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 Yi-Wyn Yen

The implosion of Yahoo’s ad partnership with Google may or may not lure Microsoft back to bid on Yahoo, but one thing is clear: Making a deal with Yahoo will be a lot less expensive that it was six months ago.

Yahoo (YHOO) is back on the market after Google (GOOG) on Wednesday bailed on the controversial search ad agreement. Investors signaled their approval of the breakup by sending Yahoo’s shares up 5% to $14.02 in mid-day trading.

Microsoft (MSFT) had no comment on the possibility of opening up renegotiations with Yahoo. But the software giant was pleased with the Justice Department’s decision to nix the Google-Yahoo deal, which would have allowed Yahoo to run some of Google’s search ads on its Web properties.

“The Department of Justice’s finding is significant for advertisers, publishers and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policymakers,” said Brad Smith, Microsoft’s general counsel in a statement.

Microsoft may have won a victory over Google, its bitter rival, but the real loser here is Yahoo. Wrote Jefferies analyst Youssef Squali in a client note, “In our view the GOOG withdrawal is another black eye for [Yahoo CEO] Jerry Yang and Co.”

Analysts say they expect Yahoo’s best option is to go back to Microsoft for a search deal. Summed up Jefferies’ Squali, “YHOO is left with 3 options: 1) go it alone, 2) merge with AOL, or 3) do a deal with Microsoft.”

“Option #1 is not optimal,” he continued, “as shareholders would need to ride out the current recession to get paid. Also having Icahn on the board should make status quo difficult. Option #2 is possible but not to our liking since YHOO would double-down on Display (the weaker segment) with no material benefit to search. Option #3 is the most likely,in our view.”

Google’s ditching of the deal is a humiliating blow for Yahoo. Google announced in a company blog post – a blog post! – that battling the feds in court to save the Yahoo deal was too risky. Three minutes after the Google blog was published, Yahoo released a statement that the company was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”

The Justice Department notified Google and Yahoo Wednesday that it would sue both companies if the pair went through with the ad agreement.  Wrote Google’s chief legal officer David Drummond in the blog post, “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn’t have been in the long-term interests of Google or our users.”

Yahoo scrambled to keep the deal afloat. Earlier this week, Yahoo proposed a drastically-scaled version to Google and the government. Yahoo offered to reduce the terms from ten years to two years and only run a quarter of Google’s search ads on Yahoo’s sites.

Analyst Jeffrey Lindsay with Bernstein Research argues that Yahoo was desperate to keep the Google deal going to stay independent. He also says that without the extra cash generated from Google, Yahoo’s attempts to buy Time Warner’s AOL (TWX) business outright is unlikely. Reports have suggested that Time Warner, Fortune’s parent company, would be willing to sell AOL for $6 billion to $8 billion. Lindsay says that at most, Yahoo can only pay between $4 billion to $4.5 billion without diluting its own shares. “Without the Google deal, Yahoo can’t afford to buy AOL,” Lindsay said.

Yahoo brushes off claims that the Google deal is a major loss to the company. Yahoo had originally said that it could make as much as $800 million in annual revenue from the deal. But in its release Wednesday, the company argues that the deal was only “incremental” to its turnaround strategy. “The fundamental building blocks of a stronger Yahoo in both sponsored and algorithmic search were put in place independent of the agreement,” the company said in its statement.

Yahoo struck the search deal with Google four months ago after it ended talks with Microsoft. The move was widely seen as a way for Yahoo to appease shareholders, who were upset that Yahoo turned down Microsoft’s $33-per-share bid. Microsoft had also offered to buy just Yahoo’s search business for a reported $2 billion in June.

Microsoft is still struggling to make a dent with Google’s dominance in paid search advertising. Analysts say that’s all the more reason for Microsoft to come back. “We can’t see why Microsoft wants Yahoo any less than it did nearly a year ago,” Bernstein’s Lindsay said. “All the same reasons still hold true for why Microsoft needs Yahoo. And now they can offer considerably less.”

By Scott Moritz

Yahoo (YHOO) moves back to the deal market as its controversial advertising partnership with Google (GOOG) is now dead.

As Fortune’s Legal Pad blogger Roger Parloff outlined last month, the legal footing was never very solid as the No.1 and No.2 Internet advertisers explored plans to work together on search advertising efforts.

