal would probably boost Yahoo's revenue—but present other problems. First, it's not clear regulators would allow it, since Google and Yahoo are the No. 1 and No. 2 search engines. A Yahoo-Google linkup would also be a tacit admission that Yahoo's own proprietary search software—a highly touted and costly development project—is a failure. Under pressure to boost performance, Yahoo could also pursue a deal with AOL or some other portal, which might goose revenue but also add bloat and overlap, problems many analysts already think plague Yahoo.

Strategic confusion. One prominent complaint about Yahoo is that it has morphed from a Web pioneer into a jack-of-all-trades without a coherent focus. "Yahoo still has to figure out what it wants to be when it grows up," says Jackson. "A media company? A communications company? A search company?" In addition to search, for instance, Yahoo has dabbled in online dating, car research, photo-sharing, social networking, travel, news programming, entertainment, and many other "verticals." In many of those areas, Yahoo is far behind the market leaders—even though the site overall is one of the biggest destinations on the Web. While fending off Microsoft, Yahoo has had little to say about how it plans to sharpen its overall long-term strategy.

Internal drift. Analysts also ding Yahoo for undisciplined leadership and lax management that allow lots of overlap among divisions. Several hundred recent layoffs, meant to convey a tougher attitude, haven't stemmed the criticism. "Yahoo is a really poorly run company," says Sramana Mitra, a Silicon Valley blogger and consultant. "It's been too decentralized, too free and easy." The Microsoft deal might have placated critics, since harder-headed managers from Redmond, Wash., would probably have imposed a stiffer structure on Yahoo. Now Yang must prove he can do it himself, after years of talk that have done little to improve performance.

A Microsoft takeover. Sure, Yahoo has escaped for the time being, but if the stock price stays depressed, the company will remain a juicy takeover target—and there's no reason Microsoft couldn't come back for another try. If activist shareholders get some traction, for instance, there could eventually be new board members more amenable to a Microsoft buyout. And if Yang loses his tenuous hold on the top job, that would remove one of the biggest barriers to a Microsoft deal. It will probably be a long time before the bosses at Yahoo can actually shout, "Yahoo!"