More bad news for Yahoo part 2
(I couldn't link it as the news was an AOL exclusive)
EARTH TO YAHOO
It was Monday morning, Oct. 23, when Yahoo took its first serious look in the mirror. At a retreat in California's Yosemite National Park for Yahoo's top brass and managers, Mallett took the stage and prodded the several hundred attendees to change the way they did business. Yahoo needed to treat its advertisers and business partners better. ``It was just what everyone needed to hear,'' says one former exec who attended the powwow. Problem was, many of the managers didn't take the message seriously. ``The business-development people all had smirks on their faces,'' recalls the executive. ``Then the ideas never got reinforced.''
That complacency didn't last long. Yahoo salespeople started noticing that advertisers weren't willing to pay the same rates for banner ads. The real wake-up call came on Nov. 21. Longtime Yahoo cheerleader and Morgan Stanley Dean Witter analyst Mary Meeker issued a report that punctured the company's prospects. She downgraded Yahoo's stock from ``buy'' to ``outperform'' and advised it to beef up its executive ranks. Yahoo's stock plunged 15% in a day.
Yahoo execs were furious. The hyperkinetic Mallett fumed for about 10 minutes, he said later. Then he read the report again. Slowly it started to sink in. On most fronts, Meeker was dead-on. In fact, Yahoo was already working to address several of the criticisms. Within days, Mallett had pinned a copy of Meeker's report to his cubicle wall next to his children's artwork. On top of the report, Mallett stuck a note: ``The market's tough, but we're tougher.''
The company's board began to stir as well. Long chided by analysts for its insular nature, the seven-member board included Koogle, Mallett, and Yang, as well as backers Moritz and Eric Hippeau of Softbank. The only true outsiders: Arthur Kern, chairman of holding company American Media, and the recently appointed Edward Kozel, former executive at Cisco Systems Inc. Starting in November, the directors floated a number of ideas for strengthening Yahoo management. One possibility discussed: bringing in a new CEO. But with Yahoo closing in on $1.1 billion in sales for 2000, nearly twice as much as in 1999, the idea gained little traction. Instead, Yahoo stepped up its efforts to hire a new sales chief and brought in other traditional-media execs.
WINTER OF THEIR DISCONTENT
With the pressure on Yahoo's top execs rising fast, the stress started to show. For starters, tension was growing between Mallett and Koogle. A key friction point was Koogle's consensus-style management, which slowed decision-making to a snail's pace, say former Yahoo execs. ``Every time we went into a meeting, we'd ask, `Is this going to be a T.K. [Tim Koogle] meeting? Or is this not going to be a T.K. meeting?''' recalls a former exec. ``We wanted to know if we were actually going to get anything done.'' According to this former Yahoo exec, it began to wear on Mallett. ``He insisted he knew how to fix Yahoo but was frustrated by [Koogle's] lack of involvement and the consensus-driven management,'' the source says. On the flip side, the former executive says: ``Koogle felt that if Mallett knew how to fix things at Yahoo, he would have already done it.''
Mallett was coveting the CEO job, say insiders. One of the candidates for Yahoo's top sales job recalls that during a January interview, Mallett made it clear that he was planning to ``move up'' shortly. He also continued to protect his turf fiercely. Shortly after Yahoo polished off its acquisition of community site eGroups Inc. in August, Koogle and eGroups CEO Michael Klein were seen chumming around the office and appeared to hit it off, say current and former Yahoo execs. ``From that point on, it was like [Klein] had a bull's-eye painted on his forehead,'' says a former Yahoo executive. Later, Klein was put into a nonoperating role. A Yahoo spokesman says Mallett did not try to promote his own interests at the expense of others: ``If someone is the right fit for Yahoo and its business, the management team is absolutely supportive of their role and success in the company.''
By January, the board was focused on leadership. Ad sales were weakening. On Jan. 10, the company was forced to slash its forecast for the upcoming first quarter by 25%, to $230 million. Publicly, Yahoo blamed general market conditions and said it was moving away from dot-com advertisers. In reality, the board was looking closely at Yahoo's missteps and its struggling management team. In January and February, Yahoo's directors batted around ideas. Koogle floated the idea of his stepping down, say insiders. And directors discussed bringing in someone above Mallett or bolstering the vice-president ranks, say insiders.
Then things got worse. Ad sales dropped so quickly that Yahoo eventually had to slash its first-quarter forecast by an additional 25%, to $175 million. Equally bad, Yahoo began losing international executives at a frightening pace. On Feb. 15, European chief Fabiola Arredondo announced her resignation. A day later, the director of Yahoo Asia, Savio Chow, stepped down. Within weeks, six international executives left the company. Heavy-handed control from Yahoo headquarters left some overseas execs irked, say two former international managers. All of the former international execs declined to comment.
By the time of the Feb. 27 board meeting, the directors had seen enough. With Moritz and Yang leading the discussion, the board came to a verdict: Koogle would step down as CEO but could remain on as chairman. And Mallett would not be considered to replace Koogle. ``Mallett was generally viewed as not being ready for the job,'' says a source close to the board.