The plan was first introduced in June as Yahoo was trying to fend off an unsolicited takeover bid from Microsoft (MSFT). Yahoo stubbornly resisted Microsoft’s early offers, including a $33-a-share bid in May. Microsoft then walked away and in July, activist investors like Carl Icahn started pushing for a shakeup of the Yahoo board and a more deal-friendly line up.

Yahoo shares, which had fallen to a five-year low of $11.25 last month, surge up 9% on Wednesday after news that the Google partnership was killed.

Investors apparently like Yahoo’s options a lot better without the antitrust battle that seemed to be looming with its Google ad plan. Microsoft and Time Warner’s (TWX) AOL unit – Time Warner is the parent of Fortune and CNNMoney – are among the potential deal partners.

On a conference call with analysts, Time Warner executives said that the news was positive for AOL. “The opportunity remains open for this business to rebuild itself,” the executives said.

By Yi-Wyn Yen

Some new bad news for Yahoo. Ten days after the troubled web portal announced it will lay off 1,500 employees, the Wall Street Journal reported Thursday that Yahoo’s deal with Google is on shaky ground.

The Journal said that both Google (GOOG) and Yahoo (YHOO) may walk away from the ad search agreement next week because the Justice Department has been moving toward a suit to block the deal. That would be a big blow to Yahoo, which was banking on making as much as $800 million in annual revenues by outsourcing some search ads on its web properties to Google.

In a statement, Yahoo representative Adam Grossberg said the discussions with the feds are “on going.”

Google representative Adam Kovacevich said in a statement that the company is “continuing to have cooperative discussions with the Department of Justice about this arrangement, and agreed to a brief delay in implementing the agreement while those discussions continue.”

Confidence in the deal is waning. In mid-June, Google and Yahoo originally said they would give the feds 100 days to review the ad pact before moving forward with the agreement. But the pair have faced an uphill battle in Washington. In early August, Yahoo filed a heavily redacted version of the deal to the Securities and Exchange Commission. Then Google CEO Eric Schmidt told reporters that he planned to go ahead with the partnership in mid-October with or without approval from the Justice Department. So far, the feds have yet to give the Internet frenemies the green light.

Critics say the ad pact would give Google too much power and make search advertising less competitive. Google currently owns 62% of the U.S. search market, according to comScore’s monthly figures for September. Yahoo is second with a 20% share and has lost 20% of its search share to Google in the past 18 months.

A source familiar with Google’s thinking said no decision has been made. Some analysts have already moved on even if the feds haven’t.

On Wednesday, J.P. Morgan Internet analyst Imran Khan sent a note to clients on why Yahoo should forget about the Google deal and sell its search business to Microsoft (MSFT). Khan suggests that Yahoo can gain an additional $725 million in operating cash flow from outsourcing search to Microsoft. The software company had offered Yahoo a reported $2 billion to buy its search business after talks to acquire all of Yahoo failed.

Writes Khan, “We think that it is unlikely that the Google/Yahoo search partnership will pass DOJ review in its current form….Without its search business, Yahoo would be very clearly positioned as a content and display advertising entity, thereby clarifying and defining its purpose to advertisers and users.”

By Yi-Wyn Yen

Microsoft needs to get its story straight.

Microsoft CEO Steve Ballmer told attendees at a tech research conference in Orlando on Thursday that a deal with Yahoo (YHOO) “makes sense for their shareholders and ours.”

But within an hour of the news, Microsoft (MSFT)  spokesman Frank Shaw issued an statement to retract Ballmer’s comments. “Our position hasn’t changed. Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies,” Microsoft said.

Yahoo spokeswoman Kim Rubey said the company had no comment on Ballmer’s statement. Yahoo’s investors, meanwhile, are loving the idea that Microsoft is even considering returning to the negotiating table. After trading in the $11 range, Yahoo’s shares jumped 10% to $12.93 on Thursday.

By Scott Moritz

NEW YORK – A brief hands-on experience with the Google (GOOG) G1 phone gives the impression that after a slew of touchscreen duds from other telcos, Apple’s (AAPL) iPhone finally has a worthy rival.

The highly-anticipated HTC phone for T-Mobile (DT) was unveiled in New York Tuesday, and kiosks with technical experts were set up so media people could run the first Android-powered phone through some tricks. T-Mobile will start selling the phone Oct. 22 for $179 with a two-year contract.

