By Yi-Wyn Yen

At the Web 2.0 Summit two weeks ago, Yahoo CEO Jerry Yang was asked if he was the right guy to lead the battered Internet portal. Yang dodged the question by defending his passion for the company he co-founded 13 years ago. “I didn’t make the decision of being the CEO lightly,” he said. “I wanted to make a change at Yahoo that I believe I can make….That’s a dream that I felt I could achieve by being CEO and that’s still the dream today.”

That dream came to an end Monday when Yahoo announced that Yang, 40, will step down as CEO and return to his former role as “Chief Yahoo.” The company’s board said it has hired headhunter Heidrick & Struggles to find a replacement.

Yang has come under fire for his inability to turnaround the company in his past 17 months as CEO. During his short tenure, Yahoo (YHOO) has had two major rounds of layoffs and has seen its search market share shrink significantly while a series of reorganizations led to the departure of senior executives. Yang was heavily criticized by Wall Street and shareholders for failing to reach an agreement to sell the company to Microsoft (MSFT). But the final straw for Yang came when Google (GOOG) pulled out of a controversial ad agreement earlier this month that would have boosted Yahoo’s revenues by hundreds of millions of dollars.

“When the board asked me to become CEO and lead the transformation of the company, I did so because it was important to re-envision the business for a different era to drive more effective growth,” said Yang in a statement. “Having set Yahoo! on a new, more open path, the time is right for me to transition the CEO role and our global talent to a new leader. I will continue to focus on global strategy and to do everything I can to help Yahoo realize its full potential and enhance its leading culture of technology and product excellence and innovation.”

When Yang took over, he was widely viewed as the right choice to replace Terry Semel, the previous CEO from Hollywood who spent six years molding Yahoo into a media company. Yang promised change in the first 100 days as CEO, declaring there would be “no sacred cows.” But 100 days came and went. So did the next 400 days. Frustrated investors have seen Yahoo’s shares drop 62% in value since Yang took over in mid-June 2007. While Semel never had Yang’s geek cred, he did manage to drive Yahoo’s stock price up to an eight-year peak of $43.21 in January 2006. Yahoo’s shares closed at $10.63 on Monday.

Yang has admitted his legacy may forever linked to the debacle with the Microsoft takeover. Yahoo’s board and management team quickly turned down Microsoft’s original offer to acquire Yahoo for $31-a-share in February. The two parties spent six months trying to negotiate a deal. “As a CEO, my job is to find the right path for Yahoo,” Yang said at the Web 2.0 conference. Not getting the deal done “is something that I’ll be labeled with.”

By Yi-Wyn Yen

SAN FRANCISCO – In the past ten months, Yahoo CEO Jerry Yang has faced a hostile takeover attempt by Microsoft, shareholder lawsuits, a proxy fight led by Carl Icahn and, on Wednesday, watched a much-needed partnership with Google (GOOG) go up in flames.  Yet the embattled Yahoo chief says he has no regrets that he took on the job.

“I didn’t make the decision of being the CEO lightly,” Yang told a packed crowd of 800 at the Web 2.0 Summit late Wednesday afternoon, hours after Google announced it was pulling out of an ad partnership with Yahoo to avoid a federal antitrust suit.

“I wanted to make a change at Yahoo that I believe I can make,” he said. “That’s a dream that I felt I could achieve by being CEO, and that’s still the dream today. And that’s something that gets lost underneath all these external issues.”

He added, “I don’t regret any minute of it. It might not be the most fun thing, but I feel like I only know how to operate by caring and being passionate about Yahoo.  I just feel that’s the reason that I’m here.”

Yang appeared relaxed while facing tough questions from Web 2.0 impresario John Battelle, who conducted the 45-minute interview at San Francisco’s Palace Hotel. Dressed in a purple-checkered dress shirt, Yang smiled and joked with Battelle who asked him to justify his job and why he rejected Microsoft’s offer to buy the company.

“What happened?” Battelle asked.

“Which part?” Yang said with a smile.

“Thirty-three dollars a share, Jerry. What happened?”

Since Microsoft (MSFT) and Yahoo (YHOO) ended talks in June, Yang has said that the company was willing to sell to Microsoft for the right price. He reiterated his position that he’s still willing to sell the entire company or Yahoo’s search business at the Web 2.0 Summit.

Not convinced, Battelle blamed Yang for failing to get the deal done. “You didn’t want it to happen,” Battelle said.

“I don’t have an ego,” Yang replied. “At the end of the day, we believed the deal was going to be done, and that a deal was not that far apart and they walked away…I know [the failure of the deal] is something that I’ll be labeled with.”

