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Tuesday, July 22, 2008

Bloomberg.com: U.S.

July 22 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Jerry Yang will have to revive the Internet company's profit with a divided board and Carl Icahn as minority leader.

The billionaire investor, who had sought Yang's ouster and pushed for a takeover by Microsoft Corp., will become a director and name two others to the 11-person board under an agreement announced yesterday. While Yang keeps his job, disappointing results will make his position tenuous, said Darren Bagwell, director of equity research at Thrivent Assent Management Inc.

Analysts on average project a 13 percent drop in earnings when Yahoo reports second-quarter results today, and Yang's promises to lure users from Google Inc. and expand sales 72 percent by 2010 may fail to materialize, Bagwell said.

``The quarter probably won't be that good, probably uglier than some people are expecting,'' said Bagwell, whose Appleton, Wisconsin-based firm oversaw about $60 billion and had 1.6 million Yahoo shares as of March. ``The inevitable is that there's either a significant change in the upper management team or the thing just gets sold off in pieces.''

Yahoo, owner of the second most popular Internet search engine, may say second-quarter sales expanded 10 percent to $1.37 billion, excluding fees passed on to partner sites, according to the average of 26 estimates compiled by Bloomberg. That is little changed from 11 percent growth a year ago.

Net income may have dropped to $140 million, or 10 cents a share, from $161 million, or 11 cents, the survey showed.

Rock-Bottom

``The sentiment's pretty much at rock-bottom at this point,'' said Ross Sandler, an analyst at RBC Capital Markets in New York. ``Everybody thinks Yahoo is going to have a crummy quarter.''

Icahn, 72, and Yahoo spokeswoman Diana Wong didn't return messages seeking comment. Yahoo will report results after U.S. markets close today.

Yahoo fell 73 cents to $20.94 at 9:43 a.m. New York time in Nasdaq Stock Market trading. Before today, Yahoo had dropped 17 percent since Microsoft walked away from a takeover of the company June 12. Nine analysts recommend buying Yahoo shares, 18 say to hold and four advise selling.

Icahn owns about 5 percent of Sunnyvale, California-based Yahoo, or more than 68 million shares. He must resign from the board if his stake falls to fewer than 30 million shares, Yahoo said in a regulatory filing yesterday. Icahn also must be invited onto any board committee that's negotiating a transaction, the filing said.

Wrapping Up Fight

``Today, Yahoo moves past a distracting proxy contest,'' Yang said in a blog posting last night. The settlement with Icahn will ``allow us to get back to the business at hand.''

As a board member, Icahn may press Yang, 39, to take immediate steps such as cutting jobs, selling some units and making acquisitions, said Jeff Lindsay, an analyst with Sanford C. Bernstein & Co. in New York. The potential candidates for the two other spots on the board include Jonathan Miller, the former chief of AOL.

Yang has sought to revive investor faith in his strategy with predictions of faster sales growth. The company forecast in March that sales, excluding revenue shared with partner sites, will rise to $8.8 billion in 2010, from $5.11 billion last year. Analysts on average estimate sales for that period will climb to $7.3 billion, according to data compiled by Bloomberg.

Before yesterday's agreement, Icahn had claimed Yang didn't have the operational expertise to run Yahoo. Yang and David Filo co-founded the company more than a decade ago as graduate students at Stanford University. Yang took over as CEO in June 2007, following the departure of Terry Semel, who ceded the lead in Internet advertising sales to Google.

Display Slowdown?

Yang also has to cope with an economic slowdown that may prompt customers to curb ad budgets. Sales of banner ads and so- called display promotions on Web pages will rise 12 percent in the U.S. this year, researcher Magna Global in New York said this month. Magna lowered its forecast from a 17 percent increase, citing the impact of soaring fuel and food prices on the economy.

Yahoo gets about 20 percent of U.S. Web queries, or a third of Google's share. Acquiring Yahoo would triple Microsoft's percentage of U.S. searches. Microsoft spokesman Frank Shaw didn't respond to messages seeking comment.

``Microsoft has been and continues to try to catch a runaway freight train with Google, and the reality is Microsoft's tried organically so many times and really has little to show for it,'' said Citigroup Global Markets Inc. software analyst Brent Thill in San Francisco.

Yahoo's deal with Icahn ``opens the door a little'' to a transaction, Thill said.

Bill Miller

Yang's biggest ally among shareholders, Bill Miller, also says he wants a new bid from Microsoft. The Legg Mason Capital Management Inc. chairman, whose firm holds about 60.7 million shares, said July 18 he would back Yahoo's board in a shareholder vote, putting pressure on Icahn to settle.

Microsoft said last week that Internet-advertising sales fell short of its targets. Google last week reported profit that missed analysts' estimates as legal and research costs expanded.

``The quarter's going to be a mess'' for Yahoo too, said Larry Haverty, an associate portfolio manager at Gamco Investors Inc. in Rye, New York. By forging an agreement with Icahn, Yang may have gained ``a couple of quarters'' to show evidence of a turnaround, and if not, a sale to Microsoft is the alternative, he said.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net

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