The G1 has a large touchscreen, nearly the same size as the iPhone. But unlike the iPhone, there is a physical keyboard under the slide-open screen. People familiar with the iPhone will find the G1 a little lighter and thicker. The G1, for you ultra-thin fans, is about 3/4 of an inch thick, downright portly compared to the svelte half-inch iPhone.

Navigating the screen is fairly easy and there are several ways to move around. The touchscreen has a swipe capability that allows you to flick up and down or side to side. There is also a small trackball-type button at the bottom of the phone for scrolling.

The 3G network coverage at the show – only 16 cities currently have T-Mobile’s 3G networks – was fast. Google’s homepage loaded in five seconds and Google search results also popped up in five seconds. Sites like CNNMoney and Fortune took about 17 seconds to load. That is a fairly standard 3G speed.

Calls worked, and the sound was clear, for those considering the device as a phone primarily.

It is clear, however, that with Google’s support, Android and HTC have made a solid Internet device that combines web access with technology like GPS and software like Google Maps. Applications like Compass Mode, as Fortune’s Philip Elmer-Dewitt explains, gives you a 360-degree street view, a trick that has been limited to PCs until now.

The phone has so-called push e-mail through its Gmail service. As Fortune reported Monday, T-Mobile was considering a low-tier price plan that would give G1 users free e-mail without a data plan. T-Mobile technology chief Cole Brodman says the company looked at a few different pricing plans, but decided that the e-mail only data plan “doesn’t do the device justice.”

The G1 will have two monthly price options, $25 for data plan limited to 400 text messages or $35 for unlimited data. That’s compares with AT&T’s $30 and $45 data plans for the iPhone.

HTC’s touchscreen has some familiar features, like a shifting orientation if the user tips the phone on its side. It also has a zoom-in function that is done with plus and minus buttons on the screen rather than the two finger pinch or separate approach on the iPhone.

The G1 allows dragging and dropping of pictures and text, a feature the iPhone still lacks. The music player was easy to use and there is a direct link to Amazon’s music store.

Overall, and first impressions being what they are,  the G1 stands well above disappointing touchscreens like Verizon’s (VZ) LG Voyager or Sprint’s (S) Samsung Instinct. And until Research in Motion (RIMM) delivers its touchscreen Storm BlackBerry, T-Mobile’s G1 is the toughest competition yet to the iconic iPhone.

By Scott Moritz

Android lands at T-Mobile Tuesday, and as part of the effort to deliver the Google phone to the mobile market, T-Mobile is considering including free e-mail access.

The new Android-powered phone will have Google’s (GOOG) Gmail service built in, and T-Mobile executives are considering offering access to Gmail free, without the need for a data plan, says one person close to the discussions.

The HTC-manufactured T-Mobile phone will be the first of the hotly-anticipated Android-operated handsets, and one of several new challengers to Apple’s (AAPL) iPhone. The Android project was created by Google to cultivate an open application platform to operate next-generation mobile phones.  T-Mobile  – a unit of Deutshe Telekom (DT) - is expected to unveil the phone during a press conference at 10:30 ET Tuesday, and offer it for sale later this fall.

Analysts see the Google phone as the beginning of an important lead in mobile Internet advertising through ads appearing on Android powered phones. Sandeep Aggarwal, an analyst with Collins Stewart, estimates that the phone will generate $5 billion in incremental revenue for Google by 2011.

Should T-Mobile decide to offer free Gmail access, it would be seen as a big counter move to Research in Motion’s (RIMM) BlackBerry e-mail service, which costs $15 a month extra. And if telcos embrace Google’s ad-supported free e-mail, it could help drive Google’s ultimate aim to spread its successful desktop advertising business to mobile phones.

The move to provide free Gmail has risks, however.

T-Mobile could undercut its own data revenue stream from BlackBerry subscribers if users trade in their Curves and Pearls for the Android phone. But T-Mobile, the No.4 wireless shop, needs an attention-getting strategy like free e-mail to help set itself apart from bigger players like AT&T (T), Verizon (VZ) and Sprint (S).  

Google referred calls for comment to T-Mobile and a T-Mobile representative could not provide an immediate comment.

As for the HTC Android phone itself, one user who got an early trial described the slide out keyboard as a little awkward for some typing tasks. The browsing quality however was “better than BlackBerry and close to the iPhone.”

By Scott Moritz

Big tech is putting its cash to work to appease investors.