It was the failure of that other deal that seemed to stun Yang. After four months of negotiating with the feds, Google on Wednesday pulled out of a search ad deal that would have generated hundreds of millions of dollars in additional cash flow for Yahoo.

Yang mentioned several times that he was “disappointed” by Google’s decision. “We were working with the Department of Justice to get this deal done,” he said. “We also felt that Google clearly did not want to stay in the deal, and we were disappointed with that.”

Yang had no answer for why Google withdrew. He said, “You’d have to ask them because we are certainly disappointed.”

In a blog post, Google’s chief legal officer David Drummond referred to the deal as too “risky.” The feds threatened to sue Google and Yahoo if they went through with the ad agreement that would allow Yahoo to run some Google search ads on Yahoo’s web properties. The Justice Department believed combining the No. 1 and No. 2 search engines was anticompetitive. Yahoo signaled it was willing to go to court over the deal.

Said Yang, “I really thought the government in this case does not understand this industry. Their thinking is too narrow. I clearly don’t agree with their point of view.”

Yang stressed that the company had “no news” with regards to reviving talks with Microsoft. He also stayed mum on reported talks to buy AOL, which is owned by Fortune’s parent company Time Warner (TWX).

“Are you buying AOL,” Battelle pressed.

Yang laughed and then smiled. “I can’t talk about that. If I tell you, I’d have to kill you.”

Said Battelle, “I think I’ll take the bullet for this audience.”

By Scott Moritz

The planned advertising partnership between Google (GOOG) and Yahoo (YHOO), which was devised during Microsoft’s (MSFT) unsolicited bid for Yahoo, is headed for a federal antitrust challenge. And that could mean, according to one analyst, that Google could wind up walking away from the deal.

Two days after the Association of National Advertisers sent a letter to the Justice Department opposing the Google-Yahoo ad pact, antitrust regulators hired high-powered attorney Sanford Litvack to lead its legal challenge to block the deal, according to The Wall Street Journal. For a look at what veteran antitrust lawyer Stephen Axinn told CNNMoney.com about Litvack’s hiring and what it means for Google and Yahoo, click here.

Part of Google’s strategy to form a search ad partnership was to keep Yahoo out of Microsoft’s hands. After failing to strike a deal, Microsoft and Yahoo went separate ways and Yahoo continued to pursue the ad partnership with Google.

Now, it might make more sense for Google to withdraw the partnership plan rather than fight the Justice Department in court, said Stifel Nicolaus analyst Blair Levin. Even though Google and Yahoo don’t need regulatory approval for their ad arrangement, Levin wrote in a research note Tuesday that “it would be risky…to proceed if they are getting signals that the agency has serious concerns.”

In addition, another analyst suggested that Google would not suffer too much if its Yahoo search ad plans were killed.  Cowen analyst Jim Friedland wrote in a note that he thought a Yahoo deal would only boost Google’s earnings before charges by 1% to 2% in the first 12 months of the deal.

Representatives for Google and Yahoo did not immediately return calls seeking comment.

But Google has already voluntarily delayed the start of the joint advertising process until October so regulators could examine its potential impact. “We are confident that the arrangement is beneficial to competition,” Google said in statement Tuesday.

The search ad partnership was first proposed in June when Microsoft went public with its offer to acquire Yahoo. The ad arrangement called for Google to run its text ads next to Yahoo’s search results. In exchange, Google would pay Yahoo an unspecified cut of the search revenue. But from the beginning, the deal between the top two Internet search services invited antitrust scrutiny and, as it turned out, some industry opposition.

After reviewing the deal, the ANA said in its letter to the Justice Department that Google and Yahoo would control 90% of the search ad market. “The partnership will likely diminish competition, increase concentration of market power, limit choices currently available and potentially raise prices to advertisers for high quality, affordable search advertising,” the ANA wrote.

Google responded indirectly to the ANA letter saying that “While there has been a lot of speculation about this agreement’s potential impact on advertisers or ad prices, we think it would be premature for regulators to halt the agreement before we implement it and everyone can judge the actual impact.”

In somewhat related news, Google, in an attempt to ease concerns among regulators, announced on its official blog late Monday that it has decided to shorten the length of time it keeps users’ Web information to 9 months from a previous target of 18 months. Google says it compiles some user information like Internet addresses and search history to better match ads to user interests.

By Yi-Wyn Yen

It’s been more than a month since Microsoft announced its initial bid to buy Yahoo for $44.6 billion. That’s led to a lot of speculations and rumors about what is and isn’t happening. But one thing is certain. Yahoo isn’t ready to shake hands with Microsoft yet.

