5 Lessons From Jerry Yang’s Fall

A founder was ill-suited to parry a deal from a cash-rich bully of a suitor.

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Shareholders must wait to see what happens at Yahoo, now that CEO Jerry Yang has said he is stepping down. The company could choose a high-profile outsider, which might suggest Yahoo still hopes to remain independent, or, more likely, pick a leader to negotiate the company's sale to one or more buyers.

But it's not too late to conclude what other companies can learn from the return of Yang, who cofounded Yahoo in 1994, and how he fumbled a deal with Google while trying to parry a takeover offer from Microsoft.

1) Founders flounder. We can think of many cases where a tech founder returns as the savior CEO, only to see the company's problems continue and often worsen: Ted Waitt at Gateway, Jeff Citron at Vonage, Michael Dell at his namesake PC company, and the new poster child of Yang at Yahoo. Now, to be fair, the jury is still out at Dell and maybe even Vonage, which is at least past crisis mode. But none of those founders worked miracles, and Yahoo needed a miracle. There is always the exception, of course, in Steve Jobs's turning around Apple. But that one exception makes the odds look long in an industry that demands fresh ideas, hard-nosed judgment free of emotional attachment, and an understanding that business is more about shareholders and not founders.

2) Buy off the bully. Yang had a chance to make Microsoft go away happy by striking a smaller deal, giving the suitor a slice of the company while retaining Yahoo's independence. Microsoft reportedly was willing to pay $35 a share for a 16 percent stake in the company, which was $2 a share more than it had been willing to pay for the whole company. Microsoft would have gotten Yahoo's search business. Now, selling that fat a slice of Yahoo might have let Microsoft's nose under the tent. But Yang would have gotten a nice chunk of change for the company's sliding search business and could have pursued his vision of a new Yahoo. He instead spurned Microsoft again after thinking he'd found a friend in Google.

3) Only a true friend scares off a bully . When Microsoft came calling with its takeover proposal, Yang undoubtedly tried to find a friend in Google. But instead of a full embrace, all he got was a tepid handshake to share a slice of search advertising. Google had no lasting stake in the outcome, with Yahoo acting as just a large reseller of Google's ads. Yahoo stood to earn as much as $800 million a year from the partial linkup with Google, which would have made its own profits from the deal. But the agreement with Yahoo meant little to Google, where much larger profits flow from its growing domination of search ads. Google's timidity was laid bare when it recently stepped out of the agreement, citing concerns about a potentially "distracting" antitrust challenge from the Justice Department.

4) Money talks. Microsoft was no simple suitor. It was a cash-rich, well-connected company whose lobbying tanked a deal that many thought would sail through Washington. Microsoft, of course, was schooled in how antitrust mechanisms work in Washington when it lost its own Windows antitrust case just a few years ago. In the Politics and Law blog, Declan McCullagh outlines a massive outlay by Microsoft on Washington lobbyists over the past year. Microsoft's spending in the nation's capital nearly doubled during the nine months that Yahoo pursued its deal with Google. Microsoft had loudly complained that the link would stifle competition. Microsoft spent nearly $25 million on Washington lobbying during the period, compared with $14 million in the same period a year ago and the year before that. McCullagh opines that it was a remarkable increase but one that's especially notable in a year in which Congress was relatively quiet on tech-related legislation. Congress instead grappled with an economic crisis.

5) Two bubbles are one too many. Yahoo was one of the survivors of the bursting of the late-1990s Internet bubble. The company was weakened but emerged to remain one of the Web's leaders. Granted, the more recent real estate bubble had little to do with technology and the Internet. But Yang saw firsthand how widespread the destruction was from the Internet collapse. And there were loud warnings of a probable crisis in real estate values and the economy at the time that Microsoft made its offer for Yahoo. It's hindsight, of course, but a more cautious Yang would have been seen as a hero.


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