Microsoft and Hewlett Packard say they will throw weary shareholders a cash treat. Microsoft created a new five-year $40 billion share buyback plan and an 18% dividend boost. And HP has set aside $8 billion for share repurchases. The top PC maker had $3 billion of buyback money still in its budget under an $8 billion program it started in November.

The buybacks are aimed at restoring investor interest in companies that have had very little to show in terms of growth amid a sluggish tech spending environment. Using some of the mountains of cash also helps discourage activist investors from forcing the companies to make a similar move on somewhat different terms. 

The move comes less than a week after Microsoft shares hit a two-year low on a broad credit-crisis selloff on Wall Street. The No.1 software shop says it has recently completed a previous $40 billion stock repurchase plan and by Microsoft’s tally, the company has now spent $115 billion on stock buybacks and dividends in the past five years.

Microsoft will pay a dividend of 13 cents a quarter, or 52 cents a share. That is up 2 cents from the prior dividend of 11 cents a quarter, and up 8 cents annually from the 44-cent level.

Microsoft’s board has also authorized up to $6 billion in debt financing including a new $2 billion participation in the commercial paper market.

“The company’s strong credit quality coupled with investors’ current appetite for high quality paper provides a unique opportunity for the company to establish its first-ever commercial paper program and enhance its capital structure,” Microsoft treasurer George Zinn said in a press release.

The company says it may use the financings to help fund operations and buy back stock.

Shares of Microsoft rose 5% and HP was up 2% in premarket trading Monday.

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.

Pushing further into Microsoft’s (MSFT) territory, Cisco (CSCO) announced Wednesday that it has signed a $215 million deal for business e-mail shop PostPath.

The move bolsters Cisco’s strategy to expand into the office software market by adding e-mail and calendar services to its existing roster of so-called enterprise networking features. PostPath, based in Mountain View, Calif., develops Linux-based software that gives corporate customers an alternative to Microsoft’s Exchange system. PostPath says its e-mail servers are compatible with a nearly all business systems, including Apple (AAPL) and its iPhone. 

Cisco, in announcing better-than-expected quarterly profits but a lower growth forecast, said earlier this month that it planned to make acquisitions in adjacent markets outside its core business selling Internet equipment.

With Google going door-to-door trying to sell its business software to Microsoft clients, this latest move by Cisco into e-mail isn’t necessarily a great comfort to the Redmond, Wash. giant. Given Cisco’s dominance in corporate IT gear, there is potential for Cisco to offer an alternative to Microsoft Exchange.

Cisco plans to add PostPath’s applications to its Web-based services, also known as “cloud computing.” Software providers have for years been looking for ways to let business users access their desktop computing tool wherever they happen to be. This way employees could collaborate on tasks using features like instant messaging, video conferencing or document-sharing services.

Microsoft’s quest to extend its desktop software dominance to the Web was a driver behind its failed bid for Yahoo earlier this year.

By Yi-Wyn Yen

Former Viacom CEO Frank Biondi and former Nextel CEO John Chappel will join Carl Icahn as the newest additions to Yahoo’s board.

All eyes are on Icahn and his gang. The three amigos will need to start making changes to placate shareholders soon because if they don’t, it’s likely that nobody on the board will. The three were part of Icahn’s original proxy slate that ran under a campaign to sell Yahoo (YHOO) to Microsoft (MSFT). Icahn dropped the fight in July in exchange for three seats on the company’s board.

Shareholders are still waiting for Yahoo to come up with a plan that will drive up the stock. Since mid-June, when Yahoo announced that talks with Microsoft were over, the stock has dropped roughly 20% in value and has hovered in the low $20s. Microsoft had originally offered to buy Yahoo at $31-a-share. Earlier this month investors re-elected Yahoo’s eight incumbents. But investors signaled their unhappiness with CEO Jerry Yang and chairman Roy Bostock. Yang received 66.3% of the votes while Bostock received the least, with 60.4% votes.

Wall Street isn’t convinced that Icahn and co. can do much to turnaround Yahoo. Says Thomas Weiser Partners analyst Christa Quarles, “Yahoo needs someone to help fix the business, and I don’t know if Icahn has the background to do that.”

Icahn has yet to reveal what his plans are to drive shareholder value for Yahoo beyond selling part or all of the company to Microsoft. The corporate raider has most recently pushed for management change at Blockbuster (BBI) and Motorola after securing board seats at those companies. Last year, Blockbuster CEO John Antioco agreed to step down after Icahn initiated a campaign to cut his salary. After Icahn won two seats on Motorola’s board in April, he persuaded the company to dump its cell phone division and was instrumental in pushing out former CEO Ed Zander.