Wall Street widely believes that a marriage between the two Internet frienemies is inevitable, but Yahoo (YHOO) says it needs more time to consider its options. In its boldest move since Yahoo’s board unanimously rejected Microsoft’s offer, the company pushed back the March 14 deadline to nominate Yahoo’s board members. On Wednesday, Yahoo said it will extend the deadline to nominate the board to 10 days after it sets a date for its annual stockholder meeting.

The general consensus is that Yahoo made the move to stymie Microsoft (MSFT), which is thought to be plotting to nominate board members who would vote in favor of the bid. Yahoo has not set a date for its next annual stockholder meeting, which coincides with the board nomination. It could push the date as far back as July 12 if it chooses. (Yahoo is required to hold a stockholder meeting within 13 months of its last one by Delaware law.)

Both parties now have more time to come up with their next move, but for Microsoft, time is of the essence. Microsoft wants to move forward as soon as possible to mount a challenge to Google (GOOG). The search giant is expected to get the final approval it needs from European regulators to buy DoubleClick, a major online ad company, as early as next week. Microsoft has argued in the past that a Google-DoubleClick merger would give Google too much of a monopoly in the online ad business.

By stalling, Yahoo is placing a big bet that it can hold out for a better offer from another suitor or get a higher offer from Microsoft. Yahoo is reportedly back in talks with AOL (TWX) and News Corp (NWS). Executives from Microsoft insist its original buyout offer of $31 per share is fair.

But waiting too long may not be a good idea for Yahoo. Many analysts believe the majority of shareholders would back a Microsoft merger over the alternatives Yahoo is pursuing. Yahoo’s stock has risen nearly 50% in value since Microsoft announced its unsolicited offer on Feb. 1.

“It’s been a month since Microsoft announced its bid, and still nothing. Every week that goes by, you ask the same question on Friday afternoon, ‘What’s Yahoo going to do?’ And then Monday morning comes with no news,” said Martin Pyykkonen, an analyst with Global Crown Capital. “So far, there really hasn’t been any shareholder ill will. Over time, the discontent will get greater.”

Yahoo CEO Jerry Yang sent an e-mail (written entirely in lower case) to his employees explaining the delay. He wrote, “this change removes an imminent deadline. microsoft, of course, could still choose to name directors, but our objective here is to enable our board to continue to explore all of its strategic alternatives for maximizing value for stockholders without the distraction of a proxy contest.”

In other words, the best shot Yahoo believes it has is to buy time. “I can’t think of any reason why they’d want Microsoft to nominate a board now,” says Gary Reback, an antitrust lawyer who represented PeopleSoft during Oracle’s hostile takeover. “Once things happen, you can’t go back.”

By Yi-Wyn Yen

PHOENIX — Yahoo chief executive Jerry Yang knew exactly what was on everyone’s minds at the Interactive Advertising Bureau conference on Monday.

In their first public appearance since Microsoft’s hostile $44.6 billion bid for Yahoo, Yang and Yahoo (YHOO) president Susan Decker each gave a 15-minute speech about Yahoo’s online ad strategy to a crowd of 400 industry players. Yang then kicked off a brief Q&A session with a joke.

“Before you start, let me guess what your first question is. Does it start with an M and end with a T?” Yang said with a smile. Unsurprisingly, Yang, dressed in drab charcoal gray, brown, and black, offered little insight into Yahoo’s take on Microsoft’s (MSFT) move to acquire the struggling Internet portal.

“We can’t say a whole lot about the process that we’re going through,” Yang said. “We’re very focused. We’re taking the proposal that Microsoft has given to us seriously… It’s been a galvanizing event for everyone at Yahoo. Our board is spending a lot of time thinking about all the alternatives. It’s something that we need to think through carefully.” Borrowing from the same, carefully-worded key points, Decker also referred to the Microsoft deal as a “galvanizing force internally and externally.”

Yahoo rejected Microsoft’s offer two weeks ago because the board felt Yahoo was undervalued at $31 a share. Since then, Microsoft has ramped up its plans to takeover the company and has hired a proxy firm to help oust Yahoo’s board. And late Friday, Microsoft released an internal memo from Kevin Johnson, the president of Microsoft’s platform and services division, about how the company plans to integrate Yahoo.

Yang remained confident about the situation. “The number of people who talk to us about the industry and what it could mean, in either direction or either outcome, it gives me a lot of encouragement that Yahoo goes to the right place,” he said.