Koogle took the decision calmly. ``He was well aware of his shortcomings,'' says a source close to the company. ``He blamed himself for not keeping a closer eye on Mallett. Koogle also felt that his lack of media experience had hurt the company.'' At 10 o'clock that night, Koogle put in a telephone call to a CEO recruiter to begin the search for his replacement. The most critical leg of Yahoo's management overhaul was about to begin.
DOC HOLLYWOOD TO THE RESCUE
One candidate quickly rose to the top of the CEO-search list. In the two days following the fateful board meeting, several directors secretly gathered at Yahoo's headquarters with Spencer Stuart recruiter Jim Citrin. The agenda: brainstorming on what they wanted in a new leader and floating the names of possible candidates. Yang was pushing for Semel. They had met at a 1999 media conference in Idaho. Since then, the two had forged a friendship, meeting for lunch every two months or so. Adding to the allure, Semel is a friend of Gordy Crawford, a partner in Capital Research & Management, which owns a 6% stake in Yahoo.
Yahoo was interested, but was Semel? After all, the 58-year-old had retired from Warner Bros. a multimillionaire in late 1999. Since then, he had been investing in online entertainment companies with his own company, Windsor Media Inc. Yang and Semel met for lunch on Mar. 9 in one of Yahoo's conference rooms. Yang quickly brought Semel up to speed on the leadership change and asked if he was interested in the CEO job. Semel said he was intrigued.
It was time for serious talks. Semel met with members of Yahoo's board. He squeezed in an hourlong meeting with Mallett. That started out uncomfortably, according to a source close to the board, but then Semel suggested that they talk about their lives outside of work. Even though Mallett was bitterly disappointed about being passed over, he was charmed by Semel, say two sources close to Yahoo's board. Semel's candidacy was picking up steam.
By the time of a board teleconference on Apr. 6, the Yahoo directors were sold. Director Moritz, who headed the board's search committee, went around to all participants in the phone call, asking for their thoughts about Semel. Although Semel wasn't steeped in advertising experience, he knew how to manage a fast-growing company. He had helped build Warner Bros. from $1 billion to more than $11 billion. The vote was unanimous: Semel was to be offered the CEO job.
But the drama wasn't over. On Apr. 8, Moritz and Yang flew to Los Angeles, rented a car, and sped out to Semel's house in Bel Air. After pitching their offer to Semel, Moritz and Yang walked through the details of the contract--including the fact that they wanted to pay only $300,000 in salary, offering a large option package instead. Semel was interested, but a few stumbling blocks emerged. One biggie: Koogle's role as chairman. ``Semel was worried about following a legendary CEO who still had the affection of his employees,'' says a source close to the board. ``It wasn't an ego thing. It was about making it perfectly clear who was in charge.''
Just a month earlier, the popular Koogle had promised Yahoo's employees that he would remain as chairman. Relinquishing the title would all but sever his daily contact with the company he had run since 1995. But there was little ambiguity: Koogle would have to part with the chairman role, or Semel would probably walk. Several days after the Apr. 8 job offer, Koogle threw in the chairman title, say insiders. ``I'm glad it didn't come to a head. It could have been a deal killer,'' says an insider. Koogle stayed on the board of directors with the title of vice-chairman.
On May 1, Koogle's era came to a close. Some of the 49-year-old exec's allies say he has long been ready to ratchet back his lifestyle and pursue his myriad interests, from racing his Mercedes convertible to hobnobbing with artists in Italy. Indeed, it seems as if his moment has passed. The youthful enthusiasm and experimentation of the early days of the Net has been replaced by a brass-tacks management style to which he's ill-suited. ``He was extremely gentlemanly and, in a way, very unbusinesslike,'' says Adriano Berengo, an Italian glassblower and Koogle friend.
YAHOO'S FUTURE
It's not clear if Mallett has a future at Yahoo, either. Although Semel and Mallett insist he'll remain, there's a question whether he'll stay on for very long after the transition is complete. If Semel brings in his former Warner Bros. lieutenants, that could speed Mallett's departure. ``Mallett will be gone,'' says analyst Andrea Rice of Deutsche Bank Alex. Brown. ``It was assumed that at some point the mantle would be passed to him. Now there's no reason to stay.'' Sure, Mallett knows the inner workings of Yahoo's business better than anyone else and boasts a loyal following among employees. But he's also partly responsible for the hubris that damaged Yahoo with so many partners and advertisers--the very past from which Semel will want a clean break.
Together, Koogle and Mallett will be remembered as the management duo that built Yahoo into one of the mightiest Internet companies. But the bad mix of Koogle's disengagement and Mallett's headstrong ways kept them from anticipating vital adjustments, and this left the company vulnerable when Yahoo's world began to spin out of control. Is the company that Koogle and Mallett helped build a long-term business or will Yahoo be the ultimate example of blown opportunities during the Web's glory days? The answer to that question is now in Semel's hands.
By Ben Elgin
With Linda Himelstein in San Mateo, Calif., Ronald Grover in Los Angeles, and Heather Green in New York
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