Chappel, who is president of Seattle-based private equity firm Hawkeye Investments, was unavailable for comment. Biondi, a senior managing director of private equity firm WaterView Advisors, responded in an e-mail that he does not comment on boards that he serves. Biondi is currently a director of five other boards, including Seagate (STX) and Cablevision Systems (CVC).

By Yi-Wyn Yen

Yahoo (YHOO) on Tuesday disclosed that CEO Jerry Yang and other directors were re-elected last week to its board with far fewer votes than previously thought.

On Tuesday, Yahoo said it learned that Broadridge Financial Services, a proxy accounting firm that handles submitting votes for major shareholders, forgot to include millions of votes in its tally. Five of Yahoo’s nine incumbents received a much lower margin of approval after votes from Yahoo’s largest institutional shareholders, Capital World Investors and Capital Research Global Investors, were belatedly added.

Capital Group on Monday had asked Broadridge re-examine the votes.  Broadridge subsequently found it had failed to include 200 million votes from the Capital Group that were withheld for Roy Bostock, Ron Burkle and Yahoo CEO  Jerry Yang, and 100 million votes withheld for Arthur Kern and Gary Wilson. Instead of an 85.4% shareholder approval, Yang actually received 66% of votes, and Yahoo chairman Bostock had 60% as opposed to 79.5% that was originally reported Friday. Yahoo’s nine directors were running uncontested.

In a statement, Yahoo blamed Broadridge’s mistake on a “truncation error” that resulted when share numbers exceeded eight digits.

Capital Research’s Gordon Crawford has been particularly critical of Yahoo for the way the company handled negotiations with Microsoft (MSFT) over the software giant’s buyout offer. Capital Group spokesman Chuck Freedhoff says the institutional funds, which own 16.3% of Yahoo’s shares, just wanted to make sure its votes were reflected in the election. “We wanted to make sure Broadridge transmitted our votes,” Freedhoff said.

The new findings show greater shareholder dissatisfaction with Yahoo’s directors, but that won’t change the board’s makeup. The nine incumbents were all re-elected last Friday at Yahoo’s annual shareholder meeting. Activision-Blizzard CEO Bobby Kotick announced his resignation two weeks ago and his spot has been filled by shareholder activist Carl Icahn. The billionaire will also get two more seats on an expanded 11-member board.

Former AOL chief executive Jonathan Miller will remove himself from consideration as a board appointee, according to a source familiar with the matter. Time Warner (the parent company of AOL and Fortune) last week said a non-compete agreement Miller signed prevents him from serving as Yahoo director. Miller was unavailable for comment on Tuesday.

Yahoo will name the two additional board appointees by Aug. 15.

By Yi-Wyn Yen

SAN JOSE, Calif. – Yahoo’s shareholder meeting on Friday was pretty dull, but that didn’t stop things from getting ugly for the troubled Internet portal as both Time Warner and Microsoft signaled their dissatisfaction with the company.

Time Warner (TWX) (Fortune’s parent company) said that ex-AOL chief executive Jonathan Miller cannot join Yahoo’s board because of a non-compete agreement, although Yahoo (YHOO) announced the nomination last week. Meanwhile, Microsoft (MSFT) denounced Yahoo chairman Roy Bostock’s interpretation of its negotiations with the company.

Miller was largely expected to be named as one of the two appointees in a compromise with activist investor Carl Icahn. On July 21, Icahn agreed to abandon his proxy fight to oust Yahoo’s directors in exchange for three seats on an expanded board. The new 11-member board so far includes Yahoo’s eight incumbents and Icahn. The two members will be named within two weeks.

A Time Warner spokesman said that Miller, who stepped down from AOL in November 2006, signed a non-compete clause that prevents him from joining a competitor like Yahoo until March 2009. “His non-compete clause was never waived,” said Time Warner spokesman Keith Cocozza.

A source familiar with Yahoo’s operations disagreed. This person said Miller and Yahoo management had approached Time Warner for approval before Yahoo announced Miller’s nomination two weeks ago. The source would not say whether Yahoo received the approval but then said the company would not have proceeded otherwise.

A Yahoo spokesperson declined to comment on whether Miller will remain a board nominee.