Yang reiterated his plan to turn Yahoo into a starting point on the web, a concept he promoted during a speech he gave at last month’s Consumer Electronic Show. Decker said that Yahoo would soon release a new feature that highlights “the best content from the web” to drive more traffic to the homepage as well as to its alliance of 500 newspaper websites. Social news aggregators like Digg.com and StumbleUpon (EBAY) already provide similar services where users vote on popular content and news of the day.

Both Yang and Decker tried to drum up excitement for a new ad platform Yahoo is working on that will allow marketers to buy display, search, video, or mobile advertising in a convenient one-stop shop. “We’re trying to revolutionize the online advertising industry,” Decker said. She did not say when the new platform would be available.

The only prediction Yang offered was that spending for online advertising will be bigger than television in five years. Marketers spent $21 billion in online advertising in the United States in 2007, according to the IAB and PricewaterhouseCoopers. TV ad spending was $162 billion in the U.S., and is expected to rise 3% in 2008, according to marketing firm GroupM.

By Michal Lev-Ram

Yahoo chief executive Jerry Yang sent a letter to the Internet company’s shareholders late Wednesday in an effort to justify the company’s decision to reject Microsoft’s $44.6 billion buyout bid.

According to a document filed with the Securities and Exchange Commission, the letter was supposed to outline “the reasons the board believes that Microsoft’s (MSFT) proposal significantly undervalues Yahoo (YHOO) and is not in the best interests of Yahoo stockholders.” But Yang devoted most of his more than 1,000-word memo to pumping up Yahoo’s assets — including its brand name, its lead in display advertising and its “healthy” cash balance — and laying out the company’s goals.

“We have taken significant but disciplined steps to refocus our business on our objectives to become the starting point for the most consumers and the must buy for the most advertisers and enhance Yahoo’s long-term performance,” wrote Yang.

Earlier this week a number of Yahoo shareholders began speaking out in favor of selling to Microsoft or other potential bidders. But despite reports that Yahoo was negotiating with  AOL (owned by Time Warner (TWX), the parent company of Fortune and CNNMoney.com) and News Corp. (NWS), no other buyer has stepped forward. Still, Yang’s shareholder letter implied he still thinks keeping Yahoo independent is a realistic option.

“Today, Yahoo is a faster-moving, better-organized, more nimble company than it was just a few months ago,” Yang wrote. “The fact is that we are well on our way to transforming the experiences of Yahoo’s users, advertisers, publishers and developers — an important shift that is at the heart of our plan to create stockholder value.”

By Michal Lev-Ram

Time is running out for Yahoo: Shareholders are starting to agitate, competitors are reportedly poaching employees and, following the rejection of its $44.6 billion bid for the Internet pioneer, Microsoft may be on the verge of instigating a hostile takeover.

What’s more, it appears Yahoo has few defenses — if any — against the software giant. That’s partly because Yahoo (YHOO) does not have a “staggered” board, meaning all 10 of its directors are up for re-election at the company’s annual shareholders meeting this spring. That makes Yahoo particularly vulnerable to a proxy battle, should Microsoft (MSFT) decide to start one by nominating pro-Redmond board candidates by the March 14 deadline and campaigning for investors’ votes.

If Microsoft opts for a hostile takeover, Yahoo does have some limited safeguards in place to protect itself. According to company documents filed with the Securities and Exchange Commission, its so-called “poison pill” is a rule that states the company can issue new shares at a reduced price if a hostile “acquiring person” buys 15% or more of its common stock. Should Microsoft make a tender offer to shareholders, those extra shares would make it harder for it to obtain a majority quickly. But it would only stall the inevitable — because of the structure of Yahoo’s board, Microsoft would nominate a slate of board candidates and try to get them elected at the annual shareholders meeting when it is called sometime this spring.

Other possible scenarios — such as a white knight emerging to rescue Yahoo, entering some kind of outsourcing deal with Google or trying to turn things around on its own — seem increasingly unlikely. While rumors of another potential buyer or partner (including News Corp. (NWS) and AOL (TWX), which is owned by Time Warner, Fortune and CNNMoney.com’s parent) have been circulating the Web, so far no one has tried to outbid Microsoft, and it’s not clear if any other company would benefit from such an acquisition.

What’s more, even if another suitor does emerge, it’s likely Yahoo will just use that as a tactic to try and get Microsoft to up its offer. As for a commercial partnership with Google (GOOG), that would likely pose antitrust issues of its own, not to mention that its long-term benefit to Yahoo is murky at best. An independent Yahoo is also unlikely to survive — shareholders had already begun to lose faith in the company’s ability to turn things around well before Microsoft announced its offer.