Shareholders gave their overwhelming support to Yahoo’s incumbents. CEO Jerry Yang received 85.4% of approval, Bostock garnered 79.5% and Vyomesh Joshi of Hewlett-Packard received the highest support with 92.9%.

Time Warner and Yahoo weren’t the only ones in a standoff. Microsoft took issue with how Bostock characterized negotiations with the software giant.

During the Yahoo shareholder meeting, Bostock claimed that Microsoft was a bad communicator. During the six-month ordeal, Bostock said Yahoo’s board “encouraged them to engage in more discussions, but they in fact reduced engagement and suggested they’d lower the price and launch a proxy fight.” Bostock also said that Microsoft did not “explicitly communicate to our board” that it wanted to raise the offer from its original $31-per-share bid to $33-per-share.

Two hours after the Yahoo meeting ended, Microsoft issued a press release that said, “Yahoo is attempting to rewrite history yet again with statements that are not supported by the facts.”

By Yi-Wyn Yen

SAN JOSE, Calif. –Carl Icahn made the right choice not to fly out west to attend the Yahoo shareholder meeting Friday.

The billionaire activist who is the newest Yahoo director wasn’t the only one that didn’t show up to the  gathering. Judging by the number of shareholders who did attend, interest in the annual meeting was fairly low. But there were still some fireworks from shareholders who remain disgruntled over how Yahoo’s board handled buyout negotiations with Microsoft.

Eric Jackson, a dissident shareholder from Florida, kicked off the question-and-answer session  by criticizing Yahoo chairman Roy Bostock. “I think you’re overpaid for compensation,” Jackson said. “I think you overplayed your hand with Microsoft and you’ve overstayed your welcome.”  The audience clapped and cheered and then laughed when Yang replied, “Eric… It’s good to see you again.”

Bostock defended his position on the board. He claimed that he made less than $500,000 in the past year and said there was a “mischaracterization and misperception” of how he handled the Microsoft deal. When another shareholder demanded that Bostock file a time sheet on the Internet, Bostock said that he would be happy to show that he worked “26 hours in a 24 hour days… in the last six months.”  He again stressed that the entire board was “deeply involved” with the Microsoft (MSFT) negotiations.

Over the course of two hours, the board’s eight members were re-elected and Yahoo’s management team – CEO Jerry Yang, president Sue Decker and CFO Blake Jorgensen – reiterated their strategy to boost the company’s top and bottom lines by turning Yahoo into a starting place and a “must-buy” for advertisers.

It was clear that Yahoo (YHOO) had expected more attendees. Only a quarter of the roughly 700 chairs available were filled in the darkened ballroom that Yahoo rented at the Fairmont Hotel in downtown San Jose. Mountains of pastries were left untouched in the hallways of the hotel. Rooms set up to deal with an overflow capacity went unused.

“We planned for this before the proxy fight came to an end,” said Yahoo spokesman Adam Grossberg.

Icahn gave up his proxy fight last week in exchange for three seats on Yahoo’s board. Along with the corporate activist, the two Icahn appointees on the newly expanded 11-member board, will be announced within two weeks.

In a blog post Thursday, Icahn wrote that he wasn’t coming to the shareholder meeting because he didn’t want to turn it into a “media event for no purpose.”  Bostock said he was looking forward to working with Icahn, and using air quotes, referred to Icahn as a “good guy despite what some say about him.”

By Yi-Wyn Yen

Oil billionaire T. Boone Pickens has decided he is not going to follow activist billionaire Carl Icahn to the ends of the earth.

Pickens told the San Francisco Chronicle that he has sold his 10 million shares of Yahoo (YHOO) for a loss because he doesn’t believe a sale to Microsoft (MSFT) is happening.

Pickens bought the shares in the hopes that Icahn would succeed in getting Yahoo’s board to agree to a sale to Microsoft. The octogenarian admits he doesn’t know how to “write an email” and decided to blindly follow Icahn’s lead. “He goes in first and I jump in behind him,” Pickens told CNBC in an interview in late May.

Icahn’s plans to sell the tarnished Internet portal to Microsoft for a profit have not succeeded. The corporate agitator launched a proxy campaign in hopes of winning control of Yahoo’s board, but Microsoft has said the company is no longer interested in buying all of Yahoo for $33-a-share. Earlier this month Icahn reached a compromise with Yahoo’s board to forgo his proxy fight in exchange for three seats on Yahoo’s board. Yahoo will holds its annual shareholder meeting on Friday, where investors will vote for an extended 11-member board.