On Tuesday, Legg Mason fund manager Bill Miller, representing Yahoo’s second-largest stockholder with 80 million shares, wrote in a letter to his investors that the company is “in a tough spot if it wishes to remain independent.” Activist investor Eric Jackson told Fortune he doesn’t believe in a “go it alone” approach. Both shareholders said they expect Microsoft to push forward, one way or another.

The danger for both predator and prey is that a hostile takeover will send valuable Yahoo employees heading for the door. Harvard law professor Guhan Subramanian says that there is there is an “old conventional wisdom” that you don’t make a hostile bid for technology companies. Why? Because, as Subramanian says, “the most valuable assets — employees — leave the building every night.”

By Michal Lev-Ram

Jerry Yang’s memos to fellow Yahoos are becoming an almost daily ritual at the Sunnyvale, Calif.-based company. The chief executive officer of the Internet pioneer — which just turned down Microsoft’s (MSFT) $44.6 billion buyout bid — sent another letter to his employees Monday, explaining the board’s decision.

“As you’ll see from the news release we issued today, our board of directors has reviewed Microsoft’s unsolicited proposal with Yahoo’s management, financial and legal advisers,” Yang wrote in the e-mail, filed with the Securities and Exchange Commission. “After a careful evaluation, the board has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders.”

Yang added that Microsoft’s bid “substantially undervalues” the company and that the board would continue to evaluate all of its “strategic options.” It’s been reported that those options include a partnership with Google (GOOG), though it’s not clear how attractive that would be to Yahoo (YHOO), or whether such a move could even clear potential antitrust hurdles.

Yang continued his e-mail with a pep talk to employees, saying they “deserve credit for the tremendously valuable business we have built.”

“All of us in management, as well as the members of the board, deeply appreciate and respect what you have done and continue to do in order to maintain and enhance Yahoo’s leadership position in the online world,” wrote Yang. The CEO then went on to list Yahoo’s key assets — including its global brand, heavily-trafficked content sites and investments in computing infrastructure like its Panama search engine.

The danger of a protracted struggle over Yahoo is that key Yahoo employees will be cherry-picked by other tech companies. Mid-level Yahoo execs are already getting multiple offers from Oracle (ORCL), Google and Salesforce.com (CRM), according to Global Equities Research analyst Trip Chowdhry.

No surprise then that Yang signed off by saying, “Of course, our most important resource is you: the thousands of creative, passionate and committed Yahoos who are executing our strategies to deliver value for users, advertisers, publishers — and stockholders.”

By Michal Lev-Ram

The Microhoo deal is still far from over, but you can bet every one of Yahoo’s 14,300 employees are wondering what the $44.6 billion bid from Microsoft means for them.

The fate of Yahoo’s top executives — co-founders Jerry Yang and David Filo and president Susan Decker — remains unclear. Will Microsoft clean house or try to retain some of Yahoo’s (YHOO) higher-ups? More importantly, will top Yahoos even want a corner office in Redmond?

Whatever happens under a new regime, Yang, Filo and Decker will be provided for financially, to say the least. Based on Microsoft’s (MSFT) bid to buy Yahoo at $31 a share (a 62 percent premium to the share price when the offer was made last Friday), here’s how the three head Yahoos would fare, according to executive compensation research firm Equilar and Securities and Exchange Commission filings:

• Jerry Yang: Yahoo’s CEO indirectly owns 43,489,864 shares held in trust and 9,314,390 held in a family partnership of Yahoo. If these shares were purchased for $31, they would have a combined value of over $1.6 billion. This value doesn’t include the 6,310 shares held by Yang’s wife, for which he disclaims beneficial ownership.
• David Filo: Filo stays out of the limelight but directly owns close to 80,000,000 shares of Yahoo. At the proposed $31 price per share, they would be worth more than $2.4 billion.
• Susan Decker: Decker holds an estimated 634,676 shares directly and 6,161,667 options. Under Microsoft’s valuation, they’d have a value of over $54 million.

But don’t expect any “golden parachutes” for these Yahoos — according to research firm Equilar and company records, there’s no evidence Yahoo would give its execs cash severance benefits in the event of a take-over. However, the company does have an agreement with Decker stating that some of her previously vested options will remain exercisable for an additional three years if she leaves the company.

As for majority of Yahoo’s employees — the non-billionaires — it’s not clear how they would fare under a Microsoft acquisition. The struggling search engine (and I mean Yahoo) had already said it would lay off 1,000, or 7 percent, of its workforce sometime this month. It’s likely Microsoft would make more cuts should the deal go through.