Now that the fight’s over, Pickens has decided to cut his losses. “I think that [the] Yahoo management was pathetic,” Pickens told the Chronicle. Pickens did not say how much he has lost in his activist gamble.

Though the most recent regulatory filings don’t show Pickens’s selloff, it’s likely that Pickens has lost roughly $50 million. He bought his shares in the first few weeks of May when Yahoo was trading between $25-$27. In the past two weeks, Yahoo’s stock has slipped to between $20-$22.

By Yi-Wyn Yen

The only thing surprising about the resolution between Yahoo’s board of directors and activist investor Carl Icahn was that it didn’t happen sooner.

The proxy campaign that Icahn launched nearly three months ago to eliminate Yahoo’s board and replace it with his own cronies at the Aug. 1 shareholder meeting came to an end Monday when the two sides finally agreed to a compromise. Proxy experts say they expected a settlement, which will give Icahn three seats on an expanded 11-member Yahoo (YHOO) board, several weeks ago.

“The end game was fairly obvious. It should have been obvious that the company wasn’t going to pitch a shutout. At the same time, it should have been obvious to Carl that he would be unlikely to get a majority vote,” said Chris Young, the M&A research director of shareholder advisory firm RiskMetrics ISS. “This was a recipe for a settlement.”

Neither side was likely to win without a compromise. Young says Yahoo’s board and Icahn were both preparing for the “nightmare scenario” – a full Yahoo slate or an all-Icahn slate that appealed to few Yahoo investors. Both slates were too extreme for disenchanted shareholders who were unhappy that Yahoo’s current board botched negotiations with Microsoft (MSFT) and wary that Icahn’s directors do not have a Plan B beyond a sale to the software giant.

Young suggests that Icahn would have likely submitted a shortened version of his nine-member slate before the Aug. 1 meeting. Last Friday Bill Miller, a major Yahoo shareholder with Legg Mason, said he would support Yahoo’s incumbent slate, which includes CEO Jerry Yang and chairman Roy Bostock, over Icahn’s. However, Miller also signaled he’d be willing to support Icahn as a board member. “We believe it is appropriate for large shareholders to have representation on corporate boards if they so desire,” Miller said in a statement. Icahn Associates owns a 5% stake, or 68.7 million shares, of Yahoo, making him the third largest institutional shareholder.

A shortened Icahn slate could have spelled trouble for Yahoo’s board. Since 2006, activists have succeeded in winning seats through proxy fight or settlement 80% of the time, according to RiskMetrics. Yahoo is among 40 large-cap companies that have reached a settlement with activists in the past year, and is the third largest behind Kraft Foods (KFT), which settled with Nelson Peltz by adding two Peltz-backed nominees to the board last November and Target (TGT), which reversed its longstanding position to sell off its credit card receivables after activist Bill Ackman started rattling cages.

A settlement that gives Icahn a seat on Yahoo’s board is a “win-win situation,” Young said. “Nobody likes to go to the bitter end. This way, nobody loses face. Everybody can claim victory and address the most important issue – creating shareholder value.”

By Michal Lev-Ram

The latest news out of Redmond is that a meeting between Microsoft (MSFT) and executives from Time Warner’s AOL (TWX) will take place sometime today, according to a report in The Wall Street Journal.

This is not the first time talks to combine the two companies’ online groups have reportedly taken place, but with Yahoo’s (YHOO) annual shareholder meeting quickly approaching (it’s now scheduled for Aug. 1), there could be renewed urgency for Microsoft to find an alternative to its failed buyout bid for the Sunnyvale-based Internet company.

AOL could not be reached for comment, and a Microsoft spokesman declined to comment on the reported meeting.

But Microsoft may not be the only company eyeing AOL. In April Fortune reported that Yahoo itself was in talks with the Time Warner subsidiary (Time Warner is also the parent company of Fortune and CNNMoney.com). However, in June Yahoo cut a deal with Google (GOOG) to run some of Google’s search ads on its Web properties, saying it expects to generate an additional $250 million to $450 million in cash flow. A senate hearing on the proposed Google-Yahoo ad deal took place in Washington D.C. this week.

Whether Yahoo is still interested in AOL – and how far AOL’s reported talks with Microsoft will go – remains to be seen. But one thing is evident: AOL is willing to talk. Last March Time Warner CEO Jeff Bewkes said he was open to combining AOL with another company, in “whatever configuration makes it the strongest and the most valuable.

By Scott Moritz

Yahoo’s (YHOO) latest reorganization aligns three divisions under president Sue Decker.

Among the top changes, Ash Patel has been put in charge of the company’s Global Products group, Scott Dietzen takes the top communications slot and Hilary Schneider will take over a newly created job of U.S. unit chief, according to a company press release.

Not mentioned in the release is the status of Brad Garlinghouse, the author of the so-called peanut butter memo that criticized the company’s spread-thin-over-everything strategy. In BoomTown, a blog run by The Wall Street Journal and the outlet that first broke the news of the impending shakeup, author Kara Swisher says that Dietzen has taken over most of Garlinghouse’s duties.

The move comes in the wake of a failed takeover of Yahoo by Microsoft (MSFT) and a controversial search outsourcing partnership with rival Google (GOOG).

Yahoo shares fell 2% to $21.58 Thursday.

By Yi-Wyn Yen

A major Yahoo investor has been urging executives from both Microsoft and Yahoo in the past couple of weeks to revive their talks, and it looks like those efforts haven’t gone to waste.

A source at Microsoft told Fortune on Tuesday that while there was “no big deal” in the works – meaning a full acquisition of Yahoo – he implied that his company hasn’t ruled out the possibility of buying Yahoo’s search business. Shares of Yahoo had reached a five-month low Tuesday, but finished up nearly 3% after two tech blogs reported that Microsoft was revisiting its bid for the battered Internet portal.

The Yahoo investor said he has spoken with company board members about reconsidering Microsoft’s (MSFT) offers to buy the whole company and, failing that, part of it. Yahoo directors, the investor said, have admitted that they made miscalculations in negotiations with Microsoft CEO Steve Ballmer. “They dragged this out for a couple months and were shocked when Steve went away,” the investor said.

Calls to Yahoo were not immediately returned.

The Yahoo investor said that selling Yahoo’s search business to Microsoft is a far better alternative than its Google ad pact. Shares of Yahoo (YHOO) dropped nearly 18% in value after the company announced it ended buyout talks with Microsoft on June 12. Instead, it said it would ramp up an online ad partnership with Google (GOOG) that would run some of Google’s search ads. “I would take anything that beats the current status quo,” the investor said.

Shares of Yahoo have been steadily falling for the past two weeks after the company announced it ended buyout talks. On Tuesday, Yahoo’s shares opened at $21.18, the low since Microsoft made an unsolicited offer to buy the company on Feb. 1.

A Microsoft source shot down rumors that the software giant is again interested in acquiring all of Yahoo. Microsoft had previously offered $33-per-share for the company and walked away from that bid in early May. “Nothing has changed in that respect,” the source said. Asked if Microsoft was making a small deal, the source chuckled and said he had no comment.

Microsoft, however, has always been open to discussing an alternate deal. One day after Yahoo said talks were off for good, Microsoft’s top advertising executive Kevin Johnson revealed in a letter to employees that the company had returned with a partial offer to buy Yahoo’s search business for $1 billion and invest another $8 billion in Yahoo.

Silicon Valley blog TechCrunch on Tuesday cited sources who indicated that Microsoft and Yahoo were discussing a full buyout. CNET reported that a partial deal was being kicked around.

Wall Street analysts took in the latest rumors with mild amusement. Said Thomas Wiesel Partner’s Christa Quarles, “This is about the 8,000th time I’ve heard Microsoft is going to buy Yahoo. Everyone’s parsing out what their sources are saying or not saying. They’re reading tea leaves at this point.”

That said, both companies have reason to keep talking. Yahoo is under heavy pressure from dissatisfied investors, and it’s facing a brain drain as top employees leave for greener pastures. Microsoft, meanwhile, views Google as its biggest competitive threat and has yet to find an alternative to catch up to the search giant in the online ad market.

Analysts say they’re not convinced the deal ever went away because neither Microsoft or Yahoo have offered a better Plan B. Wrote Ben Schachter in a recent note to UBS clients, “We continue to believe that, at some point, Microsoft will acquire all of Yahoo. Unfortunately, for all of us that are beyond tired of the constant news flow and speculation around a possible Microsoft/Yahoo deal, the Google/Yahoo agreement will not put an end to this story as we still think Microsoft needs Yahoo.”